Web Bubble 2.0

Illustration by Christopher Sleboda.

The Silicon Valley venture capitalist Michael Moritz is kinda-sorta the West Coast version of New York’s own Steve Rattner. Like Rattner, who (famously) was on the journalistic fast track at the New York Times before he (even more famously) jumped the rails for investment banking back in the early eighties, Moritz, at almost precisely the same time, was a writer on the rise in the San Francisco bureau of Time magazine before he took the plunge into high-tech finance. In the nineties, Moritz, a wry Welshman, bankrolled such monster Web start-ups as Yahoo, PayPal, and Google; according to the latest Forbes 400 list, his net worth stands at $1.3 billion. So Moritz is Rattner—only richer.

I mention all this because the other day, I found myself out in Northern California at the annual Web 2.0 Summit, lobbing questions at Moritz onstage. That morning, the Times had run a front-page story that was a kind of curtain-raiser for the conference, full of spicy tales of sky-high start-up valuations and the general-purpose giddiness now rampant in the Internet business, the thesis of which was summed up neatly by its lead: “Silicon Valley’s math is getting fuzzy again.”

I asked Moritz what sort of piece he would have done, were he still a hack, to capture the industry’s gestalt. Cheekily, Moritz replied that he would have written about the irrelevance of such stories: Who reads newspapers anymore, anyway? (Touché!) Eventually, though, Moritz got around to opining on the bubbliness of the second-generation Web boom. “The great news for me about these times of enthusiasm is that inevitably there’s a lot of bedlam, undoubtedly there’ll be carnage, there’ll be all sorts of carcasses strewn across the road,” he said. “But there will also be a handful of companies that will emerge to become very significant. And that’s what working and living and investing in Silicon Valley has always been about.”

Now, to skeptics, Moritz’s answer will sound like familiar Valley boilerplate—or the purest brand of bullshit. But to me, it says much about why the debate over whether Web 2.0 is a bubble has been so inconclusive and incoherent, conducted as if one side were speaking Swahili and the other barking like a dog. It’s also revealing about the yawning gulf that still divides the two coasts with regard to high-tech moneymaking. And about why, for all its many and manifest virtues, New York remains such a sad-assed backwater when it comes to the Internet industry.

It doesn’t require a Mensa-level IQ to make the case that the Web 2.0 boom is in fact a bubble. There’s the glut in venture capital: $3.4 billion invested in fledgling Internet firms in 2007, the most torrid pace since the height of the Web 1.0 mêlée. There are those lunatic valuations: A year ago, the burgeoning social-networking outfit Facebook was nearly bought by Yahoo for $1 billion; today, the price tag is $15 billion, an eye-popping number that did nothing to dissuade Google and Microsoft from bidding richly, fervently, to buy a tiny sliver of the company—a competition that Microsoft finally won last week. There’s the frothy run-up in the nasdaq, which has lofted Amazon’s stock back to its all-time high, has inflated Yahoo by almost 30 percent this year, and is rapidly propelling GOOG toward $700. And then there’s the flood of derivative, dum-dum start-ups inducing a severe case of dot-com déjà vu. To wit: MyCatSpace.com.

The nature of bubbles, of course, is that they pop. And today there’s no shortage of folks who believe that the end of this one is nigh. Among the doomsayers is the former Merrill Lynch analyst–cum–Eliot Spitzer whipping boy Henry Blodget, who’s lately resurrected himself with a smart new Web publication, Silicon Alley Insider. For Blodget, who headlined a recent blog post “Dear Internet Industry: Brace for Hard Times,” the signs of a looming Web recession are everywhere: in the meltdown of the mortgage market, which could hammer online advertising; in the slowdown in broadband adoption rates; in the rash of me-too competition among start-ups. Howard Lindzon, the founder of Wallstrip, worries that “the deals and rises are too easy and too loose. Too much back-patting and knuckle fives.” Even my friend Fred Wilson, the Über–NYC VC, has started fretting about “the coming downturn.”

All of these are clever dudes. And they’re hardly congenital bears. Quite the contrary. But the interesting thing that ties them together, along with most of the other prophets of implosion, is that none of them resides in Silicon Valley. Indeed, at the Web 2.0 shindig, in three days I couldn’t find a single digital Jeremiah in the bunch.

