This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Tech Market: Frothy, but no Bubble

NEW YORK ( TheStreet) -- Signs that the tech IPO market is heating up along with crazy-high valuations of some of today's most well-known Internet start-ups have triggered some familiar feelings for tech watchers -- and they aren't necessarily positive.

As they ruminate over the gobs of money that venture capitalists and investment banks are pouring into young digital media firms, some can't help but wonder if a new tech bubble is forming -- and if we're experiencing days similar to the ones leading up to March 10, 2000, when the Nasdaq peaked at 5,048.62 before tanking a short time later.

The subsequent dot-com collapse led to the liquidation of dozens of Silicon Valley start-ups, many of which were worth billions just months before.

Facebook CEO Mark Zuckerberg

Today, 11 years later, Facebook's worth has jumped 30% to $65 billion just six weeks after Goldman Sachs (GS) invested in the company at a $50 billion valuation.

Micro blogging site Twitter has seen its valuation almost double to $7.7 billion since its January funding round, and social gaming company Zynga, maker of the ubiquitous Farmville game on Facebook, is reportedly raising capital at a $10 billion valuation -- surpassing that of public video game giant Electronic Arts (ERTS).

Some investors are comparing these sky-high valuations with those of the once-promising start-ups of the dot-com era. Take early Internet grocer Webvan, whose shares were worth $6 billion despite the fact that the firm was generating less than $5 million in revenue.

"When I look at where we are right now, it reminds me so much of 1999 and frankly it scares me," Fred Wilson, a principal at Union Square Ventures in New York, recently wrote on his blog.

Other tech watchers, however, note a series of crucial differences that sets today apart from the dot-com era.

Unlike Internet pioneers like Pets.com, which spent millions of dollars on splashy advertising while continually losing money on sales, many of today's high profile start-ups are profitable, possess solid business models, experienced management teams and hundreds of millions in revenue.

Facebook's revenue, for example, jumped as high as $2 billion in 2010 and its profit topped $400 million, according to media reports. Zynga also generated a $400 million profit and hit nearly $850 million in sales.

"Whether or not you believe it's excessive to price Facebook at $65 billion or Groupon at $6 billion, there are trends and revenues to price those valuations," said Jeff Clavier, a prominent Silicon Valley angel investor and managing partner at SoftTech VC.

Venture capitalists say they have learned their lesson. Greg Gottesman, managing director at Madrona Ventures Partners in Seattle, said VCs are investing in companies more cautiously than they did during the 1990s.

"Companies in the dot-com era raised a lot of money ahead of their traction," he said. "We're smarter now in terms of not funding companies just based on ideas, but on metrics and real value."

Venture capital investments peaked in 2000, when firms poured in more than $100 billion to fund nearly 8,000 deals, according to the National Venture Capital Association. Total VC investment has declined steadily since then, with venture capitalists investing $21.8 billion in 3,277 deals last year.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs