While there certainly are some frothy valuations in certain parts of techdom, it's difficult to call it a bubble - at least not when compared to the Internet Bubble. The Bubble 1.0 tide rose all boats. It didn't matter what sector you were in, if you put “.com" at the end of your name, you immediately achieved valuations that you wouldn't have imagined in your wildest dreams. It didn't matter if you were selling low margin products like aspirin or pet-food; Dot-Com-it and you were a darling. Bubble 1.0 was also characterized by an obscenely large amount of venture capital. At the height of the DotCom mania in 1999, venture firms invested $100B. As a result of this flood of investment dollars, every good idea had 10 well-funded companies chasing it.
As has been often pointed out, a large portion of Bubble 1.0 companies didn't even have business models. They were valued on such esoteric metrics as eyeballs, clicks, or page-views. For the few who actually sold things and generated revenue, their values seemingly were higher the more money they lost, as long as they could spin a story about how losing even more money allowed them to grow faster. I remember well a conversation I had at the time with Pat Connolly, the CMO of Williams-Sonoma who was bemoaning the fact that Wall Street measured him on boring things like gross-margins and profits, but all of his startup competitors weren't held to the same standard.
Finally, during Bubble 1.0, public market valuations were bubblelicious even for large non-Dot-Com companies. Cisco, Microsoft, and Oracle had P/E ratios of 150+, 78 and 120 respectively (I can't say how high Cisco actually was because my reference source stops at 150!). Even GE, hardly a fast growing tech company, sported a PE north of 45. For large-cap companies, those are impressive valuations indeed.
Fast forward to the "Bubble" many commentators are claiming we're now in, Bubble 2.0. By virtually any measure, if you use Bubble 1.0 as your yardstick, we're not in anything close to a Bubble.
The primary argument that is being made for a new bubble are the fantastic valuations that the big 5 (Facebook, Twitter, Groupon, Zynga, and LinkedIn) are getting on the secondary market. In these markets, buyers and sellers don't have access to the same information. For most of the buyers, it is a momentum bet on the assumption of the existence of a greater fool. That said, unlike the last time, with the exception of Twitter, these darlings all have business models that are generating tremendous revenue growth and, if the buzz is to be believed, are incredibly profitable. We'll see when their numbers all become public whether these secondary market buyers were all "greater fools" or savvy trend pickers.
Go beyond those 5 and the signs of a bubble are pretty weak. Starting with the amount of money that venture firms are investing, today it is fully 1/5th of what it was the last time, a "mere" $20B. As a result, there aren't 10 well-funded companies chasing every great idea. What about all the "super-angels" you ask? They certainly make getting capital to start a company much easier, but once the company starts growing, in all but the rarest of cases, it still needs capital to grow. With less venture capital going in, there are fewer competitors with the capital to effectively scale their businesses.
Aren't VCs paying crazy valuations again? What about FourSquare's rumored $400m valuation, or Quora's rumored $85m valuation for their first round when they had just a few people and an idea. Heady valuations for sure, and not having been a part of the partner discussions when those decisions were made, I don't know what arguments used to justify them - but I can guess. Heady valuations for "Hot" and "Darling" companies are nothing new in Silicon Valley. And sometimes they even pay off. Google was a "hot" company with a seemingly outlandish valuation at the time and that seemed to work out just fine for everyone. There are always a few companies that, based on the charisma or track record of the founders or some particular set of stars aligning correctly get fantastic valuations. There are always the exceptional startups that generate the exceptional venture valuations. As I discussed previously, this sort of exceptional valuation is far from a guarantee of investment success.
Finally, look at public market comparables: they aren't even close to flashing red, I don't think they are even yellow. Back to the big three last time around and their average P/E, today the three highest profile public tech companies (who also happen to be the largest by market cap) are Apple, Google, and Microsoft, which together have an average PE ratio of 17.6. Far, far below the levels reached during Bubble 1.0.
Silicon Valley has been built on a series of major innovation waves. With each new wave comes some new mega-winners. We're in the opening stages of waves in social-media, hand-held computing, the consumerization of IT, Infrastructure 2.0, and the move of many IT functions and services to the Cloud. We haven't even scratched the surface of these opportunities so it seems a bit premature to be calling it a bubble. So for all those people paralyzed in fear of a Bubble, stop being a Chicken-Little and go out there and innovate!