- The stock market is up, and up big – same level as the peak of the dot com boom. It is a tide that that lifts a lot of boats and creates a lot of money that needs to be parked somewhere.
- VCs and Angels are investing a lot of money in a lot of companies. It is certainly not a bad thing, yet it is an indicator of excess supply of money, and that is what we saw 12 years ago when a lot of companies got funding despite the fact that they had no profits and questionable business models – not to mention outright fraud.
- There are lots of big-time IPOs of companies that don’t make money. They don’t make money and that is a very bad sign. Period end of story. We saw this in 1999-2000 and it did not end well for most of their late investors.
- Companies are inventing new metrics and measures of success. In 2000 it was all about eyeballs, not cash flow, profits or even revenues! Now we have ACSOI – sounds more like a new kind of Asian lettuce rather then an investment metric. Can Groupon really exclude customer acquisition costs from regular expenses? This begs the question of what are the underlying issues in the businesses that resort to these alternative metrics to justify their stratospheric valuations.
- Companies are playing accounting tricks. For example, DMD is depreciating payments to its writers over 5 years, as part of amortization of “intangibles”. Does anybody remember Worldcom and the big scandal over a similar issue?
- Companies claim to be part of a “new paradigm” and that is used to justify new ways of looking at their business activity, rather then draw parallels with the past. It is tempting to buy into this argument and if you haven’t invested thousands or millions into eyeballs during the dot com boom, and haven’t lost it all, you may in fact go with the flow. However, if you look back at the dot com bust, that is exactly how outpost.com, ValueUsa, Beyond.com and the many, many, many companies doing eCommerce, B2B, web hosting, telecom equipment and other “Internet Stuff” justified their poor financial and business performance. It didn’t work out well for their late investors.
- One has to ask: is value really, truly being created, or is it simply being moved around, or worse yet, destroyed. If value is not created, then the company’s business model can not be sustainable. Seems like some companies do create it, but others don’t. For example, compare LinkedIn and Groupon today, with Ebay and Outpost.com 12 years ago. LI is truly one of a kind business, with unprecedented participation, unbelievable stickiness and has real revenues. That is very similar to Ebay, which in early days had the same characteristics. Now, take Groupon: lots have been written here, here, here and here about how Groupon is actually destroying value and seems awfully similar to OutPost.com and ValueUsa. However, to make matters worse, Groupon and it’s clone LivingSocial command valuations much higher then the early eCommerce plays, so it seems the bets are even higher this time around.
- Biased analysis from trusted sources. During the dot com bust we’ve seen lots of biased advice and several disgraced analysts went down in infamy e.g. Henry Blodget. New disclosure rules were born as a result, e.g. RegFD. Today, we see things like the excellent debate in the Economist, cited above. Blank, arguing that the bubble is happening again is a retired enterpreneur and a professor and seems fairly unbiased. Horowitz, arguing that there is no bubble, has recently invested hundreds of millions in unprofitable companies that are part of the current wave, e.g. AirBnb and FourSquare. Seem unbiased?
- Last but not least: TV commercials! Both now and then we’ve seen some bizarre commercials. Take a look at this one from Outpost.com and this one from Groupon. Enjoy!
So, are these red flags, yellow flags or just unrelated observations? Would love your feedback.
In the meantime, let the party of innovation continue in full force.