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Frankly, James Altucher and I spend a lot of time agreeing with each other. Whether discussing the market outlook here on the site or politics offline, we generally see eye to eye. Alas, I'm afraid we're not on the same page regarding this whole Internet bubble/boom discussion.
Capital Flows: The Alpha and the OmegaIn a more sane time, such as today, venture capitalists will invest a few million here and few score of million there into private, unprofitable companies to help them buy equipment, hire a sales force, rent office space and do all those other things that a young company needs to do to get up and running. The funding that the VCs provide trickles into the economy as these companies buy computers and switches and servers and lease bandwidth and provide cell phones, land lines and broadband Internet connections to their employees. As shown in the chart below, commitments to Venture Capital Funds were about $19 billion in 2004. In 1999, that number was an astonishing $83.3 billion.
And that was just the VC money. As shown in the second chart, companies raised $60 billion in IPOs in 1999 vs. the more sane $32.6 billion last year. The hundreds of billions that these companies were able to tap from the public (note that I'm not even counting the amount of debt that was raised and spent) bubbled the tech economy because it capitalized many unsustainable and faulty business models that never should have had access to capital, let alone the insane amounts the public put behind them. Those unworthy companies then sloppily spent all that money, see James' example of Pets.com's Super Bowl ads, artificially inflating the fundamentals of their suppliers. The growth the suppliers saw really compounded the issue. These companies saw their fundamentals explode as they tried to scale up in order to meet the unstable, but mammoth demand. So the valuations of comparable companies exploded higher at an even more unsustainable rate, based on the false fundamental strength. One of the foolish realities of capitalism is that investors rely on relative valuations to determine how much a company should be worth. So if the markets are valuing Pets.com at 500 times sales, with a valuation of a billion dollars, and I want to build a business around my URL, Codypets.com, that I think can do $1 million in sales in its first year, shouldn't it follow that my company should be worth $500 million? That's the way the public (and the VCs for that matter) worked and that's why so much money flooded into worthless business plans, inflating the fundamentals of companies like Intel (INTC - commentary - Cramer's Take) and Sun Micro (SUNW - commentary - Cramer's Take) and Level 3 (LVLT - commentary - Cramer's Take).
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At time of publication, the firm in which Willard is a partner was long Intel, Sun and Google, although positions can change at any time and without notice. Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney.
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