Bubble 2.0

There are many people claiming that the current wave of venture capital funding and investments into Internet-based companies, most of them tagged with the term Web 2.0, could inflate too fast and explode just like the dot-com bubble back in 2000.

The Wall Street Journal invited two technology venture capitalists to discuss the matter, below you will find the arguments of the two:

Todd Dagres: “Web 2.0 is a bubble for 3 reasons: 1) There is far too much money chasing Web 2.0 deals. Too much money means too many companies getting funded at higher valuations. 2) There are virtually no barriers to entry in Web 2.0 and therefore the ability to develop a unique solution and sustain a competitive advantage is virtually nil. Therefore, it’s difficult for Web 2.0 companies to build long term value. 3) There is very little liquidity in the market for Web 2.0 companies. The Dow was recently at a high and still no liquidity. Without liquidity, Web 2.0 companies must rely on acquisitions to achieve liquidity and this will put a lid on the potential exit options and ultimate valuations of these companies. In short, they will be playing a musical chairs game in which there are far too many players and too few chairs.”

David Hornik: “I do not believe that the existence of too much venture capital money chasing too few interesting ideas constitutes a bubble. The Web 1.0 bubble inflated because the public markets were willing to bet on unproven ideas. Public markets are ill suited to evaluating such risks. On the other hand, the venture capital community exists precisely to take on that risk. While many Web 2.0 companies will fail, they will not likely fail in significantly greater proportions than has been the case with other venture investments historically. So it is hard to imagine how this so-called bubble will over-inflate. Venture capitalists will rationally stop investing in ideas that don’t bear fruit. Those that do bear fruit will gain traction and either be acquired or go public. Those are the traits of a rational market in my mind.”

You can read the full article here. What about you, do you think the current round of investments could inflate another bubble?