Mr. Webb

Bubbles bubbles bubbles! The talk continues. Last week the anti-bubble camp was in the ascendency. First we had a massive bubble debate on Branch.com (disclosure: I am an investor in Branch), featuring some of the best minds on the internet: Anil Dash, Dave McClure, Paul Kedrosky, Chris Sacca, Michael Arrington, MG Seigler and more. The rough consensus? No bubble.

In wrapping up the Branch debate, Seigler pointed to First Round Capital’s Josh Kopelman, and his hilarious bubble post - from 2007, no less - mocking those who continuously cry bubble, and failing to grasp the transformational power of the internet. A fair point.

Next we had Business Insider Henry Blodget’s presentation State of Startups 2012 presentation, subtitled “No, it’s not a bubble.” Many charts, graphs and points followed laying out why the bubble doesn’t exist.

I must confess, however, I’m in the pro-bubble camp, and while reading the Branch debate, I found myself jumping up and down with counter arguments on why we actually are in a bubble. And, since I’ve taken a two week vacation from this column, I figured I’d come back with a vengeance, and cogently lay out all the arguments and counter arguments.

I’ll start off by promising the anti-bubble posse that I will barely mention Instagram at all, and when I do, it will be only in a tangental manner. I promise.

What is a bubble?

The definition of a bubble is an important part of this debate. Chris Dixon expresses justified annoyance at this when he says “A bubble is a financial event. I don't understand people who try to discuss it without bringing financial evidence into the picture.” This is a valid point.

Economists generally agree that three things must be present for a bubble to exist: (1) high trading volumes, (2) prices that are different from their “intrinsic values,” and (3) that said difference between prices and intrinsic value must be considerable.

The Wall Street Journal puts it thusly: “Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet.”

Built into that definition are our key three items: disagreement would indicate considerable variance in price, and a big economic development implies high trading volumes. "The internet" or "the railroads" are big economic events. And because they are big events, there will be a lot of trading around them.

What a bubble is not

Just as important is what a bubble is not. A bubble doesn’t have to be in the stock market. Tulip Mania, the first bubble, had nothing to do with stocks. Subsequent examples abound. Many of the anti-bubble defenders base their arguments on metrics around the publicly-traded tech companies, talking about their P/E ratios for example. The P/E ratios of publicly-traded internet companies, such as LinkedIn, are within normal parameters right now. This, however, has nothing to do with "ALL" Internet companies, only the ones that are publicly-traded. No one realistically believes the bubble is in public companies, and the definition of a bubble does not require the bubble to be in publicly-traded companies.  Any arguments against a bubble that solely rely on P/E ratios of public companies aren't really relevant and indeed help obscure the true picture.

Additionally, a bubble is not tied to the economy as a whole. Joseph Schumpeter had a notorious aversion to looking at large economic trends when trying to discern what was really going on. He said “It is, therefore, misleading to reason on aggregative equilibrium as if it displayed the factors which initiate change and as if disturbance in the economic system as a whole could arise only from those aggregates.” (Look to p 36 here).

Economist Carlota Perez, something of a hero of Union Square Venture’s Fred Wilson, takes the point further, stating that bubbles have nothing to do with the economy as a whole. “It is not even likely that the turbulent process by which new paradigms are assimilated should lead to regular up an down trends in the economy as a whole.” (Page 36, of her seminal work Technical Revolutions and Financial Capital).

These are both important points, as many of the arguments against a bubble point to metrics from the stock market as evidence for the lack of bubble. Fact is, economists don’t care whether or not a bubble is in the stock market or trends with or against the larger economy.

It should also be said that bubbles have nothing to do with many of the things we hear about - anecdotal evidence of “founder friendly” terms, bankers going into tech, a bajillion ripoff tech companies managing to get funding, lavish parties, kid founders, etc.

Why we’re in a bubble

So, then, it shouldn’t be that hard to see if we’re in a bubble, right? If our three criteria our met, we’re in one. Bob’s your uncle.

First, I’d posit that this is not a “dot com” bubble. I believe the bubble we’re in is a social/mobile bubble. I say this for a number of reasons: social/mobile companies have higher valuations than many of the other tech companies out there, and they garner considerably more press. It’s easy for us to think of the entire dot com sector, thanks to the previous dot com bubble, but in fact we have several sub-markets now. When Chris Dixon says “Instagram aside, there is SUBSTANTIAL revenue and even profits being generated by a much larger # of companies than ever before,” he is generally mixing all tech companies together. There are indeed several tech companies producing substantial revenue. But what percentage of social/mobile companies are?

