Silicon Insider: Bubble Memory

For all the talk about a new Internet bubble, the facts don't agree.

The U.K.'s Financial Times newsletter recently had a very interesting chart, based on data provided by the National Venture Capital Association. To give you a quick explanation: the chart has quarter-by-quarter measures of the returns on venture capital investments over 5, 10, and 20 years.

Venture capital funds pay out over a long period of time as the companies in which they invested fade away, are acquired, or go public. Not surprisingly then, the 5-year return shows the most sinuosity -- reflecting the fact that these investments are still highly volatile, with the measure largely dominated by high fliers and the short-lived. By 10 years, most funds have pretty much matured and are moving towards the industry mean, which is pretty well reflected by the 20-year return rate.

Now, let's take a closer look at each of these curves in turn. First, some good news. A nice horizontal 20-year line underscores that venture capital funds are among the best investments around -- if you've got a minimum of a quarter-million burning a hole in your pocket -- holding at a nice steady 16.4 percent (and, if you are a real risk-taker, the number jumps to 20.6 percent for early and seed-round investments).

But just as important, this flat 20 year curve is a reminder, which we veterans tried to point out during the crash of 2000, that over the long term the boom-bust -- even the bubble-crash -- cycles of high tech tend to balance out.

Places like Silicon Valley, which are perpetually accused of either being out of control or in their last days, always eventually return to the norm of innovation, entrepreneurship and strong growth. I often think of all of those people who bailed out of the Valley in 2001-2002, believing that the good times were over forever -- supported in their hysteria by far too many of my fellow journalists. How many fortunes were lost by folks who would now be working for Google or Facebook or Photobucket?

Now, the five-year curve shows the most impact of the dotcom bust. There is a lag after the bust and 9/11 hit as older investments closed out. If the chart went back a couple of years more, you would likely have seen a precipitous fall over the previous couple years, then the final ugly drop into negative returns. This was the moment when many investors finally pulled the plug on their venture funds, taking the withdrawal penalty rather than ending up under water.

I would also argue that, besides the dot com crash and terrorist attack, one other factor drove short-term returns into the red: the collapse of the IPO market, thanks to Sarbanes-Oxley and other new regulations designed to "fix" the errors of the bubble. Instead they built a devastating handicap into the U.S. tech economy.

How much of a handicap? My guess is that the five-year curve on the chart ought to be symmetrical. In other words, by September 2006, the five-year return on venture investments should have been 15 percent -- instead of zero. How many hundreds of billions of dollars of lost income does that represent? And tell me, do any of you really believe it has made companies more honest? Perhaps public corporations, a little, but that's why hot new tech companies these days are wary of ever going public, choosing the acquisition route instead.

That last fact is reflected in the 10-year curve. This is the one I think we should be most worried about. This long, slow slide, down 2 percent in just the second quarter of this year, reflects the real degradation in returns coming from the industry-wide shift away from IPOs towards mergers and acquisitions.

I've written about this before, notably in the Wall Street Journal, but here the impact is unmistakable: In the name of greater regulation, we are compromising U.S. entrepreneurship and innovation, and worse, aggregating greater control to a handful of companies.

This is not something we want, not if we're to stay competitive on the world economic stage. After all, almost all new jobs, important new inventions, and most new wealth distribution, comes from start-up companies, not established firms. As Mark Heesen, president of the venture capital association said this week as he announced the latest results, "… we will need to see more exits in terms of IPO's and acquisitions in the coming year" if any kind of industry momentum is going to be created.

These are big, long-term problems, largely out of our hands (except at election time). However, there are a few lessons we as individuals can draw from all of this:

There is a lot of loose talk flying around about a Bubble 2.0 in tech that is about to explode. Don't believe it. Some companies' stocks are indeed inflated: Google, in particular, is the darling of stock investors everywhere -- but it is a company without a lot of defenses and a whole lot of enemies. So it may be due for a serious correction.

So may Apple: it is in a much stronger position, but it also depends upon Steve Jobs perpetually pulling off one market miracle after another. But otherwise, most tech companies, even in the Web space, are simply highly valued. That's not a bubble. My sense is that most of the bubble talk is coming either from: young techies for whom bubble/bust is the only industry paradigm they know -- and who see it as a norm; and the angry and jealous, the same people, resentful of other people's success, who prayed for the last crash.

I remember, back in 1999, listening to a doctor I know rage about how "those computer kids" were making more money than him -- implying that he, unlike them, deserved it. The same is true now.

Don't trust the national media. In the late 1990s, the national media discovered Silicon Valley 30 years late, then proceeded to overhype it and the new dotcom companies. Then, when it crashed, they declared the story over, packed up their laptops and left. Thus, they missed the big story of high tech's (and Silicon Valley's) miraculous recovery -- and, in the process, one of the best investment opportunities of our lifetimes.

Fast forward to about two years ago, when they "discovered" tech (especially Google) again and rushed out to tell the story -- after most of the opportunities were already gone. Now the hot new story is the emerging bubble 2.0. If you invest your money based upon what you read in these publications and watch on television you will lose every time. They are always either late or wrong -- making them the perfect reverse indicator of the state of high tech.

Don't count out tech. I remember sitting on panels in early 2001 in which many of my fellow business journalists, some of them among the most distinguished in American newspaper and magazine journalism, ominously predict not only a crash but the fact that we might never see a recovery again in our lifetimes.

Instead, in the most spectacular example of resiliency in U.S. business history, high tech came back in just three years. And despite having every possible disruptive force thrown at it, as the chart shows, venture capital has now come back after just five years. There couldn't be a better lesson in remaining perpetually upbeat about the future of high tech. And just remember, if reporters were optimists, they'd be in business.

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This work is the opinion of the columnist and in no way reflects the opinion of ABC News.