The New York Times seems to have discovered that there’s some kind of tech boom going on, as a couple of breathless articles about Silicon Valley startups and rock-star stock analysts appeared this weekend.
The articles read a lot like they were written in 1999 — we’ve got the huge salaries, the amazing perks (free haircuts!), the wacky startup pitches, the zany parties.
No question — tech is a good business to be in, especially in Northern California.
But despite the superficial similarities between now and 1999, there’s really no comparison. This time, it really is different.
Let’s count the ways.
It's true that there's a lot of seed-stage investment going on, and most these companies don't have anything beyond a concept yet.
But for investors to kick in the next $10 or $20 million, companies need to have some kind of track record -- customers, revenues, and growth.
There has been one high-profile exception -- colour, whose founders got an investment of $41 million before launch based on their reputation. But apart from that, most of the companies who are raising multi-million dollar rounds have something more than a business plan.
You can argue that their revenues and growth don't justify their valuations. But that's vastly different from the dot-com boom, when companies were able to score huge rounds of funding just to take them from slideware to IPO -- without ever having to build an actual business along the way.
The tech IPO window isn't nailed shut like it was in 2009 -- LinkedIn and Pandora went public, and a lot of other young tech darlings like Zynga are slated to do so later this year, assuming the economy doesn't get much worse.
But look at all the billion-dollar tech companies that are still private. The big example here is Facebook, which has 700 million users and is expected to earn $1 billion on $4 billion in sales this year.
In other words, today's boom is still mostly funded by private investors who have money to lose and know (or should know) that betting on tech startups is a gamble -- not the retail investors who drove dot-com stock prices to crazy heights last time around.
As Foursquare founder Dennis Crowley pointed out to the New York Times, there are a lot more people online today.
At the end of the 1990s, the Internet population was about 360 million. Now it's more than 2 billion, and the explosion in smartphones means a lot of the growth in the next few years will come from developing countries.
Crowley also pointed out that it's a lot less expensive to get a tech company off the ground now than it was in 1999 -- cloud computing services like Amazon Web Services (for raw computing power and storage) and Twilio (for telephone messaging) mean that young companies don't need to buy banks of servers to start an Internet business.
Because startups are cheaper to launch and operate, they have more flexibility to experiment with business models before they need to seek a big funding round. There's also a lot more acceptance thanks to concepts like the 'lean startup' pushed by Steve Blank and other thinkers who survived the dot-com bust. As a result, the 'pivot' has become commonplace -- a lot of seed-stage startups even boast about how their original business plan was not working, before launching into a pitch about how great the new one is.
During the dot-com era, companies took so much money and staffed up so quickly, they had only one chance. If selling pet food over the Internet (for instance) didn't turn out to be a viable business model, it was too late for a second chance.
In 1999, the dot-com bubble lifted most big tech stocks almost as much as the startups -- Microsoft, Cisco, and other giants rose to heights they've never recaptured.
This time, most of the hottest tech giants have very reasonable P/E ratios -- Apple, which has in recent weeks come close to becoming the most valuable company in the world -- is at about 14. Google is around 18. Microsoft is below 9.
There are some exceptions -- Amazon has a P/E ratio around 78 and Salesforce.com is at a shocking 550. But by and large, the tech boomlet this time is isolated to a few startup companies with proven metrics, or public companies with a track record of beating expectations.
The big tech companies are sitting on mountains of cash: Cisco and Google have more than $30 billion on hand. Microsoft has more than $50 billion. And tech king Apple has more than $70 billion (if you count its long-term marketable securities). Of all these companies, only Google has been really active on the acquisition front.
Last time, tech giants like Microsoft and Cisco were a lot freer with their spending.
That hoarding, along with the slower IPO window, means fewer easy exits, which forces startups to build real businesses.
Unemployment has stuck stubbornly above 9% -- in Silicon Valley it's actually above 12%, although not among software engineers -- and it looks like the U.S. is entering another recession.
With lower spending and more saving, only startups that deliver measurable value will be able to get real customers and make real money -- and those are the metrics that investors care about this time.
Housing prices in Palo Alto may indeed have gone up 50% to $1.2 million in the last six months like the Times reports -- although that statistic comes from one real estate Web site and doesn't match what we've heard anecdotally at all. (A house for under $1 million in Palo Alto was just as rare 6 months ago as it is now. Maybe the statistic was skewed by a bunch of condo sales late last year and early this year.)
If you want to look at real evidence rather than anecdotes, the seasonal-adjusted Case-Schiller index tells a very different story -- San Francisco real estate prices have actually dropped since a small peak last June, and are still way below where they were in October 2008. They are up about 12% since hitting bottom in May 2009. That's better than most other cities, but it's nothing like the doubling in real-estate prices between 1995 and 2000.
There are lots of parties -- launch parties, funding parties, even 'pivot' parties that celebrate the failure of one business model and the switch to another. But they're nowhere near their dot-com peak when startups were spending literally millions of dollars on arena rock bands like The Who. MC Hammer isn't exactly a huge draw on the concert circuit. When we see the Arcade Fire or Lady Gaga playing a launch party, then we'll know the bubble is back.
It's possible that the tech boom of the last year is nothing at all like 1999, but a lot like 1995. We could conceivably see four years of massive expansion and speculation, and end up with companies going public on nothing more than a slide deck.
But we're nowhere close to that point today, and today's investors, analysts, and startup executives are far more knowledgeable and cautious about the high-tech industry than they were in the late 1990s.
Plus, bubbles in particular asset classes tend to be singular events -- after all, there was only one tulip bubble, and real estate prices in Japan have never recovered to their early '90s peak. The next bubble, whatever it is, will probably be somewhere else.