DigitalMoses: Is It a Bubble, and Do We Want It to Burst?

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DM CONFIDENTIAL – Just recently, we came across a chart that Business Insider put together. It showed the stock price of a small publicly traded company who announced they acquired a $6 million stake in Facebook. The next day, the stock shot up. As there was not other major news from them, the only rational explanation for the surge was their being a proxy to owning Facebook.

The same was said as a reason for LinkedIn’s major opening day surge. People really wanted to own Facebook, but a business social network was the next best thing. The fevered interest in private companies is no different.

While we don’t have the empirical evidence in front of us, were we to look at angel and Series A rounds over the past three years, it would almost certainly show pre-money valuations at a high and time to fund at its lows. In other words, companies are getting money quicker than during anytime over the past several years while not having to give up as much for it.

This exuberance and competition to own/fund tech companies differs drastically from the broader economic climate. A new poll conducted by CBS and The New York Times finds that 39% of Americans believe the U.S. economy has entered permanent decline, but arguably more important, 63% believe the country is headed in the wrong direction.

People are still out of work in almost record amounts. Data collected by The Misery Index, which aggregates Department of Labor Statistics, shows that the unemployment rate has reached and continues to remain at a level not seen since 1982 and 1983 when unemployment reached 9.7 percent. And, if the 1980’s are any guide, we could be looking at three more years of elevated unemployment where the rates hover at a better but uninspiring 7%+. What separates these past several years from any other in the last 60 years is the dramatic jump in unemployment that happened during the heart of the financial crisis, namely from 2008 to 2009.

Consumers and businesses are still spending. Just look at Apple’s record sales year after year. While they have corporate clients, unlike Microsoft, it’s the average consumer who drives their revenues. Other companies too have done quite well over the past year and a half including Google who, like Apple, has quite substantial cash reserves. Google at least has shown a willingness to spend some of its money, from its failed bid to purchase Groupon to its most recent acquisition of Admeld for $400 million.

Another company doing phenomenally well from consumer spending is social game developer Zynga, who will soon join the list of internet companies going public raising a mind-blowing $2 billion. Their growth is in no small thanks to Facebook who doesn’t earn all that much more than Zynga but whose current valuation hovers north of $75 billion.

Whether we are actually in a bubble, despite being in a repressed economic environment, is up for debate and depends on the definition being used. We just go by feel and our unofficial sentiment polling that comes from day-to-day interactions. Things feel tepid. All of this consumer spending just seems so fragile given the general lack of jobs and prospects for economic growth/expansion.

Part of the world is seemingly on fire but somewhere that should correlate with the larger part of the world that continues to grow uneasy with what the future holds. If the latter finally reigns in the former, then we should see a pull back. It won’t be a total collapse like the dot com crash. But it seems only natural that a world in which those who “graduate” from a certain startup incubator automatically qualify for $150,000 in funding from the fund of a Russian billionaire is not sustainable.

In the past, the bursting of the internet bubble has bode well for performance-based marketers. The original dot com collapse saw the rise of companies like LowerMyBills while this recession helped fuel the boom in for-profit education. Both benefited from weak inventory pricing and a growing audience of eligible consumers. The same, though, cannot be said for today. There isn’t a clear winner from a vertical/channel perspective if the underlying malaise was to become the predominant feeling.

Brand spending is also different than before. Their dollars are on a mandate to figure out social. They have completely changed the way they engage with the web. It means pushing consumers towards Facebook and the follow/share culture. This is not something that seems in danger of going away over night the way that paid clicks on lotto sites did.

To us, it feels like many aspects of the tech world are either unsustainable (valuations for example) and/or overpriced. Speed and pricing should come under some pressure. Consumers are stressed and still under tremendous pressure. Their actions haven’t really hurt the tech community though as they still buy Apple products and shell out money for Facebook credits. That too should slow.

Brands are also spending, but they are still early in their spending. Brands, though, tend to be a lagging indicator and don’t pull back as quickly as others. Outside of Facebook, many of the growth stories are those finding new ways to unlock consumer spending, be it through savings like Groupon or through gaming like Zynga and Rovio.

Taken together what does it all mean? We think there are too many startups and there is too little ultimate money. We should see many close and employment consolidation with them going to Google, Facebook, Zynga, etc. but without these, companies have to acqui-hire them. These companies will grow but more slowly than today. Consumers will come around while the investment dollars lag (having rushed hard to fund today). And, it’s during this period where performance marketers will once again shine — just not immediately.

Reprinted with permission from DM Confidential’s blog.

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