MoneyWatch Tech

All Hail the Oncoming Tech Bubble

By Erik Sherman

Updated on: November 15, 2010 / 4:40 PM EST / MoneyWatch

Irrational exuberance has returned to high tech, at least among professional investors, according to a number of experts. Om Malik of GigaOM notes that the amount of money pumped into start-ups is on the rise, talent is becoming scarce, and the media has focused on investors, not founders.

Venture capitalist blogger Fred Wilson, who touched off this latest discussion, sees the problem in swiftly rising company valuations and the willingness to do large deals in so little time that proper due diligence isn't possible. Both have good vantage points, but are wrong if they think that this is start-up and Web-related hyperinflation with limited impact. Any bubble starts with the early warnings signs, and the ones they note are just a portion of those in sight. Yes, Virginia, there can be another tech bubble. In fact, it's already on its way. However, it's not a bubble of manic investing, but, rather, one of desperation to survive seething industry-wide changes.

If the overheat was confined to Silicon Valley start-ups, you could more easily brush it off as angel and VC investors duking it out to get the best terms and make the most money off entrepreneurs. However, the irrationality goes further:

Look at the insane bidding for 3PAR by HP (HPQ) and Dell (DELL). HP paid more than 12 times annual revenue for a tiny share of the storage market.
The entire wireless market is in open corporate warfare, with old business partners suing each other and enough patent litigation to keep an army of lawyers in good economic shape for years to come.
Many hardware vendors -- now including Cisco (CSCO) -- have begun to lay the groundwork to create their own chips, because the only way forward that they see is the vertical integration that the industry once rejected. Even Microsoft has joined the crowd.
Computing and content are undergoing atomization, so the artificial bundling -- whether of computing capabilities, music, writing, video, or information services -- that used to ensure large corporate revenues is dissolving. Companies don't know what to do to maintain their size and importance.

These factors and others are reverberating throughout the industry and shaking up old orders and ways of doing business. The previous tech bubble was a product of greed and the belief in the gullibility of others. (There's a reason that some seasoned investors discussed the so-called greater fool theory -- buy something at one price and sell at a mark-up to a bigger fool.)

This one is different, the product of uncertain times and massive change. Of course greed is still a factor, but more important is fear. Angel investors are afraid of valuations that might edge them out of profits when no one knows how well the markets will do. VCs see a lot of investment business going overseas. Large companies need to grow but see less and less room in their own sectors to do so. Small companies want to grab a piece of the business pie before it's snapped up by a tiny handful of young companies that are rapidly growing.

It's a bubble inflating by internalized fear, uncertainty, and doubt. When it goes, it won't be in an explosion, but an implosion that will have effects more far reaching than the last collapse we saw.

Related:

Image: RGBStock.com user bodgie, site standard license.