The optimistic case for Web 2.0 is as straightforward as the converse one. Despite some tremors, online advertising is now a juggernaut that promises to only become more powerful as companies like Facebook start creating sophisticated networks where fine-grained behavioral targeting is possible. More than 1.3 billion consumers around the world now use the Internet, and the global growth curve is steep. Meanwhile, the main source of unbridled mania in the nineties, IPOs, are a nonfactor this time around. Instead, the boom is being driven by giants with riverine profit flows and vast reservoirs of cash. At the conference, Microsoft CEO Steve Ballmer declared that his company intends to pull off twenty acquisitions a year, of $50 million to $1 billion apiece, in each of the next five years. (From the audience came a collective moan that verged on the orgasmic.) And Microsoft is not alone. The largesse spewing out of Google, eBay, Amazon, Yahoo, and IAC will be similarly geyserlike.

Not that nobody in the Valley admits the possibility that the nouveau Web boom has become a bubble. Actually, many do. But the attitude out there is one of sangfroid mixed with Alfred E. Neuman–esque nonchalance. And thus we come to the attitudinal chasm between the coasts. “Is it a bubble? Is it a bubble? It’s a bubble! It’s a bubble!” is the way that people here in the East tend to approach the situation. Out West, by contrast, the prevailing sentiment is, “Okay, okay, it may be a bubble—and your point is?”

“In the technology industry,” blogs Netscape founder Marc Andreessen, who now runs a company called Ning, “lots of start-ups being funded with some succeeding and many failing does not equal a bubble. It equals status quo. The whole structure of how the technology industry gets funded—by venture capitalists, angel investors, and Wall Street—is predicated on the baseball model. Out of ten swings at the bat, you get maybe seven strikeouts, two base hits, and, if you are lucky, one home run. The base hits and the home runs pay for all the strikeouts. If you’re going to call a bubble on the basis of lots of bad start-ups getting funded and failing, then you have to conclude that the industry is in a perpetual bubble, and has been for 40 years. Which may be fun, but isn’t very useful.”

Andreessen would, and does, admit that the dot-com boom evolved into a bona fide bubble. But for him and others in the Valley, that’s not the end of the story. At the depths of the crash, when I was living in San Francisco, I remember talking to Intel’s legendary chairman, Andy Grove. Grove had been one of the loudest naysayers about the dot-com brouhaha, but now he argued that the bubble, for all its excesses, had been a healthy thing. “What this incredible valuation craze did was draw untold sums of billions of dollars into building the Internet infrastructure,” he said. “It is probably true that the infrastructure would have gotten built anyway. But instead of it happening over fifteen years, it happened over five.”

You’d be mighty hard-pressed to find many New Yorkers who’d proffer such an argument. In their eyes, the bubble was bad, bad, bad—just ask Governor Spitzer. And, no doubt, the downside of bubbles is considerably more pernicious when the broad American investing public starts putting their retirement savings into the likes of eToys and Pets.com. Yet even in the absence of an IPO frenzy today—when the victims of any current irrational exuberance will mostly be venture capitalists and their investors—the tut-tutting around these parts is getting pretty loud. In part, no doubt, this owes to the tendency among New Yorkers to call a spade a spade. To our healthy sense of skepticism and somewhat less healthy constitutional dyspepsia. But it also owes, I think, to a money culture where screwing the pooch is seen as shameful and is duly stigmatized, where failure merits a scarlet F, as opposed to being a badge of honor, as it is (largely) in the Valley.

It’s a culture also riven with envy, to be sure, the direct result of Gotham’s collective inferiority simplex when it comes to matters Webby. “People in New York feel a chip on their shoulder because they’re not in the center of this thing,” says Seth Goldstein, a longtime Silicon Alley player now decamped to Marin County. “The question is, why didn’t Netscape start in New York? Why didn’t Google start in New York? Why didn’t Yahoo start in New York? It’s that things are able to percolate here, not because of idealism but because of a willing suspension of disbelief.”

Disbelief will never be something that New York suspends willingly. No doubt some of Goldstein’s old pals in the city are scoffing at what he’s doing now: running a start-up building what he calls “craplets” for Facebook. But Goldstein reckons that, with any luck, he’ll be able to sell his little company for $100 million or so by the middle of next year. Another sign of bubbliciousness? Or a minor miracle? The great thing about the Valley’s point of view is, the answer can be both.

E-mail: jheilemann@gmail.com.

Web Bubble 2.0