No really this time it’s different

TWTR and the tech bubble

Well, here we are again. By here, I mean 1999. Back in the dot.com era, I was a newspaper reporter in Palo Alto with a front-row seat to the bursting of that tech bubble. The Twitter IPO looks like a leading indicator of another wonderful bubble in the Bay Area. Let’s call it the mobile/social bubble. It’s going disrupt everything including the balance sheets of a bunch of enthusiastic investors and the lives of a bunch of tech-enthusiastic transplants. So get in while the getting’s good. You still probably have another couple of years. For those not here last time around, lets review:

A focus on asset monetization not revenue or profit generation. Almost universally, the dot.com bubble is reviled for a process whereby businesses like Pets.com focused on capturing eyeballs and then driving up incredible valuations based on hand-waving around future profits those eyeballs would generate. Sound familiar? In the mobile/social bubble, it’s much more appealing and lucrative to figure out how to build a business that Google buys or that makes a splashy IPO than a business that, oh, makes money.

Skyrocketing IPOs with no profits attached — a subset of the asset monetization issue. It’s a little hard to understand a $25b market cap for Twitter when they don’t make any money. Let me repeat that. Twitter loses money. And is supposedly worth $25b. High-flying IPOs of the dot.com bubble: Other companies in this market cap range? Think McDonald’s, Nike, Halliburton, TimeWarner. Those companies were around the last time. They will likely be around the next time a bubble happens as well.

Online properties that are supposedly irreplicable. Many of the dot.com high fliers were ISPs or search engines, thought to be the best avenues for eyeball grabbing and to have huge customer stickiness. A few examples: AOL, which wisely took its inflated stock and bought a real company in TimeWarner and rescued itself; GeoCities, the hosting service that Yahoo acquired for $3.6b and has since killed off; Lycos, purchased by a Spanish telecom firm Telefonica for $12b and sold in 2010 for $36m. All of these sites were either replicated or bypassed by other, better, cheaper solutions. The mobile/social bubble’s supposedly irreplicable properties are the social networks. Let’s tick them off: Instagram, Wayze, Facebook, Twitter, LinkedIn, Tumblr, Yammer, Pinterest. Investors are betting on their continued relevancy and that their network effects makes them irreplicable. That sounds similar to the bet last time. And there’s some evidence that people are migrating away from these sites already. They are promising the revenue will magically appear. For some or most of them, it won’t.

Traffic on 101. I chatted with my neighbor in the hallway of our apartment building yesterday and he was absolutely bonkers out of his mind about how bad his commute is. He drive does the commute from San Francisco to Apple, in Cupertino, every day. The other day his morning drive took 2 hours. It’s only 50 or so miles. He said traffic has become much worse over the past few months. Back in the era of dot.coms, same story — 101 became totally clogged. [I’ve looked for annual historical numbers on commute times but haven’t found them. If someone knows of a source, please tell me.] It becomes much harder to attract talent to the area when no one can move anywhere at commute hours. So it becomes harder to form new companies and bring in fresh talent rather than start an incestuous circle of quick buildouts, lots of hype and easy exits. And it becomes much harder for any real growth to be sustained. There’s a long-term fix to this, which is to build out real public transit in the Bay Area. But the booms just don’t last long enough for that to happen and the local libertarian mindset doesn’t care too much about “public” or “transit”.

A real estate bubble. Local real estate prices in hot zip codes are creeping up above their 2006 high water mark. If you thought we learned our lesson, think again. Compare the Case-Schiller index for the Bay Area for 1996-2000 to 2009-2013. Similar ramps, right? This is admittedly more the effect of a bubble than a cause — if you have every newly-minted millionaire (or at least newly-employed engineer) wanting to live in a few neighborhoods you are going to get a run-up in prices. On the other hand, there’s a strong undercurrent that makes the real estate bubble a feedback loop to the corporate asset bubble. If people are concerned they won’t be able to afford a life in a place they’ve grown to love, they will employ strategies to ensure they can lock in that future as soon as possible for fear of being locked out entirely in a sea of millionaires. In the short run, those are strategies that lead to hyping current assets, not ones that lead to carefully building organizations, reputations and a career.

New York media getting excited about San Francisco. New Yorkers normally don’t pay much attention to the rest of the world because, you know, they’re awesome. When they start to write articles about San Francisco, watch out. Any hipster knows that if she reads about a trend in the New Yorker it’s no longer a trend she wants to be a part of.

Two recent prime examples: First, the New Yorker article on San Francisco, which makes for an entertaining read and makes me feel famous by proxy since I live here. However, despite the writer’s local origins it makes easy mistakes — like saying microchips were an industry in San Francisco, when in fact that industry was 50 miles away in Silicon Valley. (That’s sort of like saying that big pharma is a New York industry, when in fact it’s from New Jersey.) But the essential point of the article is that the San Francisco tech industry is merging lifestyles and startups and technology and the whole point of life out here is to be able to ride your bike out to Stinson Beach. The article feels a lot like wistful thinking on the part of New Yorkers who always view Californians as living a totally different life. There might be 20,000 people in San Francisco or Marin who are pulling this off. But it’s not how most people live. Talk to my neighbor, above, and see what he thinks of the ride-your-bike lifestyle.

The New York Times followed up with a piece on Point Reyes entitled “My West Coast Martha’s Vineyard”. Pt. Reyes has approximately zero resemblance to Martha’s Vineyard, except that they are both on an ocean. But for New Yorkers, it makes the landscape understandable. Mainly so when they come to visit their daughter out here they will have something to do besides eat morning buns at Tartine and take a trip to Napa.

Ok so how is this interest indicative of a bubble? You have to feed the beast, not just with capital, but with people. The more that people on the Eastern Seabord get comfortable with their children spending years of their life on something that’s not just a job but a lifestyle, the more the progeny of Montgomery County and Darien and Newton will make the trek and feed the beast. Hopefully some of them will like it and stay when the bubble bursts.

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