The classic example of a bubble is the Tulip-mania of the 17th century [1].
The dot-com bubble was ultimately caused by a system awash with dumb money where even the most ludicrous ideas were getting funded. It was a house of cards that eventually came down. It earns its bubble label because two things happened:
1. Funding dried up to the point that legitimate businesses couldn't get funded or failed; and
2. The ramifications of the bubble extended far beyond dot-com companies.
Do we have something like that now? IMHO no. But I think we do have a valuation bubble of sorts. The system is awash with money (particularly Russian money) but what you have to remember is that we're still talking about far less money than in 2000.
In 2000 there were no angel rounds (per se) and companies weren't bootstrapped or funded on $250k or less. It was pretty much straight to a $5m+ Series A due to the (then) high costs of servers, software licenses and bandwidth.
Now you can build a prototype of something for as little as $10-50K. Infrastructure costs are almost zero (for a prototype). The only major cost left really is developer time and $250k will pay for 2-3 developers for a year (at a mix of salary+equity). That same venture would've required an order of magnitude more money in 2000.
So I think what you'll see is that a lot of angels will lose their shirts in the next few years or simply get poor returns. The same applies to the lower end of seed funds. But I don't think funding will dry up to the same extent simply because the market has many more participants, we're talking about far less money (both in total and per investment) and the barrier to entry is so much lower than it used to.
Now, this may translate into a problem where angel-funded companies can't get Series A/B funding and thus fail but with many companies reaching profitability with very small amounts of money the only real impact will be (IMHO) consolidation (today we have some significant players--Google, Facebook and Apple for example--swimming in cash and ready to write big checks even for talent acquisition) and the adoption of more lean-and-mean approaches, which can hardly be a bad thing.
Where ordinary investors could really lose out is on companies like Facebook. The early investors will (and have) made out like bandits but honestly I can see that bubble bursting at some point in the future.
The classic example of a bubble is the Tulip-mania of the 17th century [1].
The dot-com bubble was ultimately caused by a system awash with dumb money where even the most ludicrous ideas were getting funded. It was a house of cards that eventually came down. It earns its bubble label because two things happened:
1. Funding dried up to the point that legitimate businesses couldn't get funded or failed; and
2. The ramifications of the bubble extended far beyond dot-com companies.
Do we have something like that now? IMHO no. But I think we do have a valuation bubble of sorts. The system is awash with money (particularly Russian money) but what you have to remember is that we're still talking about far less money than in 2000.
In 2000 there were no angel rounds (per se) and companies weren't bootstrapped or funded on $250k or less. It was pretty much straight to a $5m+ Series A due to the (then) high costs of servers, software licenses and bandwidth.
Now you can build a prototype of something for as little as $10-50K. Infrastructure costs are almost zero (for a prototype). The only major cost left really is developer time and $250k will pay for 2-3 developers for a year (at a mix of salary+equity). That same venture would've required an order of magnitude more money in 2000.
So I think what you'll see is that a lot of angels will lose their shirts in the next few years or simply get poor returns. The same applies to the lower end of seed funds. But I don't think funding will dry up to the same extent simply because the market has many more participants, we're talking about far less money (both in total and per investment) and the barrier to entry is so much lower than it used to.
Now, this may translate into a problem where angel-funded companies can't get Series A/B funding and thus fail but with many companies reaching profitability with very small amounts of money the only real impact will be (IMHO) consolidation (today we have some significant players--Google, Facebook and Apple for example--swimming in cash and ready to write big checks even for talent acquisition) and the adoption of more lean-and-mean approaches, which can hardly be a bad thing.
Where ordinary investors could really lose out is on companies like Facebook. The early investors will (and have) made out like bandits but honestly I can see that bubble bursting at some point in the future.
[1]: http://en.wikipedia.org/wiki/Tulip_mania