Bubble Hater

by nikiscevak on October 12, 2005

There are a lot of people complaining about a bubble with web 2.0. If only they sat back and thought about what a bubble really was.

When the “Internet bubble” happened in the late nineties it was a financial bubble not a consumer usage one. For better or worse though, the word bubble is inextricably linked to finance. At its heart, a bubble means that meant that capital was too easy to come by.

And with that, there is absolutely no way in hell that there is a financial bubble today for web 2.0. But first let’s sample some of the ‘data points’ that are justifying the conclusions out there. They almost defeat the argument themselves:

- Kevin Burton says that we are in a bubble because it costs $2,800 to attend web 2.0 and that other conferences are cheaper. Thanks Kevin.

- Mike Rundle thinks there is a bubble because he can’t see how Flock, the new social browser, will make money. As well as not being able to see a business model, Mike points out that they have raised $2 million. $2 million!!! Mike take a look at Google or Yahoo’s financials. You will know how much each search is worth then. You will know that both are willing to give 80% of the revenue to a company that helps the consumer execute the search. Hell, you will know that a non-profit that points to a homepage with a Google search box can earn $30m/year in ads.

- Om Malik, who should know better, picks one company that he wouldn’t fund and then extrapolates that the entire web 2.0 universe. The amount raised? $5m.

- Alarm Clock (jealously?) argues that since two small deals (involving weblogs) got more coverage than an acquisition involving Sourcefire, and that the Sourcefire acquisition was worth more than them combined, then we are in a bubble.

All suffer from the sample size of one (i.e. themselves) conundrum. “I wouldn’t use this”, “I don’t think I would pay for that”. The same trap led people to think that smartphones would become mainstream, that wireless hotspots would be a great business and so on. But as Steven Levitt would say, let’s take a look at the data.

The PwC Moneytree survey tracks venture capital investment and has done so for some time. Enough time to have significant historical data. Go and look at this graph. More money was invested in Q2 2002 than it was in Q2 2005. There could be no more conclusive evidence.

But what about all these new companies with Google Maps, you ask? Simply it costs a lot less to start a company and pursue an idea than it once did. Go and read Joe Kraus’, a founder of Excite and now Jotspot, post on exactly how the economics have changed. But for all the ideas and companies that are being generated versus the capital being expended there is an extreme amount of efficiency being produced. Great ideas have a greater chance of being created (and so do bad ones too). That’s one of the great things about the Internet. In the end, more great things will be created than when hardware still cost hundreds of thousands of dollars and when open source software was immature.

If you think that the barrier to starting a company being lowered is a bad thing then there is not much anyone can do to help you.

Where there is a bubble, in my opinion, is in attention and communication. The blogosphere has amplified media attention such that there is a humongous supply of comment. There is not an oversupply as the world has changed. More people are blogging. More will. But that means that ideas are discussed at rapid pace and that they spread very very quickly. It also produces a frustration with the resultant information overload. But don’t blame the bubble, blame the downside of publishing being more easily accessible.

blog comments powered by Disqus

Previous post:

Next post: