Related topics: IPO, stock market, technology, Facebook, economy
Entrepreneurs, venture capitalists and investors have been singing the same song for the last few years: "We really learned last time," "It's different now," and "You don't need that much money to start up a company anymore."
Sure, many in this wave of Internet companies have had a relentless focus on costs and are becoming profitable. But it's been pretty clear based on the skyrocketing valuations of some companies (I'm looking at you, Facebook and Groupon) that we are seeing the beginnings of a major Internet or social-media bubble, even if it is a pre-IPO one.
That point was driven home in a chorus of voices when The New York Times recently had a debate called "Is This Tech Boom Different?" Typically, techies point out how much we have learned since the dot-com bust or that because these companies are still private, mom-and-pop investors aren't getting hurt.
A rude awakening
But I had a rude awakening after talking with Peter Sisson, the founder and chief executive of San Francisco startup Toktumi, which develops a hosted service that gives your iPhone or Android phone PBX-like features, such as a second line.
Sisson was concerned that we are now officially in another Internet bubble, after a $41 million round of startup funding for Color, a company that makes a photo-sharing application for mobile phones.
This news came just two weeks after Rovio, maker of the phenomenally popular mobile game Angry Birds, got $42 million in funding.
The news about Color's funding was more of a jolt. While its founder, Bill Nguyen, is well known in Silicon Valley as a mostly successful serial entrepreneur who sold his last startup, Lala, to Apple (AAPL, news), the $41 million for a stealth app company in its first round was quite a shocker.
And while Nguyen told Business Insider that Color is more than just an app, which is also getting panned by some trying it out, it hasn't changed the perception that his company's funding was a watershed moment -- when Silicon Valley realized it's in the midst of the next bubble.
So who could get hurt?
But if it's only venture capitalists and private investors buying Facebook's pre-IPO shares, or the big clients of Goldman Sachs, then it's OK if Facebook has a pre-IPO valuation of a gazillion dollars, right?
Or, as Internet entrepreneur Jason Calacanis said at South by Southwest in March, "Right now, the only people who can get hurt are angel investors who are already rich and don't care about the money."
But that's not so, according to Sisson, who is on his fourth startup himself.
"It screws things up," he said. It's already starting to get harder to hire good engineers and other jobs. "For talent, you are now competing with companies like Color with $41 million."
Toktumi is in a desirable spot, in the fast-growing mobile business. The company has about 30 employees in downtown San Francisco, on a block of California Street becoming restaurant row for the Financial District. "We have lost one engineer to a company about to go public," Sisson said.
In addition to the hypercompetitive market for good engineers and developers, companies with too much funding can also fuel an overinflated Internet advertising market, with escalating prices that will hurt companies that rely only on advertising for revenue. That occurred in the last dot-com boom and bust.
There can be other issues, too, when employees start to count on the anticipated valuation of their company's stock before it goes public.
"I just get concerned when employees at companies start counting their chickens," Calacanis told the panel at SXSW. "That's where employees can get hurt," when they start calculating how much Facebook or LinkedIn could be worth and how much their shares will be worth when they go public. "And they start buying houses based on that and then they can't get out."
Secondary markets a factor
Paul Saffo, a longtime Silicon Valley futurist and the managing director of foresight at Discern Analytics, said another new and unexplored element of the boom this time is the fact that many employees have been able to sell their shares in secondary markets like SharesPost and SecondMarket.
"We are really in new territory here because of the growth of private placements," Saffo said. "One thing for sure is the days when founders were giving stock to their company masseuses and borrowing against their stock for houses are long gone. Or else they are dumber than I think."
Even though it's still a private bubble for now, there will be ramifications beyond the investor elite. And it's probably just beginning.
