Tuesday, July 12, 2011

Fortune: Don't Call it the Next Tech Bubble Yet

We'll skip past the obvious news of the day for now, and take a look at an interesting cover story in Fortune revealing how Silicon Valley is enjoying an economy completely disassociated from the majority of the country.  While suffering a tremendous skid in 2008 along with the greater economy, the boom/bust cycle is firmly in boom as the social media bubble phenomenon overtakes the region, creating millionaires a plenty.  Home prices in Palo Alto are up over 20% in 6 months and with the lock up period for many of the hot IPOs set to hit in the coming 6 months, a lot of new money is ready to be unleashed in the region.  The WSJ had a story last week about how the 'perk bubble' is back in the Valley - companies lavishing all sorts of treats on their employees circa 1998-1999.

This is a long story but a pretty fun read in terms of people living in an alternative universe.
  • Michael Dreyfus, 49, is a leading real estate broker in the heart of Silicon Valley. During the winter he sensed the housing market was coming back, though he hadn't a clue what he'd be in for. In February prospective sellers came to him with a listing for a perfectly respectable property in Palo Alto: four bedrooms, three bathrooms, 7,500-square-foot lot, needs work. He recommended that the sellers ask $1.9 million. When the house went on the market in April, they had bumped the price to $2.3 million. Seven offers came in above that price; $2.7 million won the frantic bidding. Several buyers attempted to make offers even as the broker was supervising repairs to a kitchen flooded by a burst pipe. What's a little leak when the price tomorrow may hit $3 million? "We live in an alternative universe here," Dreyfus acknowledges.
  • Welcome to the Bizarro World of Silicon Valley Summer 2011, where financial fervor is fueling yet another real estate boom. Billions of dollars in fresh venture capital is being invested, and tech IPOs are hitting the stock market weekly. The rest of the country may be in the economic doldrums, but here the winds are fair and the sails of the newly rich captains are full.   Proceeds from IPOs this quarter -- nearly $12 billion so far -- are already more than double last year's total.
  • Only three years ago the place was altogether miserable. The recession of 2008 paralyzed venture capital and strangled growth.    Boom and bust has been the way of Silicon Valley -- as it's been for all California since the Gold Rush. Genentech in the 1970s launched the biotech industry. Intel (INTC) and Apple (AAPL) gave birth to personal computers. Netscape created the modern web revolution. Companies thrived, then hit the inevitable hard times.
  • Netscape's highest public valuation obviously pales in comparison to Facebook's current evaluation -- or even Twitter's private valuation at about $8 billion based on secondary-market action. The argument for big valuation -- and against Netscape's way back when -- is that the current generation of dotcoms have better business plans and rely on more than mere "eyeballs" to measure potential profitability. 
  • Who's correct? For any 10 people you ask, you'll get 11 answers. Reasonable folks can disagree about the prospects for boom or bust. But their reckoning is about psychology more than economics.  "I think it's a wanna-bubble," says longtime Valley observer Paul Saffo. "Investors are desperate for something -- anything -- with a prospect of returns, and there is a lot of hot money looking for a home." 
  • Travel round the valley, and you can see what worries the poker-playing VC. It isn't just about high valuations and too much investor money chasing too few sound deals. Nor is it only about a rush to take questionable companies public. There are also cultural data points that are unmistakable: fast cars, homes priced for Marie Antoinette, and numbered bottles of balsamic vinegar from Italia.
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    • Barely presentable engineers just out of schools like Stanford and MIT are commanding higher beginning salaries than lawyers. (Yes, some might call that progress.) On Highway 101, the main drag of the Valley, billboards compete to attract engineers.  Bidding wars for the next extraordinary engineer -- someone who's content to be an employee with some options, rather than immediately getting into the startup game -- have resulted in salaries as high as $250,000. That's almost double what top talent got in the late 1990s.
    • Of the roughly 1,300 pre-IPO employees at LinkedIn, the vast majority became paper millionaires the day of the offering. Leaving aside the executives, the shares of the rank and file were worth as much as $190 million. (Co-founder Reid Hoffman became a multibillionaire that day.)
    • Dreyfus, the Palo Alto broker, says housing is "really hot" in premium areas of the Valley -- the best since boom days in the late "wacky" 1990s (though not yet at the prices of those days gone by).  What especially surprises Dreyfus, he says, is that so many buyers are from elsewhere -- particularly New York and London -- filling the management ranks at expanding social-network companies like Facebook. 
    • Buyers at the top end of the market -- above $5 million -- often pay all cash. Because newly flush employees at companies like LinkedIn cannot sell any of their shares for at least 180 days after the IPO, those employees have yet to hit the Sunday open houses. The marketplace may therefore get hotter still, fueling perceptions of froth.
    • In the past six months the median price of a home in Palo Alto has risen 24% to $1.2 million, according to DataQuick. Dreyfus says his own statistics in May showed only a 27-day supply of homes for sale -- assuming one home sold per day. A year earlier, supply was three times that.
    • Now 40, Montulli doesn't yet see many signs of a bubble, but he hears echoes of the times of Netscape. "There's still conservatism in the Valley," he says. "There's a lot of money chasing a very small number of companies -- those that actually show traction and are achieving real revenue and massive numbers of users. Those are the companies now getting bid up." The question, he says, is whether those valuations -- born in part of scarcity -- eventually will affect all those lesser companies around which fear still prevails over greed. He senses less fear of late. 
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    [Apr 15, 2011: BW - This Tech Bubble is Different]

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