Spending is skyrocketing in Silicon Valley. According to the cover story of the August issue of Fortune, one brand of balsamic vinegar that's been "aged for a long period of time" sells in a Menlo Park grocery store for $40 a teaspoon. Housing prices are exploding, too--one mansion cited in the article hit the market at $1.9 million and sold for nearly $3 million a few weeks later. And the local Tesla dealership is flooded with twentysomethings waving fresh checks for $100,000 electric cars. It sounds like the 90s but with better gadgets and bigger numbers.
There's a ton of money being spent in Silicon Valley because, like at the end of the 1990s, there's a ton of money being made in Silicon Valley lately. This has been true for the past couple of years, but with LinkedIn's explosive success on Wall Street and Zynga's recent $1 billion IPO filing, we're starting to see more and more articles about the social media bubble. Also known as the Tech Bubble 2.0. Or: The Scary Redux of Silicon Valley circa 1999. In May, we noticed that venture capitalists seemed exceedingly optimistic that the tides had turned since a low point in 2008, when Sequoia Capital--"the best venture capital firm on the planet" according to entrepreneur and angel investor Chris Dixon--released a "slideshow of doom" marking the death of easy money in Silicon Valley. Many news cycles later, the venture capitalists continue to sound confident. They're also the ones who stand to make another ton of money if all goes well.
David A. Kaplan, who wrote The Silicon Boys at the height of the last tech bubble in 1999, quotes a handful of variously optimistic experts in the aforementioned Fortune story. Inevitably, the headline on Kaplan's article is the best argument for and against the existence of a bubble: "Don't call it the next tech bubble--yet." Bascially, the current situation in Silicon Valley resembles the last bubble, but the industry is still new enough and volatile enough for some folks to cross their fingers and hope everything will be okay. Kaplan talked to some smart people when sourcing his theory, and we pulled out our favorite quotes.
Futurist Paul Saffo: "I think it's a wanna-bubble. Investors are desperate for something--anything--with a prospect of returns, and there is a lot of hot money looking for a home."
Saffo, a professor at Stanford and Silicon Valley vet, sounds like he's half right about the money question. (Why else would balsamic vinegar be so expensive?) The venture capital community is shrinking, though, both in the number of firms and the amount of money to be invested in new companies. A Thomson Reuters report out Monday morning shows that the number of venture firms has dwindled from 233 in 2007 to just 37 in the second quarter of 2011. The amount of money those firms are raising has shrunk accordingly from $30.7 billion to 2.6 billion. Mark Heesen, the president of the National Venture Capital Association describes the expected effect:
The fact that the number of firms raising money successfully remains at such low levels confirms an ongoing contraction of the venture capital industry, which will serve well those funds that can obtain commitments -- but that group is becoming more and more narrow. While a smaller venture industry will intuitively produce higher returns, it is critical that the mix of funds remain geographically diverse and cover a broad base of industries if we expect to contribute to economic growth and innovation at the levels we have historically. For that reason, we would like to see more funds raise money in the second half of the year.
Netscape founder Marc Andreessen: "A key characteristic of a bubble is that no one thinks it's a bubble. If everybody's upset, it's a good sign."
Well, it's easy to see that tech journalists are upset by running a search for "social media bubble" and reading through a page or two of the 12 million results. But over the course of the past year, the market's been bullish about tech's second coming. Kaplan points to this chart of Bloomberg data that stacks the trend in tech valuations over the past two years on top of the trend in the soaring first four years of the 1990s bubble. The upward trend is slightly less aggressive, but only slightly. Kaplan adds, "It's a reasonable point, except prognostications of a high-tech bubble were surely out there in 1999, just as some talk of a housing-market tumble preceded a housing-market tumble in 2008."
Venture capitalist Randy Komisar: "The only foolproof indication of a bubble is when you hear it pop."
Komisar, the partner at the juggernaut venture capital firm Kleiner Perkins, does not necessarily offer a rosy outlook. But sounds like the most practical--we'll keep our ears open. Not that it will do any good, as once we hear "pop," we're all doomed anyway. In the meantime, this generation's Silicon Valley boys might as well enjoy their sports cars and fancy vinegar while they can, regardless of the unknown future of easy money.