Remember when Netscape went public in 1995, kicking off a torrent of investment in new Internet companies that lasted for five years? Well, now we’re waiting for another Netscape-caliber IPO: the first public stock offering by Facebook, which is expected to come sometime next year. The deal will no doubt value the company at tens of billions of dollars, or more, and make many, many people into multi-millionaires, if not billionaires.
Except this IPO will spell the end of the party, not the beginning. I’m convinced that the frothiness we’re seeing right now in Silicon Valley cannot last. And it won’t last, I believe, past the point at which Facebook finally sells shares to the public.
Why? One would have to be blind, or have no friends in New York, London or Shanghai, to not realize that Silicon Valley is currently operating in a different reality. In Silicon Valley, office space is scarce, engineering graduates are commanding record salaries and homes are being purchased before the “For Sale” sign has even gone up. The number of startups formed in the last two years dwarfs the company formation pace of the late 1990s. And high-growth companies are receiving private financings at valuations – many over $1 billion – that could only have been achieved a decade ago by going public and beating Wall Street’s estimates over several years.
But here’s the disconnect, which is obvious to everyone: We are in midst of the Great Recession, with 9% U.S. unemployment, European default risk, growth in China slowing and state governments on the brink of bankruptcy. Yet young technology companies with unproven management teams and business models are commanding nosebleed valuations. The most recent example is blogging startup Tumblr, which raised money valuing it, reportedly, at $800 million. This despite the fact that the company doesn’t have its business model figured out yet. Many of these investments are being justified by the anticipation of some highly lucrative, initial-public offerings for tech companies in the coming 12 months. If standouts like Facebook, Zynga, Groupon and Twitter are going to go public for tens of billions of dollars, the argument goes, surely lesser tech stars can command a premium in their financings as well.
Totally true, but what’s more important is that people are simply reluctant to buy any story, not with their own cash at the very least.