Stefano Bernardi Head of Customer Development at Betable.

Every once in a while we see a blog post that calls out the bubble. This time, it was Nick Bilton’s turn. Once that happens, the twitterverse goes nuts on replies, from Dave’s total rage to Des’s dismissing irony. We also see a ton of very insightful blog posts about it, so it’s not all bad. Chris Dixon weighted in, as did Michael Arrington and MG Siegler. Tech blogs picked it up too of course, including VentureBeat and GigaOm.

I’d like to do a slightly more analytical and less religious discussion about it and put it here in the simplest terms possible, to try to explain to people not in the “scene” what a bubble is, what happened during the dot com bubble and what is happening now. Let’s start with the definition of a bubble. This should also be valuable for clueless tech journalists looking for pageviews.

A bubble happens when a huge amount of money get thrown in a specific market. At first valuations rise incredibly, as everyone thinks the market is growing like crazy. Investors start putting their money into riskier assets and think everything is fine. At some point the bubble bursts. This happens when the crazy growing phase stops and people realize how overpriced goods, services or companies are. Here is the definition of bubble by Investopedia:

A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.

This is what happened in the real estate crisis and the dot com bubble. Investors decided that picking up subprime-mortgages was fine as the prices were growing and “who would default?”. Then sub-prime mortgages started to default, and suddenly a lot of houses hit the market bringing down the prices and values. Boom.

This is also what happened in the dot com bubble. VCs started investing in more and more startups, even ones that had no market or business model. Companies were spending like crazy to acquire customers but had no clues on how to turn profits. Everyone decided to go public to up their valuation and raise more money. This shifted the risk from VCs to normal investors. The high number of internet companies going public and the realization that their markets were minuscule and business models where flawed made the bubble pop. Boom, with the difference that now many small private investors had put tons of money in the stock market and saw it all disappear.

Now, let’s try to put together a few numbers and facts

• In 1995 (start of the internet boom) there were 16 million online users.
• In 2000 (bubble burst) there were 350 million users online.
• Today there are 2.2 billions people on the internet.
• Facebook has got 3 times the users of the entire internet population at the time of the dot com bubble.
• US eCommerce and Online Retail sales projected to reach $226 billion.
• Mobile. There are now 5.6billion people with mobile phones.
• Smartphones. 1.8 billion, and 91 million of those are in the USA.

I feel that many journalists focus on the occasional $40m founding round and $1b acquisition and forget a lot of very important facts.

I think we’re in a period of economic growth. You get a complimentary definition courtesy of Wikipedia.

Economic growth is the increase in the amount of the goods and services produced by an economy over time.

The reality is that there are a ton of people online, who are spending money on internet companies. There are also a ton of people that spend a lot of time online for whose eyeballs other companies are extremely willing to pay. The reality is that LinkedIn, Zynga, Facebook, Google, Amazon, ZipCar, Pandora, Ebay are all companies making real revenue and adding real value. The reality is that there is space for more disruption while earning a lot of revenue. Everyday someone new gets on the internet, everyday someone new starts to spend money on the internet. This is not slowing down and will probably top at the whole world population (which is also growing like crazy).

Valuing Facebook at close to $100b is speculative to say the least, and nobody can know if it’s a good bet for a few years. But we also must acknowledge that Facebook still has a lot of non-monetized potential, and that will factor in its valuation. What would it be worth at the moment? Let’s say 30b? I could see myself paying 3x that price betting that it has the potential to actually be a 10x valuation.

Was Instagram worth $1b, not for you and definitely not for me. But for Facebook it was, probably even more than that. Were $40m for Color a good investment? Definitely not. Were they the start of a bubble? Not either. But I do believe there is the risk for a bubble. Every person who can code thinks they can raise millions of dollars for an app with no business model and no real product market fit. Fortunately, we’re definitely not at this stage yet. Some people are able to raise funding for products that have me raise eyebrows, but they are the minority in a pool of incredibly smart, hard-working, passionate and motivated people that are building awesome products with clear business models and huge markets.

Raising funds is still very hard in the valley, and raising them at sound valuations consistently through the life of a company is almost a miracle.

Companies that create value, have a clear business model in a huge market, with passionate and smart founders will never be in high supply. Let’s keep on investing in those and everybody will be fine.

Sources:

http://www.internetworldstats.com/emarketing.htm

http://en.wikipedia.org/wiki/E-commerce 

http://en.wikipedia.org/wiki/List_of_countries_by_number_of_mobile_phones_in_use

http://www.go-gulf.com/blog/smartphone