Here We Go Again…

I remember that Monday morning, January 10, 2000.  The day that AOL announced it was buying Time Warner.  The word starting seeping out the night before, Sunday night.  I went to sleep like it was Christmas eve, and couldn’t wait for what market madness the morning would bring.  I was working at Flatiron Partners, and Fred, Jerry, Bob and I had a standing Monday morning breakfast at the Mayrose Diner.  We all looked at eachother that Monday morning with our mouths agape, shaking our heads in amazement that this was really happening.  In retrospect, that deal was a watershed for the Internet.  It announced that new media was going to be bigger than old media.  It also marked the final inflation of a bubble that popped painfully only a few months down the road.

I came home tonight to a techmeme filled with news about Amazon’s boffo earnings, rumors about Yahoo! and Microsoft’s interest in acquiring Foursquare, and a Bloomberg Business Week analysis of whether Pincus’s Zynga can continue to extract hundreds of millions of dollars from people buying virtual hoes in his games on Facebook.  Brad Stone’s story about sharing credit card transactions in public was already filed for tomorrow New York Times.  Waiting for me on the kitchen counter was a copy of this week’s New Yorker, filled with an essay by Ken Auletta “Publish or Perish:  The Ipad Takes on the Kindle.”  Next to it was New York magazine, whose cover “Life is Tweet” features Sam from, Karp from Tumblr and Dens from Foursquare.  All the while, my mind was still adjusting to the new contours that had been etched into it, first by Twitter’s annotation feature announced at its Chirp conference last week, and then by Facebook’s Open Graph blitzkrieg yesterday.  It feels like something big is about to pop, something on the AOL-buys-Time Warner richter scale.

All of which begs the question, what gives?  The great recession of 2008 is a distant memory, as we move through the Spring of 2010 with stocks like Apple and Amazon up more than 100% from their lows.  The Nasdaq chart from the financial crisis up until now looks something like this:

And to think, the seminal stock of the social media era, Facebook, has yet to trade a single share in the public market.  One can only imagine how much pent-up demand there is from mutual funds, hedge funds and retail investors for stock in this company that has established the default identity system for what will soon be over 1 billion people around the world.  One could argue that the value of this resource on a macro economic basis is commensurate with that of oil (ie Exxon Mobil) or of the two primary computer operating systems (Apple and Microsoft), and that the “mature” value of Facebook in 2012 might be closer to $300b than $30b.

And yet, against the breathlessness of what might be, is the reality of what once was.  All we need to do is look at the Nasdaq chart from the 1998 Russian financial crisis through the dot com bubble of 2000 to give us pause:

Although I am not a market technician, my spider sense is tingling.  The wheels of capitalism are back in motion, and liquidity is flowing from the top to the bottom of the cap structure.  University endowments are trying to distinguish deal flow quality from the PayPal mafia versus the Xoogler community; Web 1.0 bankers are reuniting to capitalize on the coming Web 2.0 IPO liquidity, and startups with big ideas, hockey stick user growth, but relatively little revenue, are commanding eight figure Series A valuations.

Markets tend to overact on the way up and on the way down, so we may well see an extended period of bullishness over the coming months or even years.  The Nasdaq has another 100% to go before it gets into the same trough to peak range we saw 10 years ago.  The bubble needs to wait for companies like Facebook, Groupon and Twitter to transition from privately held to publicly traded before bursting.  But burst it will, as it always does.  Not before, however, some very fortunate entrepreneurs, investors and bankers make out with new fortunes.


In light of all this, it hadn’t occurred to me until now how uncanny my experience last Saturday night was.  Tina and I ventured out from Marin into SF to join Kara Swisher and Quincy Smith for what we thought was going to be smallish dinner honoring Bob Pittman.  Yes, that Bob Pittman.  The one who, along with Steve Case at AOL, bought Time Warner.  The one who made us all shake our heads in amazement that Monday morning ten years ago.  As we walked into the back room of Tres Agaves, we quickly realized that this was no small dinner party.  There had to be at least a hundred friends and colleagues milling around: Google execs, angels, VC’s, Public and startup CEOs.  Everybody was enjoying the open bar and free flowing conversations.  As I made my way to the back, to take a breath, there was Bob Pittman, off to the corner, looking fit as ever.  The only noticeable difference was a fresh shade of sandy gray stubble matching his sandy gray hair.   Every few minutes, somebody would venture up to him and shake his hand and reminisce about the last time they met.  The younger startup folks seemed to have no idea who he was and were more concerned with putting together their tacos from the cart.  Little did they know, however, how much their future will be shaped by his past.

99 thoughts on “Here We Go Again…

  1. i remember that morning at the mayrose seth. it is gone now, as you know, but internet mania is not. that’s the point of this post, i think, and it is a good observation

  2. “Amazon’s boffo earnings”

    Yes, more than 12 years after they floated, their operating margins are almost as good as Wal-Mart’s.

