Same Economy, Different Bubble

from the and-it's-going-to-pop dept

Last year, The Onion (which has a knack for predicting the future in really scary ways) had an amusing article: Recession-Plagued Nation Demands New Bubble To Invest In. In the immortal words of Homer Simpson: "It's funny 'cause it's true." And, indeed, one of the big fears we've had since the beginning of the government's response to the financial crisis is that it hasn't been doing anything to solve the real problem of a lack of transparency. Pumping more money into the system without fixing that simply meant that we'd repeat the cycle, with the money eventually finding some bubble again.

At this point, it's worth taking a step back, and understanding why these sorts of bubbles occur. Sometimes, investment bubbles can actually be quite beneficial. In markets of true innovation, where a clear success story or business model hasn't yet been worked out, a bubble allows a lot of money to be thrown at the problem at once. From that, you get a lot of ideas tested in the marketplace very rapidly. Many of them fail once the bubble collapses, and many investors lose money, but the ideas that do work and do stick around tend to takes us forward in leaps and bounds. Bubbles in innovative technologies function as a form of speeding up the innovation process and getting lots of infrastructure built and ideas tested rapidly. It's no fun if you're caught on the wrong side of the investment, but for society, it can be a net gain.

However, that's not what happened in the last economic crash. That was built on a different sort of bubble, based not on funding innovation, but on a series of arbitrage plays where bankers actively worked to obfuscate risk, so that it could be passed on to the latest sucker. Basically, they kept taking riskier and riskier assets, and packaged them in a way that they looked less risky. Then, by making it so no one could really look at (or understand) the true risk, they could sell these super risky investments off to suckers at prices as if they were safe. And, since such a house of cards takes a while to collapse, it doesn't take long for everyone to pile in, feeling like they have to match those returns.

So, the answer to this is to increase transparency. If you could really get the information out there, such that people could look at the underlying details and properly calculate the risk, not based on random clueless rating agency employees, but in a true market, then it would be that much more difficult to pass off and misprice super risky vehicles as safe.

But that's not what's happening. Without any efforts at increasing transparency, combined with pumping a ton of new cash into the market, we're getting another bubble. The bankers are still operating the same way they did in the past -- which is looking for ways to obfuscate the risk and find new suckers to take the risk off their hands without really understanding how to price that risk. It may be securitizing life insurance or it may be in the carry trade. It doesn't really matter. The money is looking for a new bubble and a focus on short term profits over long term sustainability -- and that's enabled by allowing banks to play "hide the risk."

This is really quite worrisome. It's been over a year since the financial crisis went into panic mode (even if the actual recession and problems significantly predated that). And while the "worst case scenario" did not occur, there's been little evidence of real fixes to the economy or any attempt to really fix the factors that resulted in the original problem. Instead of creating transparency and a long term strategic focus, we're just pumping cash into the economy to try to help suckers find the next bubble.

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Perhaps The Real Bubble Is In Overly Aggressive Intellectual Property Claims

from the this-again? dept

Last week, Kara Swisher posted a video to the AllthingsD site, with a parody song, based on Billy Joel's "We Didn't Start the Fire" called "Here Comes Another Bubble." It was a bit silly, but self-referential enough that lots of folks couldn't resist highlighting it, so it quickly got passed around and linked on various sites. The video kicked off with a video clip that Kara herself had filmed and posted and then included a bunch of other photos and videos and the parody song. However, someone took exception to it and sent a takedown notice, forcing it offline. The first thought many people had was that it was the record labels, protesting the use of the Billy Joel song without credit, but Valleywag has another, perhaps more plausible, theory: a photograph of Valleywag bigshot Owen Thomas was used briefly in the video, and the photographer who took it got seriously pissed off about it. Thomas thinks the photographer may have sent the takedown notice that got the video pulled offline. If true, that would be unfortunate, and most likely an excessive use of a takedown. An extremely brief clip in a video that doesn't hurt the commercial value of the work is unlikely to be seen as infringing on the copyright. There's a reason fair use exists. If anything, this may be yet another example of copyright being used to prevent creative works, rather than encourage them. Of course, the performer of the song probably isn't too upset. This will just provide a second round of publicity for the song -- and, besides, he apparently just raised $3 million for his (unrelated to the video) startup anyway.

