Tech Bubble? Investing Like It’s 1999

Banks pouring money into technology funds, wealthy clients and institutions clamoring to get pieces of start-ups, expectations of stock market debuts building — as Wall Street’s machinery kicks into second gear, some investors with memories of the Internet bust a decade earlier are wondering whether this sudden burst of activity spells danger for the industry once again.

With all this exuberance, 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.

“I worry that investors think every social company will be as good as Facebook,” said Roger McNamee, a managing director of Elevation Partners and an investor in Facebook, who co-founded the private equity fund Silver Lake Partners in 1999 at the height of the boom. “You have an attractive set of companies right now, but it would be surprising if the next wave of social companies had as much impact as the first.”

Funds set up by Goldman and JPMorgan Chase have invested in Internet start-ups like Facebook and Twitter or in funds with stakes in those start-ups. Even the mutual fund giants Fidelity Investments and T. Rowe Price have stepped up their efforts, placing large bets on companies like Groupon and Zynga.

Thomas Weisel, founder of an investment bank called the Thomas Weisel Partners Group that prospered in the first Internet boom, says he is “astounded” by the amount of money now flooding the markets.

“I think it’s much greater today,” he said. “The pools of capital that are looking at these Internet companies are far greater today than what you had in 2000.”

Yet there are notable differences between the turn-of-the-century dot-com boom and now. For one, the stock market is not glutted with offerings. In 1999, there were 308 technology I.P.O.’s, making up about half of that year’s offerings, according to data from Morgan Stanley. In 2010, there were just 20 technology I.P.O.’s, based on Thomson Reuters data.

More important, the tech start-ups that have attracted so much interest from investors have real businesses — not just eyeballs and clicks. Companies like Facebook have fast-growing revenue. Groupon, which has been profitable since June 2009, is on track to take in billions in revenue this year. And since 1999, when 248 million people were online (less than 5 percent of the world’s population), broadband Internet and personal computing have become mainstream. About one in three people are online, or roughly two billion users, according to data from Internet World Stats, a Web site that compiles such numbers.

“In those days, you had tiny, little companies going public that hardly had a business plan,” Stefan Nagel, associate finance professor at Stanford University, said. “And now you’re talking about only a few companies — companies that are already global and with revenue.”

With such a small, elite group, the potential fallout if things go badly would be limited, some investors say. “Yes, we have a frenzy again,” said Lise Buyer, a principal of the Class V Group, an advisory firm for companies considering initial public offerings. “But the frenzy is on a very select group of companies. Facebook is clearly Secretariat, but there are a few other championship horses they are looking to bet on.”

For Wall Street, the initial attraction to Internet start-ups in the 1990s was the opportunity to earn fees from taking the companies to market. At its peak in 1999, the industry made $1.3 billion in underwriting fees, according to data from Thomson Reuters.

But as enthusiasm surged, many firms also rushed to make investments for their clients and themselves through special-purpose funds and direct investments. And in many cases the banks got burned just as ordinary investors did.