Last week, at the D9 Conference, Marc Andreessen soothed everyone’s worries about a tech bubble by saying that it’s can’t be a bubble because everyone thinks its a bubble. He claimed that
a key characteristic of a bubble is that no one thinks its a bubble.
While his premise is accurate, this isn’t a case of if and only if and the reverse of the statement does not necessarily follow. From a logical point of view, such a claim can only be dismissed as silly.
Andreessen also claimed that it can’t be a bubble because the stock market isn’t behaving like one. However, one needs to look no further than the recent LinkedIn and pending Groupon IPOs, in which P/E ratios ballooned astronomically. While Andreessen is correct in pointing out that the P/E for traditional technology companies have remained low, he incorrectly claims that if LNKD is indeed overvalued, that would mean that
for the first time in equity history, we have a bubble that’s affecting one stock.
This is also a silly statement. Comparing LNKD to Apple and Google is like comparing apples to oranges. We must instead focus on the newly emerging web companies who behave like an industry of their own. As many VCs already know, web startups are rarely evaluated on something as archaic as their P/E ratios.
To determine whether or not we are in a web technology bubble, we need to critically analyze the new metrics that VCs are using to evaluate their investment. Gone are the days that a simple cash flow statement is enough to judge the potential of a company. These new metrics may or may not reveal the true (and evolving) value of such web startups. And if they do not, then we have a bubble on our hands.