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Henry Blodget, CEO and Editor-In Chief of Business Insider, speaks during the Digital Life Design conference in Munich, Germany. He doesn't think there's a tech bubble.
Business Insider just wrapped its "Startup 2012" conference in New York yesterday, where it's promoting its new BI Intelligence service, which is being spearheaded by Pascal-Emmanuel Gobry, Alex Cocotas, and BI CEO Henry Blodget.
They put together an entertaining presentation about whether there's a tech bubble a-swellin' up right now, getting ready to pop and make us scream and keen and cry out loud. (Is there a bubble? BI Intel says, resoundingly, "Nope!") But before I get into that, and a Twitter exchange I had two weekends ago with Leigh Drogan of Surfview Capital, about the whole bubble thing, I would be somewhat journalistically remiss if I didn't express one significant reservation about this whole BI Intel project.
For starters, I am Business Insider's number-one fan, in L.A. at least. Henry and his crew have figured out how to stitch together the wonky econoblogsosphere with the aggregational accumen of the Huffington Post and the jaunty and at times borderline slapdash (in a good way) tone of the early Gawker. I think the site looks like hell, but that's part of its charm. And anytime anything happens in the business and economy world — and even these days the wider world (SEO is alive and well) —I often check BI to get their take. Joe Weisenthal is a complete maniac, in the very best bloggy sense of that sleep-deprived sobriquet.
BI deserves every penny of the $7 million in funding it received last year, even if it does healthily (sickly?) bend the rules at times about aggregation. Isn't just a good product. It's a distinctive and increasingly addictive one. Plus, it's voicy. You never feel like you're reading a robot. You feel like you're reading people having fun.
But — big but, too — going into subscription business intel is troubling, as long as Henry Blodget is directly involved. He has Gobry and Cocotas on the team, as well as presumably other members of the BI staff. But Blodget is the marquee name at Business Insider. He's like George Plimpton was at The Paris Review: it's his show. And of course this is a guy who was banned from the securities business for life for committing fraud. It cost him $4 million. He's reinvented himself quite successfully, as a journalist, broadcaster, and businessman. But now he wants to get BI into the business of dispensing analysis for pay, something akin to what the Economist Group does with its Economist Intelligence Unit, but focused on the Internet economy.
I don't think Blodget has much choice but to trade on BI's growing reputation and page views, in order to get this thing off the ground. And that means trading on being Henry Blodget. But this is obviously, you know, a bit awkward. I hope he addresses the issue, directly, at some point. Maybe he has already and I've missed it. I'm sure somebody will let me know. And let me know if this is really no big deal. After all, even if Blodget is dispensing analysis about stocks, he's not working inside the securities business. And he has repented. And he's certainly got a point of view that could be value to clients, when his serious thinking is removed from a more pop context.
So there it is. Now on to the "Is there a tech bubble?" question. BI Intel says "No. No! NO!" And in 75 witty slides, Blodget & Co. lay out the case, with a nice dose of boosterism for the New York startup scene. The centerpiece is an analysis of why it was very smart for Facebook to buy Instagram for $1 billion, even though Instagram has no revenue and only 13 employees. Fair enough, but that's fails to address whether Facebook is correctly valued, built as it is on the assumption that its millions of allegedly active users will continue to gladly provide it with content and labor for free — and, critically, do so in the mobile space, which is where the ga-ga growth for Facebook will be in the future.
At any rate, I've commented on the radio that there is a tech bubble, but that there's also an M&A bubble inside the tech bubble. Facebook-Instagram is my exhibit A. Instagram isn't worth $1 billion, but it quickly solves a Facebook pre-IPO bubble and Zuckerberg could make the decision to buy it as an imperial CEO, something that he will find more difficult once the company starts trading publicly. I now think that venture capitalists will spend their time furiously seeking startups that can do something that Facebook can't do and fund the bejesus out of them with the hope that Facebook will keep up the acquisitions, even though it says that it won't.
I started tweeting with @LDrogan about this and he brought up what he's calling a "private bubble" — by which he meant a bubble in private markets, where shares in companies can be traded, pre-IPO then directed me to his blog post about it:
[W]e are in a private market bubble and a public market boom. Valuations for private tech companies are through the roof, beyond any rational metrics used to value companies, even very high growth companies with massive markets to execute on. Instagram gets bought by Facebook for one billion dollars without a stitch of revenue, enough said.
Interestingly enough, these valuations are not being driven by asset inflows, the cause of asset bubbles. In fact, venture funding has actually been declining recently.
Our private market bubble is being driven by speed and scale. Like no other time in history does a company have the potential to scale as quickly and to such great depth as they do now. This changes the game for investors, who in the past had the opportunity to jump in along the scaling process. Now, because a tipping point can lead to scaling so quickly, investors have moved up their time frames, and are pumping large sums of capital into companies at earlier stages.
These valuations are not being driven so much by classic valuations metrics as they are simply by venture investors wanting to pump large sums of money into companies which they believe have the ability to turn scale into profit down the road.
So you can extrapolate from Drogan's views and conclude that while BI Intel is right and there isn't a tech bubble, in the sense of a Web 1.0 tech bubble, there is a bubble being driven by VCs who are desperate to, well, keep up. Those VCs then need a way to exit their investments, but that can be a serious problem, if the companies go public too soon: "Scaling a user base to massive proportions does not equal being able to show stable growth in profit quarter over quarter," as Drogan writes.
That doesn't necessarily matter to the investor, however. He gets out and the immature startup becomes a public problem.
It's a bit raggedy at this juncture, but you can see the outlines of this thesis showing up in other places, a various aspects of what'g going on are independently pondered and conjectured about by people who might not be tech or business players or journalists.
Joel Kotkin, for example, recently nibbled at the edges of some of these issues, in a piece about the California economy, politics, and environmentalism:
Progressives and many Occupy protesters...tend to view social-networking firms like Facebook more as allies than as class enemies. This embrace of Silicon Valley is nearly as strange as the Occupy movement’s decision to target the ports of Los Angeles and Oakland—large employers of well-paid blue-collar workers. Activists portrayed the attempted port shutdowns as attempts to “disrupt the profits of the 1 percent,” but union workers largely saw them as impositions on their livelihood. As former San Francisco mayor and state assembly speaker Willie Brown wrote in the San Francisco Chronicle: “If the Occupy people really want to make a point about the 1 percent, then lay off Oakland and go for the real money down in Silicon Valley. The folks who work on the docks in Oakland or drive the trucks in and out of the port are all part of the 99 percent.”
The explanation for the progressives’ hypocritical friendliness to Silicon Valley is simple: money and politics. Venture capitalists and highly profitable, oligopolistic firms like Google (with its fleet of eight private jets) invest heavily in green companies; they were also among the primary bankrollers of the successful opposition to a 2010 ballot initiative aimed at reversing AB 32. The digital elite has become more and more involved in local politics, with executives from Facebook, Twitter, and gaming website Zynga contributing heavily to the recent campaign of San Francisco mayor Ed Lee, for example. Lee has, in turn, been extremely kind to the digerati, extending a payroll-tax break to Twitter and a stock-option break to Zynga and other firms that may soon go public.
Kotkin has indicated that Silicon Valley is now operating more like Wall Street, serving the interests of an investor class rather than functioning as a crucible of innovation.
The bottom line here is that when BI Intel talks about a bubble, it's talking about the wrong kind of bubble. It's staring at one analysis that says "No bubble" when a different bubble, one we may not have as much or any experience with, is forming, outside its field of view.
Let's not forget, in the land of disruptive innovation, bubbles can be disruptively innovative, too.