Ad Takes Off Online: Less Doll, More Awl
YouTube Website Goes Down
Getting to the Bottom of a Digital Lollipop
In Silicon Valley, pointing out this sort of thing is considered a bit impolite.
J. William Gurley, a general partner at Benchmark Capital, a big venture capital firm, has scoffed at people who "write silly articles about the notion of a pre-revenue company having a very high valuation."
When the media likened the precipitous decline in the shares of Groupon to the events of the late '90s, venture capitalists went on the offensive.
Michael Arrington, a partner at CrunchFund, wrote on Twitter that The Wall Street Journal was waging a vendetta against the company because it wrote a headline that read: "Groupon Investors Give Up." Chris Dixon, a partner at another venture capital firm, Andreessen Horowitz, joined in on Twitter.
(Read more: Groupon CEO: Our deals are 'designed for mobile')
"Everything is spun negatively," Mr. Dixon wrote. "Comparing current valuations to the dot-com bubble is simply irresponsible."
The venture firm Mr. Dixon joined last year was responsible for $40 million of the $950 million that early investors put into Groupon. But public stockholders have not done well. Groupon's share price has been cut in half in the past two years.
Wall Street is starting to question how long this can all last. A recent Bloomberg survey of Wall Street investors, analysts and traders who use the company's financial data terminals found that the majority thought Internet and social media stocks were at or near unsustainable levels.
Roughly half said that the bubble was here or soon would be.
Not that the big investment houses are shouting sell. They rarely do. As of Friday, 12 of the 17 stock analyst recommendations for Twitter available on Bloomberg terminals were buy or hold. Only five were sell. Of the 48 recommendations for Facebook, 40 were buy and eight were hold. Not a sell to be found.
(Read more: Twitter stock could fall 80%: Hedge fund manager)
Michael Mandel, an economist at the Progressive Policy Institute in Washington who wrote presciently about the '90s dot-com era, said that if there was a bubble this time — and there might be — its bursting would not be as bad as the last one. That is because back then, start-ups advertised on other start-ups' websites and, in many respects, robbed Peter to pay Paul. So when one company collapsed, other dominoes fell, too.
"Bubbles that are not self-feeding are not a big problem, and I'm not seeing the kind of self-feeding that I saw in the '90s," Mr. Mandel said. "So if it turns out that the social media boom is overdone, or that any aspect of the tech economy is overdone, the only thing that will get lost is the money that was invested."
Still, now that companies like Facebook and Twitter are traded on the stock market, the investing public at large is exposed. If big investment institutions pull back from the broad stock market or, worse, start dumping technology shares, everyday investors could get caught in the downdraft.
"What's likely to happen is that there will be a huge winner-takes-all outcome, where one or two companies and investors will be successful," said David Santschi, chief executive at TrimTabs Investment Research in Sausalito, Calif. "But as a result, there will be a lot of companies that are just going to go poof."
And a lot of people's money will go poof with them.