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Avoiding Another Dotcom Disaster

Silicon Valley startups fueled growth of the technology industry, and it would be unfair to say that day is over. However, a Wall Street Journal report has touched off a debate about the latest spate of startups, many of which are reportedly running out of money.

The Journal reported yesterday that startups are having a hard time securing follow-up funding. Although most of these companies are centered in and around Silicon Valley, it's important to note most of these are specifically Web-based startups. The problem, says one venture investor, is too many startups seeking a limited amount of capital.

Even though this news adds to the general malaise around the economy, it could help avert a disaster like we saw in 2000/2001, when the last over-hyped tech bubble burst and the closure of dotcom companies rebounded on the hardware supply chain.

What is fueling startup fever, the Journal and venture blogs report, is the valuation of companies such as Facebook, Google, and LinkedIn. At the same time, Web-based companies such as Groupon have delayed their IPOs because they haven't raised as much interest as expected. Web-based music business Pandora went public, but with a lot less fanfare than expected.

So venture capitalists are holding back — a trend that is confirmed by the latest data from the National Venture Capital Association. Quarter-to-quarter IPO activity fell by 77 percent in the third quarter of 2011, reports the NVCA and Thomson Reuters, with only five companies going public.

Here's the good news: four out of those five deals were in the US, and four out of five were in the IT sector. Two were Internet-specific; one was in computer hardware and one in computer software and services.

One of the reasons VCs are pulling back, according to the Journal and the NVCA, is a lack of “quality” IPOs. In VC parlance, a quality IPO is one that makes big bucks for its investors. In electronics supply chain parlance, a quality IPO is one that has staying power, results in job growth, and may spur hardware sales. The Internet continues to be a driving force in tech, and increased demand for digital music, streaming video, and other types of content sells lots of smartphones, tablets, PCs, and big-screen TVs.

Another dotcom bubble would be a disaster for the supply chain, but it looks like investors are checking themselves before it gets out of hand. The blog TechCrunch puts it best: the market's going through “a form of tech start-up Darwinism, weeding out bad deals for companies deemed worthy.”

11 comments on “Avoiding Another Dotcom Disaster

  1. AnalyzeThis
    October 14, 2011

    As someone who lived through the first dotcom bubble (my start-up actually made it and was sold to a bigger company, which was then sold to a giant conglomerate), I think it's very safe to say that the bubble this time around isn't nearly as big.

    I do think investors generally learned from the mistakes of the first bubble. It was far, far easier back then to get funding with just an idea or a vague concept. Nowadays, you need much, much more than that before getting that VC backing.

    Back then, it was common to see a large investment in a start-up and think, “what are they thinking?!” But these days, it's much rarer to see those obviously ill-advised investments. The last one I remember in recent times was the moronic $41 million thrown at Color earlier this year.

    Anyhow, even if there is another dot-com bubble burst, like I said, the bubble isn't nearly as big now. It won't be nearly the disaster the first one was.

    I think the bubble of 2000/2001 was kind of a unique situation. Everything was so new. So many people were throwing money at things that they didn't understand. I'm not saying that this no longer happens, just that these days the bad investments are fewer and much smaller in terms of cost. And part of this is due to the fact that the costs of putting together a start-up are a small fraction of what they were in the late 90's.

  2. _hm
    October 14, 2011

    Investors has do much more research and needs detail understanding of these startups. Some of them will offer novel product and services and will thrive. It is nice to many more startups coming up.

  3. Backorder
    October 15, 2011

    Interesting obervation by TechCrunch, regarding the darwinism inherent in the present startups' success and failure. 2000/2001 saw a lot of excitement mainly due to the novelty of the industry. Past decade has seen maturity set in with the VCs, which are far more pragmatic with their investements and have reduced the percentage of their bets on really ambitious projects. Hence, I doubt if there would be another dot com bust as severe as witnessed earlier. 

  4. mfbertozzi
    October 18, 2011

    Well, in my opinion, it is not completly right to use “bubble”; new start-ups are coming and it is good now and it was good also in the past. Key factor is what there is behind that: fog or consistency ? In case you are bringing on the field consistency, sooner or later, you will achieve good results for your entrepreneurial idea.

  5. _hm
    October 18, 2011

    I agree with you. Success may be 1 in 5. But that is good rate! You may have to try more – 2, 3 or more. But eventually fruits of one success are so great, it is worth the efforts. Also, it is good for economy for both developed and developed economy.

  6. mario8a
    October 18, 2011

    I guess they use the term “bubble” for similarity with the real-state bussines, where every 10 o 15 years prices are lowered to riase the interest to buy, that might be the same strategy in the supply chain.

  7. SunitaT
    October 18, 2011

    The problem, says one venture investor, is too many startups seeking a limited amount of capital.

    @Barbara, why do you think there is sudden spurt in the number of startups. What is fuelling this phenomenon? 

  8. stochastic excursion
    October 19, 2011

    There are two factors that make any kind of exuberance in tech start-ups unlikely.  One is the unfavorable credit situation that small businesses are faced with.  The other is the trend of more established business to stretch out their payables to 60 days and more instead of the 30 days that used to be customary.

  9. Eldredge
    October 19, 2011

    The whole posture of the investing community is, understandably, more cautious and probably more realistic than it was in the previous dotcom bubble. Lets hope that, when the economy does improve, the companies that did obtain funding can flourish.

  10. Barbara Jorgensen
    October 19, 2011

    One of the reasons we are seeing a bunch of new start-ups is the success that online sites such as Google, Facebook and Groupon have so far experienced. But they are the exception: a decade ago, there were 50 or more failures for every dotcom success. Social media is now the new Internet–it's a new venue, but nobody really knows how it is going to play out. At the same time, everybody wants to be in on the one compnay that hits paydirt.

     Another reason we see more online companies is they are inexpensive to set up. But there comes a time when even a low overhead compnay has to seek backing. I think that's where many of these companies are right now: they've made some traction on their own steam but need venture to reach the next level.

  11. mfbertozzi
    October 21, 2011

    Lack of quality on IPOs was/is maybe related to a wrong perception about the reason to launch startups. At the time of the bubble, it was broadcasted “start-up” as one of the way to make profit easy. As consequence wrong dream also as marketing message from the valley to incentive ventures in investments has been broguth outside and companies based on poor entrepreneurial idea/consistency have been tried to launch. Am I really wrong on this feeling?

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