Amid all the excitement about Web-based startups such as YouTube, MySpace and Facebook, there is one word that almost everyone is afraid to say. Here's a hint: It starts with a "b" and it rhymes with "trouble," and when it pops suddenly, as it did in 2000, it can make millions of investors very unhappy.
Given the $1.6-billion (U.S.) that Google just paid for YouTube, the $580-million that News Corp. splashed out for MySpace, and the rumoured $1-billion that Facebook is being shopped around for (not to mention the eye-popping $4.1-billion Skype deal), it's tempting to think that we are in another tech bubble.
But are we?
The answer depends on how you define a bubble. Is there an awful lot of enthusiasm out there about social networking and Web-based services? Definitely. There's also a ton of money flowing around Silicon Valley, which makes many people nervous, since the venture capital (VC) market tends to be a supply-driven business.
In other words, all that cash wants to find a home somewhere. In many cases, venture capitalists will force startup founders to take far more money than they really need. After they do so, of course, they invariably want to get it all back as quickly as possible, which usually means going public and flooding the market with stock. Does the name Webvan ring a bell?
One of the interesting things about this time around, however, is that there have been relatively few tech initial public offerings. Vonage and Shutterfly are about the only ones worth mentioning, and the former -- a voice over Internet protocol play -- is believed to have gone public because its backers were desperate to get their money out.
What is happening instead is that companies are not just financing their early, garage-based days by themselves (or with small amounts of "angel" funding) but are building their businesses to a substantial size -- in some cases large enough to make them an attractive acquisition target -- with virtually no traditional VC money whatsoever, and therefore no need for an IPO.
One of the companies that often gets mentioned is Meebo. The founders built the company (which allows Web users to log in to multiple instant messaging networks) using their credit cards and a small amount of angel funding. When they did get VC backing, it was on much better terms than if they had done it earlier.
DabbleDB, a Web-based database provider based in Vancouver, was courted by the major Silicon Valley VC groups, but turned them all down and eventually accepted a smaller amount of money -- with fewer strings attached -- from the Canadian group Ventures West.
One of the things that allows startups such as Meebo to get by with less money is that Web-based businesses can be run on a virtual shoestring, thanks to a raft of cheap online services. Amazon, for example, has made many a startup's life a lot easier with a data-storage service it recently introduced called S3, and a related server offering called EC2, which allow companies to host their services cheaply on Amazon's gigantic server farms.
Don MacAskill, chief executive officer of a photo-sharing site called SmugMug, recently wrote about how Amazon's services have made his business easier and more profitable. SmugMug hosts more than 500 million photos, or 300 terabytes of data (users get unlimited storage) and now instead of paying huge amounts up front for storage and bandwidth, it can pay small amounts as required.
Entrepreneur Joe Kraus, one of the founders of the early Web portal Excite, said it cost more than $3-million to get that company from the idea stage to the operational stage. His latest company, JotSpot -- which was recently acquired by Google for an undisclosed sum -- took just $100,000 to get to the same stage.
In addition to services such as Amazon's, Google offers half-a-dozen free services that businesses can use, including Web tools such as maps, e-mail, calendars and spreadsheets. Other companies, including Toronto-based Freshbooks, provide free or inexpensive services that startups can use to do invoicing, time-tracking and other administrative functions cheaply.
There's no question that the amounts of money Google, News Corp. and eBay have paid for their acquisitions are massive, and it could be argued that this is a sign of a return to irrational exuberance. At least this time around, however, the companies they are buying are a lot closer to being real businesses, and investors are one step removed from the risks.
Mathew Ingram writes analysis and commentary for globeandmail.com
