Alan Patrick, co-founder of technology consultancy Broadsight, says we are at the beginning of another bubble and that the first breaths have been blown: "A bubble is defined by too much money chasing assets, greater production of those assets, then the need to find a greater fool to buy them."
So far, money is chasing a small group of companies – Facebook, Groupon et al – that could prove to be good investments, says Patrick, who also writes the Broadstuff blog. That was true of other bubbles too: at the start of the US property boom, for example, it was the best houses in the best locations that took off first. Only later did people start speculating on grotty flats in Florida.
According to Patrick, there are 10 tell-tale signs that a bubble is being blown:
■ 1. The arrival of a "New Thing" that cannot be valued in the old way. Dumb-money companies start paying over the odds for New Thing acquisitions.
■ 2. Smart people identify the start of a bubble; New Thing apostles make ever more glowing claims.
■ 3. Startups with founders deemed to have "pedigree" (for example, former employees of New Thing companies) get funded at eye-watering valuations for next to no reason.
■ 4. There is a flurry of new investment funds catering for startups.
■ 5. Companies start getting funded "off the slide deck" (that is, purely on the basis of their PowerPoint presentations) without actually having a product.
■ 6. MBAs leave banks to start up firms.
■ 7. The "big flotation" happens.
■ 8. Banks make a market in the New Thing, investing pension money.
■ 9. Taxi drivers start giving you advice on what stock to buy.
■ 10. A New Thing darling buys an old-world company for stupid money. The end is nigh.
This time social media is the New Thing. Its most earnest acolytes claim that the likes of Twitter and Facebook are a revolution in human communications unseen since Gutenberg started printing the Bible. They aren't making money, but they are worth a fortune. Two smart cookies – Arianna Huffington, founder of the Huffington Post, and Michael Arrington, creator of the influential technology blog TechCrunch – have sold their publications to AOL, a company not noted for the astuteness of its recent decisions. Tick off stage 1.
The second stage looks tickable, too. Fred Wilson, investor at Union Square Ventures and a veteran of the 1999/2000 dotcom bubble, has been sounding the alarm for some time. In a recent interview with TechCrunch, Wilson said he was worried that a two- or three-person startup could get a $50m-$100m valuation. "To me that's not in the realm of reasonable," Wilson said.
He even went as far as to name names – in particular Quora, a questions-and-answers site set up by Facebook alumni Adam D'Angelo and Charlie Cheever that raised $11m in funding last year at a price that valued the company at $86m. Now it is reportedly fending off offers for $330m. See stage 3 above.
Mark Cuban, the investor who made a fortune in the first dotcom boom, has compared the current funding frenzy to a pyramid scheme. In another recent interview, David Cohen, managing director of the well-known Silicon Valley start-up fund TechStars, says there is a bubble in the number of companies financing startups. Cross off stage 4.
The last dotcom boom really took off after the flotation of the internet software company Netscape in 1995. Patrick says this time it's likely to be Facebook that lights the fuse. So far, private investors have been locked out of the New Thing. But JP Morgan is setting up a fund, and Goldman Sachs recently tried to get its clients' money into Facebook. That would take us all the way to stage 8, in which case we're just waiting for stages 9 and 10 – where cabbies get in on the act and the game goes into reverse.
Internet Strategy Briefing 
