by Christine Wong

Is there a startup bubble forming?  

I’d have to say yes – but not the same kind we saw a decade ago when the dotcom bubble burst.  

Christine Wong, staff writer, ITBusiness.ca

This most recent spate of bubble babble was touched off by the one billion dollars (it sounds nefarious when you say it like Dr. Evil in the Austin Powers movies) Facebook just forked over to buy Instagram 

No one’s disputing that it makes good business sense for Facebook to buy a startup superstar like Instagram. But the valuation seems outrageously high. Now everyone’s asking: is a billion-dollar acquisition price for a startup – one that’s not even publicly traded — a sign that a bubble is nigh in the startup ecosystem?  

It brings yours truly back to the heady days of the late 1990s. (Okay, I may look 25 but I’m actually old enough to admit I chased Michael Cowpland’s Porsche through the gates of Corel’s parking lot in 2000 to try to get a real quote from him after he quit as CEO of that sinking software ship. He didn’t give me one.) Back then the bubble involved startups with little or no revenue stream (and sometimes no business plan) doing IPOs that netted hundreds of millions of dollars overnight.  

Today I think another startup bubble is forming.  But the vehicle driving it this time around isn’t an insanely overvalued IPO market – it’s insanely overvalued acquisition deals. I’m guessing the Facebook/Instagram deal will be the tipping point we all look back on as touching off the current bubble when we reminisce about this another decade from now.  

Not everyone agrees with me, of course. Alkarim Nasser is a Toronto-based serial entrepreneur (Bogaroo, AndroidTO, Bnotions) who’s also the CTO of the Decode Ventures seed fund. He chatted with me by phone from Silicon Valley, where he heads twice a year to catch up on the startup and financing scenes.  

“What happened with Instagram is an anomaly that hasn’t really happened in a while,” Nasser says. “The average (startup acquisition) price is only about $25- to $30 million.”  

One big difference between the 90s bubble and today’s startup scene, Nasser adds, is that tech IPOs today are totally not hot: Groupon, Zynga and others have seen their stocks fizzle after their initial debuts.  

Luckily, there’s another key difference between the 90s bubble and today’s startup mania: the money being overspent unwisely in 2012 doesn’t belong to Joe Sixpack and Betty Housecoat. When the dotcom bubble burst and ridiculously overvalued tech stocks sank like stones in 1999 and 2000, millions of regular people – direct retail investors or folks who unknowingly held those stocks in their mutual or pension funds – lost a ton of money. 

(This is no urban myth: two of my former coworkers at separate Ottawa media outlets lost over $100,000 each simply because they ignored advice to dump Nortel shares in the misguided hope they’d bounce back one day. These were not members of the wealthy set but hardworking guys in their late 40s saving to put their kids through university.) 

Though Nasser argues convincingly that there’s no bubble in tech stocks or IPOs now, he does agree with me that a startup acquisition bubble may be looming further off in the distance.  

“What (the Instagram deal’s) gonna open up is a tidal wave of acquisitions over the next couple of years,” he says. “There will be a lot more people with money and that’s quite possibly when a bubble will form on the acquisition side … We’ll see the financing of too many companies and there won’t be enough second, third or fourth round financing for these companies. So we’ll hit a (financing) wall. Is that really a bubble? I’m not really sure – but it’ll weed out great companies from not-great companies.” 

So yes, I’d say there’s a startup bubble out there right now. You can see it in the flurry of acquisitions being made, the sudden abundance of blogs and news coverage focusing on the startup scene (yep, I’m guilty as charged), and now, the crazy amounts of money being thrown around to acquire fledgling tech firms. 

The key differences between now and the last bubble are: today’s bubble is based on acquisitions, not IPOs or overpriced stocks. And thankfully, fewer people’s money is being put at risk with the current bubble compared to the millions of people hurt when widely held tech stocks crashed and burned in 2000.

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  • Marco

    Well outlined and my feelings as well. Although I agree with Alex, it’s difficult to see the impact on joe six pack right now. This is only because it is in a groundswell right now. With the standard stock market underperforming, it won’t be long before the average investor will be looking for a new strategy, and funding startups will be it, with the hope of hitting on the next app, platform or software giant. Problem is, when that shift happens to the average person, it’s usually when the bubble is about to burst. Let’s hope people are more cautious this time around.

  • Alkarim Nasser

    Great point, Marco – definitely starting to see that shift where typical public market investors are looking to private equity to diversify. Sensing the cautiousness is there as well. That bust wasn’t too long ago at all. Hard to forget what happened.