Tech Bubble, Blubble or Rubble?

I kid you not.  Over the past week, all three of these words have been used to describe what is happening in the tech investment space right now.  Much of the discussion has centered around a comparison of 2011 to the infamous tech bubble of 2000 in which many of us participated, failed and hopefully learned from.  The general consensus is that what is happening right now is quite different, in a good way, than the disaster bubble burst of 2000.  And I agree.  Here are some key messages pulled from a few sources that I think sum up what happened in 2000, what is happening now, and why the optimism and high tech valuations now are justified.

From “We’re in the Middle of a Terrible Blubble!“, Michael Arrington hits the nail on the head when he says,

“A perfectly reasonable 2000 tech startup business decision – spend $10 million on a massive advertising campaign that may bring in $500k in revenue. The “branding” value makes up the difference, and those few new customers will continue to spend money and tell their friends!  Grab territory while it’s there to be grabbed, the thinking went. We’ll figure out the business later. Money was so easy to come by, it made sense to some.”

This is EXACTLY what my company did back in 1999.  We raised $55M in an IPO with an underdeveloped website, zero revenue and a plan – detailed in our prospectus – to spend $15M+ on advertising and branding campaigns.  Insane right?  Didn’t seem so back then when money was being thrown at us.  We blew that money on advertising, didn’t sufficiently monetize the traffic, then had to shrink the team and hunker down to survive the storm of 2000.

Michael’s main point in the article is that back in 2000 the objective was to raise way more money than you need, tens of millions, and spend it all as fast as you can, not to build product but to build brand and awareness.  Now, companies are raising less money, but at valuations that are potentially too high (because of “blubbering” angel investors), in order to hire as many engineers as possible to build a valuable property, then raise a follow-on round after proof of concept to scale and at much higher valuations.

Mark Cuban, owner of the Dallas Mavericks and tech billionaire, makes another interesting point in response to the article above,

“Its a bubble when you are on the elevator and people outside the industry are telling people to buy things they don’t understand. In this market, its about VCs and Angels wanting to be part of the “next big stock”.  Its as if VCs and Brokerage houses think they need to have pretty portfolio companies, so they take on huge risk with enormous valuations for Twitter, FB, Groupon, etc.  Not that they aren’t great companies, but there is so much market , as well as performance risk, the risk profile is through the roof.  This isn’t a bubble, its a Rubble.”

Finally, there’s a well written piece that’s worth reading called “Bubble, What Bubble?” that takes an analytical approach to comparing 2000 with 2011, concluding that certain “bubble criteria” are not being met in today’s market.

All of these perspectives and my own experience leads me to believe that we are not remotely in a bubble similar to 2000.

What do you think?