Is there a new Tech Bubble waiting to Burst?

With all of the money from banks pouring into technology funds, and wealthy clients trying to get a piece of the start-up pie, some investors with memories of the dot-com burst a decade ago are wondering if this sudden surge in investments foreshadows another danger for the industry. 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" (Rusli and Kopytoff). The New York Times' article recounts many of the investment busts from 1999 and 2000. What is frightening, however, is that there is even more money flooding the market today than there was during the dot-com bubble. The Huffington Post and SFGate reported that San Francisco technology jobs are climbing near the level of the dot-com peak and may soon surpass the dot-com era peak. Another warning sign? It's too soon to tell.

But there are some important differences between the turn-of-the-century dot-com boom and now. First of all, the market is not supersaturated with offerings; in 1999, there were "308 technology I.P.O.’s, making up about half of that year’s offerings" (Morgan Stanley data) and "In 2010, there were just 20 technology I.P.O.’s" (Thomson Reuters data). Furthermore, most of the start-ups that have investors excited are ones that have real businesses producing fast-growing revenue. "Groupon, which has been profitable since June 2009, is on track to take in billions in revenue this year" (Rusli and Kopytoff). As a result, since there is such a small elite group making up this new boom, some investors say that the potential fallout if things go badly is limited. But, as cash continues to pile up, investors fear that all this money cannot be put to work responsibly. "With only a few perceived 'winners,' some investors must be choosing losers or paying too much" (Rusli and Kopytoff).

It is interesting to note that most of these investments are going towards social networking sites like Facebook, Twitter, and LinkedIn, which is a key difference between the Internet world of today vs. ten years ago. Most of the dot-com era investments were for delivery websites or sites that were seen as what JPMorgan Chase then dubbed "essential resources to consumers." (In 1999, Chase Capital Partners invested in Kozmo.com--an online delivery service that raised hundreds of millions in venture funding. "At its height, the company’s sprawling network of orange bike messengers employed more than a thousand people. Less than two years later, it ceased operations" (Rusli and Kopytoff).)

Are today's investors taking advantage of people's every day social lives? When you log in to Facebook, you're trying to keep in touch with friends and get some news from statuses and posted links; but for Facebook, every time you login, you're making the company more money by keeping up their number of users and therefore their ad revenue. Instead of users consuming actual products or services like the dot-coms of ten years ago, today's users are building on their existing relationships--and social networking sites are making money from that. What if you stopped logging in to Facebook to turn to even newer forms of social networking that lie in our future, or even to revert to older forms like emails? Would today's technology growth turn out to be simply a passing trend, a soon-to-pop bubble, a castle built on an ever-shifting foundation?

So will we be spared another burst bubble? Is today's technology sector truly different than that of the dot-com era? Has the ever evolving relationship between society and technology finally solidified sufficiently to allow for responsible investing? We shall wait and see.