Froth Watch: Silicon Alley Investors Don’t See a Bubble

The current tech boom is not a bubble yet, according to some investors in Silicon Alley.

In an interview with Fred Wilson for TechCrunch TV, Chris Dixon asks Fred Wilson what stage he thinks the early-stage technology investment market is in.

Mr. Dixon asserts that “the fundamentals are strong.” He brings up the word “bubble” in his opening question for Mr. Wilson, who quickly batted down the notion that investment furor had reached that level. Mr. Wilson did express concern, however, about high valuations for “first-time founders who’ve never done it before” and investors trying to jump on the hottest new thing. He mentioned Quora specifically as a site that boasted a very high early valuation. “Maybe it’s me being annoyed that I can’t get the deal I used to get a year or two ago,” said Mr. Wilson.

High valuations notwithstanding, Mr. Wilson also said that Google is worth $200 billion, and he sees Facebook as equal in value to the search giant. By that logic, Facebook at $50 billion is still a worthwhile investment. Reuters’ Felix Salmon did a similar back-of-the-envelope calculation for Twitter yesterday:

If Twitter is 20% the size of Facebook, and Facebook is worth $50 billion, then Twitter can be worth $10 billion, no? And the proportion of the market capitalization of all the telcos around the world which can be attributed to text messaging is so mind-bogglingly enormous as to make $10 billion seem like a rounding error.

Not to be outdone by a web video, Roger Ehrenberg weighed in with his own bullish take:

Great franchises cannot always be valued purely on the basis of revenue or current cash flow. This isn’t sophistry, it’s simply reality. When Google paid $1.65 billion for YouTube, many thought this was merely a symbol of having way too much cash to spend on something irrational which it coveted. Fast forward, Google has had to pump hundreds of millions into integrating and scaling the YouTube platform, but will this acquisition pay off on an ROI basis? Google has created a unique property in one of the fastest growing segments of the online market, and they have the resources to take the long view. I bet it will turn out to have been a prescient deal for the company.

Even though, as Salmon acknowledges, it’s pretty much a fundamental truth that venture investing is extraordinarily risky and in the absence of proven business models other metrics need to be applied, it is still undertandably disconcerting to hear people actually say things like “cannot always be valued purely on the basis of revenue or current cash flow” as valuations reach for the skies. Careful out there!

mtaylor [at] | @mbrookstaylor

Froth Watch: Silicon Alley Investors Don’t See a Bubble