    I could have sworn the whole dotcom bubble was predicated on the belief that online retailers would achieve far higher margins than physical retailers.

  3. Great post. I am glad you put into words what many of us are feeling. Have you ever stepped outside on a bright summer day and ‘smelled’ rain coming? That’s how I feel about the impending train wreck in new media / web 2.0. The spectre is out there. It’s palpable. You can feel it. Hear it. Smell it.

  4. @seth – yes, it never ceases to amaze me how most humans have the memory of a goldfish. Newsweek had a cover story a couple of weeks ago about ‘America is back!’ — except that they forgot that most of the country is out of work and financially under water… I could easily imagine a further 100% run-up for Nasdaq before the inevitable decline — valuations in tech are more about ‘the wish fulfillment of the herd’ than anything else.

    @Carl – I think the mania was predicated less on future margins for physical goods and more on 1) Amazon eradicating physical retailers altogether and 2) the allure of exciting (higher margin) businesses that were unknown unknowns at the time (eg Kindle, Amazon Book Store, movie rentals).

  5. It’s a lot of fun watching someone build a house of cards. It’s even more fun to help them build it. The trick is to leave the room before the thing comes tumblin’ down.

  6. @Rurik – MOST of the country is NOT out of work. I think you may have been watching too much cable news.

    • @Patrick OK, OK I exaggerate — but the real unemployment rate is pretty bad right now and there is a huge hidden iceberg of debt at both the financial institutional and consumer levels that has yet to be written down. (It will be a very painful process, over many years.) By April 2010, things do ‘seem’ ok in many ways, and that new positive sentiment is enough to allow the wishful thinking tech herd into a new mini-bubble (which I think is Seth’s point, or at least the point I extrapolate).

      To be clear, there are great things happening in tech: Facebook’s Putsch this week is an amazing chess move, and may well lead to a $300bn valuation in 2015 (not 2012), alongside a major government clampdown. But we should bear in mind the dire financial status of much of the country — it is the elephant in the tech boom room (excuse the rhyming).

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  9. The perspectives gained are unique and the experiences invaluable. Few can say they have both and are still around to bring them to bear on opportunities for the future. Glad to have your voice Seth.

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  11. Interesting post.
    Definitely had me reading the whole thing- but I have to say I disagree.
    I don’t see how a 66% increase from recessionary lows can compare to a more than 150% increase during a period of irrational exuberance.
    I get it – who is to say we’re not in irrational exuberance now?
    Well for one the NASDAQ is pretty much half of what it was before. Additionally, NASDAQ highs today still haven’t returned to 2007 levels, where as in 2000 NASDAQ had never seen equivalent highs. So I don’t think using these comparisons there is reason to conclude they are similar.

    And lastly look at the economics driving the 2000 deals. I think corporations have poorly valued their acquisitions but the public market has looked for true revenue and business models from their web 2.0 all stars- and punished companies for their track record of poorly valued Web 2.0 acquisitions.

    Again interesting narrative. I have a difference of opinion.

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  13. Seth – I remember that morning well myself (as AOL’s banker on the deal). We thought we were changing the world that morning…..and I think we did……we just didn’t realize it had a long time-delay fuse. What we are seeing in our strategic deal discussions leads me to think that you are right.

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  16. Mostly I agree with you. But any prediction about future without a reasonable time estimate is very speculative indeed.

    A weather forecast like “it is going to rain” does not help much.

    However, I believe the real message here is internet mania with all the enthusiasm, belief, ego and hype is still alive after all these years. And very much true indeed.

  17. It’s all a myth! There is only HYPE and speculation and sometimes encouragement to ‘make believe’ that something BIG is around the corner. What’s really taking place is a further fragmenting of the ‘cybercom-media-landscape’ into ever increasing tiny little pieces.

    In fact the whole thing is only serving to further confuse the individual and fracture the mass by generating and offering a miasma of disparate technologies, models, formats and brands.

    If anything, all we’ll witness is a burst of activity – a mad scramble for sticky web assets from XLE’s (Extremely Large Enterprises) – particularly in the social networking space. Followed by a further bombardment of a whole new range of ‘apps’ and means for communicating from one person to another and from individual to group.

    in respect of the ‘merger’, I remember the AOL promise only too well and predicted it would fail from day 1. Reason being that the old media really didn’t understand the new media and that the bridging of the two was way ahead of its time. Beyond that, the Time Warner/ AOL model (which, incidentally was predicted in an early 80’s OMNI ALMANAC) would have pitched old school media boys within TW against the AOL New Kids on the block – and hesitate to guess, the ego’s would’ve been way too big for both to form a new harmonious working cluster.

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