The cover story of a recent issue of BusinessWeek magazine featured a photograph of Digg.com founder Kevin Rose. In the photo, the boyish-looking Rose is sporting a backward baseball hat, headphones and an impish smile, and his thumbs are pointed upward. The headline across his chest proclaims, "How this kid made $60 million in 18 months."
Of course, Rose hasn’t really made any money off of his venture, at least not yet. But the point is, the headline and the photo are eerily familiar. Haven’t we been here before. Didn’t we learn anything from the dot-com boom and bust of the late 1990s.
Remember the first technology bubble, the irrational exuberance, when venture capital was thrown willy-nilly at every dot-com company that came along, and companies received millions of dollars in investments, even though many did not have real business plans and often were not even generating profits.
Silicon Valley was the toast of Wall Street. Investors and investment bankers alike feared missing out on the next big venture. Double-digit returns on investments seemed paltry.
The technology-laden Nasdaq Stock Exchange peaked at 5,048.62 on March 10, 2000.
Remember those Super Bowl commercialsω Seventeen dot-com companies paid more than $2 million each for 30-second spots during Super Bowl XXXIV in January 2000.
Shortly thereafter, most companies that had invested to upgrade their technological systems in preparation of a Y2K calamity that never happened then stopped upgrading their systems. Demand for information technology (IT) services shriveled up.
By the following year, the stock market had plummeted, and only three dot-coms bought Super Bowl commercials.
Then the terrorist attack of 9-11 sent the economy into a full-blown recession, and investors and bankers alike wondered how they could not have seen it coming all along.
Well, if the recent BusinessWeek cover is any indication, many people apparently have forgotten the lessons of the dot-com bust.
This new wave of investment exuberance is increasingly generating a buzz of caution and warnings on the Internet from investors and technology geeks alike, who are calling it by various names, including “Tech Bubble 2.0” and “Bust 2.0.” At the heart of the concerns are the growing emergence of “Web 2.0” companies that are Internet-driven.
Plenty of warning signs about irrational exuberance being reincarnated in the technology sector abound on the Left Coast.
Notorious Silicon Valley blogger Michael Arrington conducts parties for technology geeks and others clamoring to connect with venture capitalists.
“If you ever had any doubts that we’re in a full-blown tech bubble again, consider the big TechCrunch party Michael Arrington is throwing (recently) down on Sand Hill Road,” said Al Saracevic, who writes “The Tech Chronicles” blog for SFGate.com. “Arrington, whose popular blog is the Bible for Web 2.0 startups, used to throw parties at his San Francisco digs. Not anymore.”
The parties have become so popular that Arrington obtained some venture capital to move them to a larger venue and expand his guest list to 700. Passes to the party are auctioned off for charity on eBay.
Saracevic, who also is the deputy business editor for the San Francisco Chronicle, sees plenty of similarities to the rising exuberance over technology companies today that he saw in the late 1990s.
“We’re seeing some of the same hallmarks in late 90s. A lot of excitement. We’re also seeing some of the same mistakes made in the heyday,” Saracevic told Small Business Times. “The creation of too many companies that do same thing. In the same space. We’re seeing the same kind of over-indulgence.”
One difference Saracevic is seeing this time around is a scarcity of initial public offerings, which proliferated in the first technology boom.
“What it boils down to, in what used to be dumping bogus companies in the open market, the person left holding bag was the retail investor and the day trader guys, thinking they would make a killing,” Saracevic said. “Now, I think it’s more healthy. Those holding the bag will be big, stupid corporations that are dumb enough to buy a (Web) site for $65 million. In that way, this bubble’s a lot healthier for the average guy.”
There is one other key difference this time around. Executives from technology companies that crashed and burned in the first dot.com collapse are smarter today.
Wisconsin business executives have long chided each other for being too conservative, too tight with their money and too unwilling to take risks. However, those very qualities may work in the state’s favor if the Tech Bubble 2.0 quickly deflates.
Wisconsin refugees from the first bust are building their companies with solid business plans, selling assets of goods and services that have tangible value in the marketplace and paying as they go.
