When Bubble 2.0 Ends, How Bad Will it Be?

17 Mar ’07

The discussion about whether we’re in a bubble has happily moved on, and the focus seems to be shifting now to speculation about how bad it will be. This is perhaps just jitters in the wake of the U.S. real estate market’s recent troubles, and recent wobbles in global stock markets, but in any event one can’t really argue with the idea that there’s been a certain frothiness to tech in the past few years. So when it ends, will it be ugly? Will there be bodies, and if so, how many swamps will they fill?

Henry Blodget – yes, that Henry Blodget – recently wrote about what’s next in the context of how a recession in the market might affect Web 2.0. The gist, and my reactions in italics:

  • Money will get harder to raise. (Because VCs will be feeling pressure from their clients, and exit valuations will be lower). Web 2.0 companies notoriously require little in the way of financing. Not nothing, but little. This point may have an effect, but it will be much less pronounced than in Bubble 1.0.
  • Financing and exit valuations will be lower. Because the stocks of acquirers and comparably public-market companies will be lower. Sure, but that’s hardly rocket surgery. And I suspect there’s much less of a connect this time between Web 2.0 valuations and public co valuations (er, there was a connection at some point??). Exit valuations are lower this time around generally because more exits are early, pre-financing, and not via IPO; Oh, and of course they’re not being fuelled by complete insanity and utter disregard for the rules of financial gravity, all egged on by ‘professional analysts’ being egged on by i-bankers, as they were in 1.0. They’re technology / team acquisitions rich enough to allow the team to do well, and to do it without the uncertainty of building the business to the next stage, with help from outside money.
  • Investors will get impatient for start-ups to develop businesses instead of “products” and “communities.” Right. And there will be – er – nothing on the other side of that for investors to be patient with.
  • The growth rate of online advertising will slow dramatically. In tough times, advertising is one of the first expense lines to get cut (by big businesses and small). What’s more, some start-ups that are currently buying advertising will cut back or cease to exist. Even if advertising generally is cut, money will still move online. Online will be affected less. Perhaps it will even grow. Who knows. And the online advertising story now isn’t about startups advertising online, it’s about the Fortune 500 doing it. So more bodies in the startup swamp will probably have less effect this time than it did the last.

And finally, “In short, being a Web 2.0 entrepreneur or employee may soon get more difficult and less fun. Hit the bids while you can!” OK, I guess. But boiled down, there’s not much here other than recession=bad.

I’m a much bigger fan of Christine Herron’s thinking, “5 key reasons that ‘Bust 2.0’ should be less painful to the market”, posted as a reaction to this line of thought at SXSW. Gist, with the details in her post:

  • There’s more infrastructure to support ad-based business models
  • Established companies are developing online plays, but looking to startups for help
  • Business models are more diverse
  • It doesn’t take as long to prove/disprove your business model
  • Valuations aren’t as ridiculous

I’ll add one more point. We are midstream in a massive disruption of the way business – particularly the media business – relates to its customers. Regardless of what happens in the broader public markets, that process must continue. It’s simply become a question of survival for many businesses – kind of an “adapt or die” moment. This disruption will create opportunities for entrepreneurs for as long as it continues. My gut tells me that this is going to insulate the Web – to some extent (OK, ‘to some extent’ this entire discussion is angels dancing on the head of a pin) from turbulence in the broader public markets. [Ed: Wow, is that a paradigm shift??]

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