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Clean-Tech Bubble? How Cliche

from the here-we-go-again dept

There's no debate that the clean-tech sector has been enjoying a surge of interest from the venture capital community. Wired magazine takes a quick look at some recently released data that shows that clean-tech investments by VC have surged to new heights in 2007. The article notes that clean-tech dollars are closing in on the amount invested in Internet start-ups which, naturally, raises the specter of everyone's favorite B-word: Bubble. Yes, the accelerating rates of VC investment into clean-tech companies might chart something like late-90s VC Internet start-ups. Yes, 2008 may indeed bring some clean-tech "venture flameouts" reminiscent of Webvan and eToys. Overall, though, using the history of the Internet sector as a yardstick (let alone a forecasting tool) for clean-tech is naive. The article does steer away from this analogy to some extent: on the whole, clean-tech companies will be measured the old fashioned way, in revenue dollars rather than in clicks, page views, or eyeballs; clean-tech companies are generally trying to capture pieces of some very large existing pies, rather than define and create new markets for themselves; and clean-tech businesses look more bricks-and-mortar than Internet in terms of infrastructure requirements.

Digging a bit further into the numbers provides some insight into whether or not VC firms are looking at clean-tech as the Internet-boom redux. While clean-tech VC dollars are closing in on the amount invested in Internet start-ups, the number of companies funded with those dollars is much fewer (168 deals over three quarters of 2007 compared to 195 Internet deals in the third quarter of this year alone) and the value of those deals is substantially bigger (upwards of $11MM on average, compared to $5-6MM avg. for Internet companies). The number of new Internet companies getting funded far exceeds new clean-tech businesses, meaning much of the clean-tech money is re-investment in existing companies. In this light it's fair to say that the growth in VC dollars for clean-tech is more indicative of a maturing sector than of a bubble buildings to a burst. A few billion dollars seems to be a reasonable investment toward trillion dollar opportunities. But if I start seeing beige-and-white box vans driving around San Francisco again, and sock puppets on TV, I'll start getting worried.

Daniel DiPasquo is an expert at the Insight Community. To get insight and analysis from Daniel DiPasquo and other experts on challenges your company faces, click here.

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The Difference Between Sense And Nonsense: Trying To Make Sense Of Microsoft's Facebook Deal

from the hint:-it's-nonsense dept

Sure, it had been rumored for over a month now, but the news that Facebook actually convinced Microsoft to buy a stake at a $15 billion valuation still makes you do a doubletake. Microsoft put in $240 million for a tiny 1.6% of Facebook. This is less than the $500 million originally rumored, but it tips the scales in terms of totally ridiculous valuations. We had thought that it was Skype who had played the game the best in its insanity inducing ascent to getting bought. Despite only having revenue under $10 million per year, the company started spreading rumors that it was worth over $1 billion. This was helped along by a reporter who confused millions and billions, and suddenly we were off to the races. Suddenly, without any real change in business prospects, we were told that the company was worth $3 billion and then the suitors really started showing up until eBay coughed up $2.6 billion with earnouts that could have brought the deal to $4.3 billion. Of course, we all know how that game ended: eBay just evaporated $1.43 billion of that deal. Last year, it was YouTube who played the same game, riding the hype and whispers to a Google buyout for what now appears to be a paltry $1.65 billion (plus legal headaches). That was merely around $3 million for every day the company had existed.

However, in 2007, we clearly have a new champion at this game. Facebook is most certainly a popular and viral site. However, there are still plenty of questions about how much money the site can really generate long term. When Yahoo apparently tried to buy Facebook last year for $1.62 billion, the math still seemed ridiculous and hard to support. To then make the case for a valuation 10x only a year later goes into fantasy territory. Also, there's a big question about what Microsoft gets out of this. It's hard to see them getting a huge return on the investment. Yes, Facebook is growing and there are some interesting possibilities there -- but we've also seen every other social network before Facebook grow rapidly, peak, and then fall off the map pretty quickly as well. And, even with the growth rate and adoption for Facebook, the rumors concerning how much revenue it's bringing in make it next to impossible to for this valuation to make any sense. About the only rationale that seems to make sense is that Microsoft just threw away $240 million to block Google from getting the deal. Maybe that's worth $240 million (pocket change) to Microsoft in the grand scheme of things -- but it's difficult to see Facebook ever being able to justify that kind of valuation unless something massive changes in the near future. Still, it's great news for Facebook and Mark Zuckerberg who were able to play this game better than anyone we've seen before. Meet your new valuation insanity champion.

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