In a recent post I talked about the media tech bubble ("of course it's a bubble"), hypothesising that the clearest sign of a bubble is that every single IPO is being priced as if it's the next Google...which of course they can't all be. So some brief thoughts on why this might be.
Nobody wants to be the guy who turned down the next Beatles (or the next J K Rowling, or perhaps more germanely the next Google) - every industry has its legendary poor dumb bastard, "that guy" who had the Next Big Thing sitting right across his desk and passed. I've worked on acquisition strategies before with people who seemed more concerned than was entirely healthy that they not be "that guy".
In fact the only way to make sure you're not that guy who turned down the next Google is to bet on everything as if it is the next Google. Which is where we find ourselves now. Everyone bets on everything as if it's the next Google, and so Facebook is worth $100 billion, AirBnB is worth $1 billion, a "grilled cheese platform" can take $10m and LinkedIn, Demand Media, Zynga, Groupon etc et al can go all the way from first round to float on that same basis. Assume they're all the next big thing. Put a number on it. That's where the valuations are coming from. Not wanting to turn down the Beatles means that every time two six-formers turn up with a couple of lines of poetry scribbled on the back of an envelope they're immediately handed a seven figure retainer, just in case.
Which is dumb on two levels. First, as I said in my last post, not everyone is going to be the market leader. If you don't know how many gateway monopolies there's room for in each market, here's a hint - you can usually count them on the fingers of one, well, finger.
Second, the challenges most of these businesses face don't even bear any real comparison with the challenge once faced by Google. Google had a market-leading consumer proposition and was waiting to find the business model that worked with it. It found it in time with AdWords, connecting commercially-focused searches with paid results. Yet somehow this has become the example that allows every dotcom and its investors to claim that they don't even need to be making money right now.
Up to a point it's true - you usually should start with a landgrab and worry about making money later. But you can only use Google as an example if your problem is vaguely similar. Demand Media (to take one example) has pretty much the opposite problem Google once faced - a superficially viable business model tied to an awful consumer experience. LinkedIn has a cruel twist on the problem, where it's blindlingly obvious how its consumer proposition can also be a business model (charge to connect recruiters with users) but not obvious how to implement that without alienating the users. Groupon has a completely different competitive space in which its first-mover defensibility is increasingly dubious. Facebook has a killer network effect but so did MySpace, not so long ago, and the social network doesn't have anything to tie people in comparable to the Google search algorithm. Just pointing at Google and repeating the mantra "those guys started out not making money" isn't going to cut it when you consider in detail the completely different challenges faced by this set of companies.
We need to learn not to mind that we turned down the Beatles - that, in fact, turning down the Beatles is almost the inevitable consequence of a sane investment strategy that turns down most things. One comes along in a generation, at most, and there's no reliable system for spotting them. Chasing the notion that we can't let the next big thing get away has left every single possible investment ludicrously over-valued. If you stumble into a goldmine in your back yard you're just, very, very lucky. If your neighbour stumbles into it first it doesnt mean you're doing anything wrong, and it doesn't mean you should have been wandering round the garden with a torch and a spade all along.
(Photo by Jerry on Flickr)