Is a New Tech Bubble Brewing?

Last April I reported on venture valuations going into Wascally Wabid land: insanely great levels from very small beginnings. Today the WSJ headlined the phenomenon as Web Start-Up Values Soar, with some examples:

  • Quora raised $14m at $88m post value before it even launched its service
  • Blippy raised $11m at a $46m post value
  • Foursquare raised $20m at $95m post value, up from a mere $1.35m at $6m value less than a year earlier

For those not familiar with venture funding, these are very big jumps, and very rapid. There have been more like this, although the whole group of wascally wabid companies is still relatively few (under 20).

What it has done is spawn a Cambrian Explosion of new ventures, increasingly funded by a new class of venture investors, the so-called SuperAngels. When this emergent phenomenon is combined with the global rush for smartphones and connected devices, it suggests that a new tech bubble is coming.

This is how it felt around 1978, when a plethora of new PC companies got started, some with wascally widiculous names like Kentucky Fried Computers, or the dot-com bubble, with all of those’s. Reading economic history, this must but what it felt like in the early days of autos, with over 300 car companies started. There have been false starts before, such as pen-based computing in the late 1980s, but they never got this far.

Tech bubbles follow a different timetable than credit bubbles, and are not driven by cheap money but by fundamental breakthroughs. The main driver of the other tech bubbles has been Moore’s Law, the inexorable improvement in processing power at the chip level. The PC bubble came from the microprocessor. The dot-com bubble came from breakthroughs in modems. This proto-bubble is coming from the culmination of Moore’s Law, where all the infrastructure to build a consumer web app is available for dirt cheap. Moore’s Law has made computers, software, networks and data centers so cheap that value is being created at the top of the stack. The Era of Cheap is drving the explosion of new consumer Internet ventures.

It may seem challenging for a new tech boom to emerge inside of the New Normal economic environment. Yet the PC bubble grew large during the last double-dip, in 1980-82, and faded when the broader market took off. In the New Normal, there is a Global Scramble for Yield: with rates low everywhere, capital rushes into areas that can deliver. And when tech booms run, they deliver remarkable returns, at least to the winners. And they can run even when the other indexes stutter-step.

The broader market technical are showing the possibility of such a breakout in the Nasdaq. The Naz has never recovered after the 2000 peak, unlike the Dow and the S&P, and has formed a large converging triangle pattern. It is very close to smashing above the upper trendline since 2000. Triangles are corrective formations, and this one connects the 20 year bull market (from the PC bubble to the dot-com mania) to a new bull run. If we break up, we should run pretty long and hard to new highs.

(click to enlarge)

The pattern may not break out now, but have one more drop to complete the triangle. Triangles are five-wave patterns, and this one has only had four so far. The final wave should be short in time and distance compared with the prior waves. The breakout should be fairly strong, a thrust out, and should take us at least as far as the largest width of the triangle, the initial drip, meaning we should go to new highs.

About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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