Tech Bubble 2.0?

A New York Times article today wonders if we're stealthily entering a new tech bubble, with many of the same warning signs that accompanied the original late-'90s hysteria (emphasis mine).

Banks pouring money into technology funds, wealthy clients and institutions clamoring to get pieces of start-ups, expectations of stock market debuts building — as Wall Street’s machinery kicks into second gear, some investors with memories of the Internet bust a decade earlier are wondering whether this sudden burst of activity spells danger for the industry once again.

With all this exuberance, valuations are soaring. Investments in Facebook and Zynga have more than quintupled the implied worth of each company in the last two years. The social shopping site Groupon is said to be considering an initial public offering that would value the company at $25 billion. Less than a year ago, the company was valued at $1.4 billion.

“I worry that investors think every social company will be as good as Facebook,” said Roger McNamee, a managing director of Elevation Partners and an investor in Facebook, who co-founded the private equity fund Silver Lake Partners in 1999 at the height of the boom. “You have an attractive set of companies right now, but it would be surprising if the next wave of social companies had as much impact as the first.”

What's interesting about this go-around is that these deals have so far been done outside the formal capital market structure, which means that the usual buyers and sellers are unable to do their bidding in the traditional manner. The result is that there is an effective monopoly on the companies' shares, and any interested buyer is forced to pay whatever usurious price the seller (let's call him "Mark") requests.

This dynamic definitely helps add fuel to the speculative fire, and it could potentially make any bubble particularly painful if it does burst--it could also eventually make it exceedingly difficult for these companies to do a traditional IPO in the future, lest the market price the shares at a significant discount to these heavily-skewed private market transactions.

Investors beware--with Facebook trying its best to rewrite the rules of our financial markets, there is significant risk to anyone who owns equity in these companies (not that I think any of you do, unless you happen to be international men of mystery with large undisclosed ownership stakes in private equity firms--which I suppose is theoretically possible). I'm not saying with certainty that Facebook is overvalued, I'm just saying that until real two-sided trading develops, any and all valuations are suspect.

[NY Times]