Private: Intelligence

We’re now well into 2011 and it’s starting to look and smell a little bit like 2000.  Once again we have M&A activity, consolidations and IPO’s taking place on a weekly basis that generate mass coverage.  The news is out there, led by the Huffington Post being acquired by AOL, and followed closely by news of Linkedin and Pandora filing for IPO’s.  Meanwhile we see angels and VC’s once again throwing money at companies with a vengeance not seen since… well… mid-to-late 2000!  But does this wave of hype and excitement signal an impending collapse based on overvaluation, like we saw in the dot com bubble?

For what it’s worth, I don’t think so.  Back then the hype was just hype, and the over-inflation was based on prospective value in the marketplace rather than real revenues.  These days the growth and investments are based on real revenue, though some may argue the value of some of these companies are slightly exaggerated, but that means the floor is more stable than it was in 2000.  These companies are generating real revenue, they are growing, and the investors and speculators are betting their futures on real companies rather than vaporware.

Companies like LinkedIn and Pandora offer real value to consumers.  These companies generate real money and going public makes sense because they’ve paid their dues and they can continue to grow.   The speculation on their respective futures may drive a minor bubble at some point, but the fact is if there were another “margin call”, the value of these businesses would only go down so far, they wouldn’t drop to zero.  They could decrease to the point where their actual revenues reside, but that’s far better than most companies in 2000 and 2001.  You can certainly question their multiples for valuation, but you can’t question that there is value in and of itself.

The investment dollars that are going into these businesses to create value are also better placed than they were in 2000.  Leading up to the last dot-com bubble there was a period of irrational expenditure, and that’s not the case this time around.  We’re coming off the worst recession in a very long time, and there are still signs of instability in the economy.  Housing is still down, and unemployment is still higher than we would like.   There’s still conservative optimism.  There’s minimal inflation of value because most other markets are artificially being held down right now.  If anything, the tech sector may actually begin to lead the growth of the economy and create more value as a halo effect for the US.  These companies are creating jobs, and that’s what we need to see more of right now, in order to sustain continued economic growth.

On the flip side, the entrepreneurs these days are scrappier than they were in 2000, and I’ll go out on a limb and say they’re even smarter.  I can’t foresee any more examples like what happened with Boo.com, when they spent $188 million in 6 months.  The people behind the money are more cautious and more watchful, and if anything they are more conservative than anyone was back then.

No – I don’t see another bubble, per se, but that doesn’t mean we can’t still be cautious.  If you’re looking for money in this environment, be sure to do your homework.  If you’re investing in this environment, be sure to do your homework.  If you cover the companies on either side of this relationship, be sure to do your homework.  If we can maintain a base of rationale thinking we could see some very interesting, and very valuable, growth over the next few years and that growth could lead the rest of the country into a new age of digital and/or industrial renaissance.  Enjoy the ride everyone!!