Are We in a Bubble in the Internet Space?

Tons of press, blog posts, tweets, etc., about whether or not we're in a "bubble" in the internet space. Here's my suggestion for a simple test:

• Notwithstanding the LinkedIn IPO, the recent Groupon IPO filing and the widespread rumors about Zynga and the imminent filing of their IPO, the overwhelming majority of internet companies will provide liquidity for their shareholders via an acquisition. Too many structural impediments (e.g., collapse of institutional trading profits, Sarbanes-Oxley, the Spitzer settlement with Wall Street imposing draconion restrictions on sell-side analyst activity, consolidation of the IPO buyer community....) for a robust, industry-reviving resurgence of the IPO.
• Returns for investors, and wealth-creation for founders & employees will come through the difference between the valuation at which the investors, et al., made their investment(s) and the valuation at which the Company gets acquired.
• Accordingly, if the entry valuations are increasing faster than the exit valuations, we're in a bubble. If they aren't, we're not.
• I have only anecdotal data (if anyone has real aggregate data, please comment), but, based on that, I would assert that we are deep in a bubble.

Comments

[Soupala]

It sure seems like we're in somewhat of a bubble, although I'm no expert. What amazes me is the size of investments going into early stage tech companies producing little or no revenue yet. I can understand a few million into a company that could make money someday or perhaps be acquired by the big dogs, but the sheer number of early stage startup investments in the 20-100 million range in the past year is what kills me. My startup needs less than a million to scale up to a size where we should be able to prove our revenue potential and profitability. If my company doesn't line up the funding before the bubble bursts, I feel like we're going to have a tough time fighting through the calamity.

[Steve]

Watch for the phrase "new paradigm" attached to discussions about valuation. Also "old economy" vs. "new economy". In short, if traditional valuation metrics can't be used, we are in a bubble.