Let’s Not Forget the Other B Word

Heather Green has a timely article today wondering if we are in the middle of a great boom or heading towards another bust. It’s a great question, and one I have wondered about too as I see Gather getting crazy money and hear rumors of Digg getting bought for $30M.

Back in the nineties, I and many others, bought stock in companies that were going to change the world and make a ton of money in the process. Study the phrase “were going to” in that sentence. We ignored it at the time, but “were going to” is very different from “were.” Back then, nobody expected these companies to make money right away- we were in the middle of a tech revolution that was going to change the way things worked and create tons of revenue for every smart idea. Here’s a list of some companies that proved to us that a smart idea does not ensure profitability, or even survival: Exodus, 360Networks, JDS Uniphase, ICGE, Enron, VerticalNet, Wind River Systems, Portal Software- you get the picture.

The combination of too much money, the greater fool theory, a media frenzy over dot.coms and good old fashioned momentum chasing led millions of people into the tech fray. And millions of people got slaughtered when the gig was up. All because the investing world got too enamored with tech and stopped caring about investing fundamentals.

Are we in danger of the same thing today?

Hopefully not on anything approaching the same scale. But if enough of these startups with good ideas and bad balance sheets catch come of the crazy money out there looking for deals, we could start moving towards the cliff. There are two ways these good idea companies can hit a homerun: get bought by a Yahoo-equivalent (e.g., del.icio.us) or do an IPO and get bought by you and me. The Yahoos can take care of themselves. If we start hearing rumblings that some of these startups are going public, then I think we need to proceed with caution.

There’s something else I wonder about. If everyone is out there trying to hit that $30M homerun, will there be any money left over for a truly useful application or product that has reasonable prospects? In other words, is there money for a company that hits singles and doubles.

Our economy was built on singles and doubles, but these days it looks like everyone is swinging for the fences.

And that makes for bad baseball and bad investing.