Don't Call It a Bubble

It may be tempting to draw parallels between Web 2.0 hype and the dot-com frenzy. But hard numbers show this isn't 1999

by Sarah Lacy

I spent last week in Memphis, Tenn., as far away as I could get from Silicon Valley. I have been immersed in the Web 2.0 scene for the better part of a year—attending no fewer than a dozen events in the prior month alone—and I was tired of it. Tired of the small talk; tired of being "on"; tired of mugging for photos that would be posted on someone's blog the next day. I needed a break.

Then I read Michael Arrington's "Silicon Valley Could Use A Downturn Right About Now." The TechCrunch blogger hearkened back to 2005, when there was a lot more "goodwill and community surrounding innovation." When new ideas were discussed over burgers and beers—not hyped at lavish parties. Companies were launched in living rooms. Now they're drawing millions in venture funding—not all of it deserved.

Weak Parallels

I see his point. I, too, recall that in the not-too-distant past—before Google (GOOG) shelled out $1.65 billion for YouTube in 2006—people were starting companies because they thought they had cool ideas—not just to flip a startup to Yahoo! (YHOO) or Google. There was less talk of "exit strategy" and more emphasis on fun projects put together with friends on a shoestring budget.

That air of excitement has given way to a climate of giddiness. At no time was that more evident than on Apr. 16, the opening night of the Web 2.0 Expo, when at least five parties were in full swing in a several-block radius of San Francisco's South of Market district. The hottest ticket was for the NetVibes "Universe Launch Party" at hotspot 111 Minna. The whole affair felt downright breathless.

My hunch is most of the people at the party—and the hundreds lined up outside—didn't even know what NetVibes does. For the record, it's a site that lets you grab mini applications from other sites to create your own mashed-up home page.

I'll admit it. It felt a lot like 1999. But as tempting as it may be to draw stronger parallels between today and the period before the dot-com bubble burst, once you move beyond gut feelings, the comparison simply doesn't stand up.

What's Different

Consider some areas of glaring contrast between today's Net startups and the dot-com implosion of a half-decade ago.

• IPOs. Not only are we not seeing the IPO frenzy of years gone by, we're not seeing Web 2.0 IPOs, period. Yes, Internet companies like NetSuite are planning to sell shares and a few others like OpenTable.com are considering an IPO. But among the companies specializing in the user-generated content, social media, and social networking that make up the Web 2.0 scene, there's not a one.

Even Facebook, which has already turned down $1 billion from Yahoo, likely won't sell shares to the public until 2009. Say there was a big Web 2.0 bust tomorrow; without IPOs, you're pretty much limiting any potential financial carnage to the companies and their investors, not the countless individual and larger investors singed a half-decade ago. In 1999, a record 270 venture-backed companies went public for a combined $21 billion. They weren't all dot-coms of course, but many were pumped up by the dot-com hype. Last year, 57 companies went public, for a total of $5.1 billion.