Syed Alam was a poster child for high-flying dot-com entrepreneurs in the late 1990s, when he founded Milwaukee-based Softgear Corp. By 1999, Softgear had grown to 21 employees and $2 million to $5 million in annual revenues. In that same year, Softgear was named one of the Future 50 companies by the Council of Small Business Executives (COSBE) of the Metropolitan Milwaukee Association of Commerce (MMAC).
“We had gotten into this phase where we felt there was unlimited demand for things, so we built capacity without really paying a lot of attention to what the demand was,” Alam said. “That came to a head in March of 2000, where things just disappeared because the market just didn’t value what a lot of these large companies were doing.”
Before 2000, Softgear barely needed to look for clients, because there were so many people interested in buying technology and investing in the Internet.
Then suddenly, when the clients were no longer there, Softgear was struggling to pay its employees and had too much capacity for such little demand. Alam closed the company in 2001.
Alam blames the first dot-com crash on faulty business models and a multitude of events, including:
• On Jan. 1, 2000, the world awoke and realized that there was no Y2K gloom and doom.
• In March of 2000, the tech bubble burst, as the Nasdaq reached its zenith.
• The terrorist attacks of 9-11 crippled the economy.
• Corporate scandals involving Enron Corp. and others further shook investor confidence.
“When (all of) that went down, I think it took a lot of companies with it,” Alam said. “It was indiscriminate, because the whole tech sector went down and because of that, we had this recession.”
In 2004, Alam re-emerged in the technology market with Alam & Co., a technology consulting company, and the wisdom gained from his Softgear venture.
“Those tremors have profoundly changed the way entrepreneurs are conducting business today. What I have done and what most people like me are doing now is trying to find new ways to limit risk and to not get into that same situation again,” Alam said.
“The difference is the entrepreneur himself,” Alam said. “Last time, investments were made to businesses before the validation of a viable business model. The thought was that the business would come.”
Two key changes entrepreneurs have made to eliminate business risks are that they are now outsourcing and they are much more objective about their projections, Alam said.
“Entrepreneurs are still ready for growth in their businesses, but until then, they pay as they go,” Alam said.
With his headquarters in Chicago, an office in Germantown and a delivery center in Pakistan, Alam is growing his company this time around at a steady and stable pace.
Today, Alam & Co. outsources its programmers, whether it is through Alam’s location in Pakistan or through a partnership with a Russian or Mexican IT consulting firm. His employees in the United States are focused on innovation, he said.
“The work we do here would be client face-to-face work, where you help your clients solve a business problem by working directly with them, but we are not programming code here because we believe that we are not going to be able to long-term compete with that,” Alam said.
“It is a chance to work out the kinks (of the business model), and then once you have determined that this is where your sweet spot is, then it is getting into a defensible position and defending that sweet spot,” Alam said.
With his lessons learned, Alam is bullish on the tech sector this time around, even if it is again over-exuberant on the West Coast.
“Web 2.0 is so vibrant right now,” Alam said. “The innovations of Google and the popularity of blogs and Facebook are a testament to Web 2.0 and the new media these models are gathering.”
Alam & Co. will open new Canadian delivery centers in Toronto and Vancouver and another delivery center in Dubai in 2007, Alam said. The delivery centers will consist of programmers who will be delivering products to Alam & Co.’s customers.
“We are ahead of our plans at this point in revenue, profitability and customer base,” Alam said. “Well ahead of plans.”
Like Alam, Neil Biondich Jr. also is a veteran of the first dot-com crash. His Milwaukee-based full-service IT company, Red Anvil LLC, was formerly known as SPS Productions.
“We never received outside funding, and we are still around because we did not grow beyond boundaries, we did not have a crazy business plan, we organically grew our services and software and we are largely designed around the needs we found our clients having,” Biondich said.
Biondich does not believe Wisconsin technology companies will be hammered by another tech bubble.
“Businesses are much smarter about putting plans together and are not getting funding as easily as they used to. Funding sources are not out to fund on speculation,” Biondich said. “In general, the business model is going toward a much more service-oriented society, and the Web is catching onto that. You don’t have to sell widgets to make money. The value is the captive audience, and once you have the audience, you can sell the audience’s attention to other businesses. Any high-traffic Web site doesn’t have to charge the consumer. The consumer is the commodity.”
