Saturday, December 4, 2010

Is Silicon Valley Headed For Dot-Com Bust 2.0?

On the front page left column above the fold article in the NYT today, "Silicon Valley Showing Signs of Bubble", the article questions whether all the venture capital money flowing to current Silicon Valley social network start ups will actually pan out in the long run, particularly in terms of the huge amounts they're investing in these entities. Some of the apps trade on exclusivity, almost like Studio 54, like Path, "an iPhone app for sharing only photos on a social network limited to only 50 people". Investors coughed up $2.5 million for that one.

The question becomes, will these young and hot entities go the way of early 21st century dot com busts like

Are we seeing herd behavior again? People are afraid to "miss the next big thing". There are differences between 1.0 and 2.0. Most of the companies now are not traded on the stock exchange so there is no exchange bubble. Of course, that leads to questions of transparency and regulation in favor of investors.

But in this current environment, when money is hard to come by with ZIRP interest rates, cash is king. And some technology companies are sitting on a lot of cash.

[Microsoft, Apple or Google] have about $90 billion in case on their books. McKinsey & Company calculates that the largest software and hardware companies have enough excess cash on hand to buy nearly all of the tech industry's medium-sized companies.

The question in my mind is, how will these companies eke out profits? Will online advertising actually support these businesses in the long run?

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