Is the Second Tech Bubble Burst Nigh?

Reports warn of a return to 1999-level recklessness

How many doomsayers does it take to kill a party? Last week, as reports poured in showing major first-quarter growth for the venture capital industry and valuations for startup companies soared ever higher, subdued talk of a second tech bubble grew to a clamor.

Foreboding headlines from The Wall Street Journal and USA Today cautioned of a return to 1999-level recklessness. But as former Citigroup CEO Chuck Prince told the Financial Times in mid-2007, months before the credit crisis forced his resignation: “As long as the music is playing, you’ve got to get up and dance.”

Venture capital has broken into an all-out Brazilian Carnival. According to the National Venture Capital Association, U.S. VC funds raised more than $7 billion in the first quarter of 2011, a 76 percent increase over the first quarter of 2010. Investors now fight to win startups the way sports agents fight to win star quarterbacks—“complete with power plays, personal feuds and turf wars among Wall Street bankers, billionaire speculators, and venture-capital veterans,” the Journal reported.

Never mind that most startups aren’t star quarterbacks—rash speculation abounds. At a Startup Weekend event in Los Angeles, actress Demi Moore tweeted her approval of one company’s presentation and, 48 hours later, the company had raised a cool million. “If you meet investors tonight, be nice,” a host said at New York’s Startup Weekend in April, “because those guys write checks pretty quickly.”

This time it’s different, some say. This time, it’s worse. In past bubbles, companies “helped build technology that begat other technologies,” Bloomberg Businessweek wrote recently. Today’s companies, which focus on getting consumers to buy things, aren’t creating anything to build on. The “technological legacy” of a company like Groupon, now valued at $25 billion, “is cute email.”

No matter. The band plays on and most investors dismiss the bubble brouhaha outright. “I don’t see anything out there that says bubble burst,” one told CNN. “It’s a nice story: We all want to tell stories about bubbles inflating, then bubbles bursting.”

Perhaps the best argument came from early-stage investor Howard Lindzon, who applied a high Zen—or just stoner—logic: “The fact that everybody’s talking about it means that we’re not in one.” Party on, dude.

Publish date: April 26, 2011 © 2020 Adweek, LLC. - All Rights Reserved and NOT FOR REPRINT