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The Bubble Cometh? Reasons to Worry About the Internet Economy

Published: September 12, 2007

Author: David Rodnitzky

I remember the halcyon bubble days of 1999 and 2000. Launch parties, ridiculous salaries, people at parties talking in hushed tones about their big idea. That was a lot of fun. And then it all blew up. Something like 60,000 people were laid off in the Bay Area – you couldn’t find a U-Haul for 50 miles.

Today, the Internet economy is a lot different than it was six years ago. For one, Internet adoption by mainstream America is no longer an open question. And there are a lot of Internet companies that actually make a lot of hard cash and are profitable to boot – that was a hard combination to come by around the turn of the century.

At the same time, I see a lot of troubling signs that history may be repeating itself. In particular, there are three reasons I worry that we may soon see a market-correction in the Internet economy.

1. Eyeballs are Once Again Cool. Forget about making a profit, as long as you can demonstrate that your Facebook widget has been downloaded by 250,000 people, you can get big dollars at big valuations. In general, it seems like there are a lot of cool Web 2.0 companies that get a lot of visitors but don’t get a lot of their visitors’ walletshare (insofar as 18 year olds have much in their wallets to begin with). I’m sure that some of these companies will find a way to monetize their users, but I suspect that the majority will not. That means a lot of Web 2.0 employees and investors are going to get hit.

2. Salaries are Exploding. I’ve been interviewing for some junior-level positions recently, and I’ve been shocked by some of the offers prospective candidates have received. One candidate – with about a year of experience – received a $100K+ offer, not including the bonus, from another company. Folks, hiring 23 year olds at $100K a year simply is not sustainable. Have people forgotten the concept of burn rate?

3. Too Much VC Money. VC investment dollars are flowing into the Valley again. New VC firms are popping up, as are new incubators and angels. The top-tier VCs still get their pick of the litter, but I sense that the second-tier firms are struggling to get into deals. As such, desperation leads to poor investments and higher valuations. There’s gonna be a shakeout when a lot of these bad investments don’t pay off.

I don’t think we are going to see the massive layoffs we saw in 2000 and 2001, but I do think the Valley is too hot right now and things are going to cool down. I’ll go out on a limb and say that you’ll start to feel the impact by Q1 2008.

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