Let’s look at those three pillars of the definition:

Trade is at high volumes
Social mobile companies are proliferating. Many are getting invested in. TONS of them. We all know this. We see new deals every day on Techcrunch, VentureBeat, Betabeat, etc. Perusing the Branch discussion, everyone agrees there’s some “froth” at the early stages for “certain” types of companies (i.e., social/mobile).

But all this is, of course, subjective. So let’s look at Blodget’s empirical data. Despite some blurring at the beginning, in his Anti-Bubble presentation, Blodget points out VC investment in tech is increasing, now, even in a down economy.

Prices are “considerably at variance to intrinsic values.”
So let’s turn our attention to pricing. There are two parts of this equation: (1) considerably at variance and (2) intrinsic values. Let’s go one by one.

(1) The very existence of a plethora of heated discussions on bubbles should be enough evidence that investors profoundly disagree. The tepid IPO market vs. the number of companies aiming to IPO, along with their substantial number of backers wishing for the same thing, should indicate two parties who substantially disagree on value, considerably.

(2) “Intrinsic value,” of course, is a bit more complicated. This has always been the sticking point for any educated bubble conversation. The tech sector has produced myriad companies that operated for years without revenue that eventually went blockbuster: Google, Amazon, Facebook, etc. Revenue, then, is only part of the equation. The trick is to figure out what else matters.

Intrinsic Value is defined by economists as the current and projected future value, marked to the present, of an asset. It is the “actual” value vs. the “market” value (and, thus, Facebook’s $1B purchase of Instagram is moot. That is a market value). This also means that if revenues are currently at zero, but future revenues are projected to be high, the current valuation is positive. So, then, despite zero present revenues, a company can have intrinsic value.

Opinions vary, however, on how to calculate this intrinsic value, since it relies solely on unknown future revenue. Is it the next instagram? Or a failure? It could be either. Mark Andreessen suggests factoring in the likelihood of the big win, thus adding a percentage multiplier into your calculations.

So let’s do that.

It is my position that many, if not all, of these companies are projected to earn their revenue from advertising. There are exceptions, like Zynga, but by and large, most of these companies are expected to make their money off of advertising. I have written extensively in the past about the finite size of the global ad market, and how we can only support 9 more google-sized companies.

There are about 3,500 startups funded every year. Delve into the stats at that link and you’ll see 1,000 of them are new startups in internet or media. The online ad market in the US is about $40B. The math there is $40 million potential for each new startup (you could complicate this by saying 5,000 startups over, say, five years, and $200 billion over the same span, but the math is the same.) And this ignores the previous contenders. What, really, is the statistical chance that any new startup will capture a substantial portion of that market? Given the massive barriers to entry via the need for building a substantial user base, and the large, incumbent players who already capture that ad revenue (Google is not going to go away), statistically, the answer has to be that It is approaching zero.

That should be the end of the argument from a mathematical perspective. The “rational” future “actual” value is the potential future value multiplied by its likelihood. I contend that the potential is far lower than stated, and the likelihood is far lower than stated as well. It’s not a $40 billion times 10%, it’s $40 million times .01%.

So there we have it. Mathematically, prices are out of whack with intrinsic values. And there is considerable disagreement, i.e. “considerable variance.”

There really shouldn’t be any thing else to the argument. However, I concede that all of this, while based in data, statistics and fact, is still based on my opinions of likelihood. There is still some guesswork.

Let’s look at the counter arguments.

The Arguments against it being a bubble:

There are a bunch. Let’s go through them one by one:

“This time it’s different”
There is a strange paradox going on with some observers contending that no one’s saying that this time things are different, while actually, this time, people are saying it’s different. Henry Blodget just gave us the best example of this. “Is everyone justifying today’s prices by saying ‘this time it’s different?’” he asks? “No.” And yet, right after saying that no one was saying ‘it’s different this time,” 15 slides later, Blodget is outlining why it’s different this time. It’s kind of awesome.

Paradox aside, Blodget’s arguments for why it’s different are the same as many others in the anti bubble camp: that way more people use the internet than during the dotcom boom, so the valuations are more realistic. That we are undergoing a social revolution, and that we are undergoing a mobile revolution. All of these are true. All of these are irrelevant to the existence of a bubble. They are arguments on one side of the “considerable variance” debate. Personally, I hope they are true. But we are sticking to the actual definition of a bubble here, and the fact that it’s different is moot. Indeed, both Schumpeter’s creative destruction and Peres’s technical revolutions, imply that many bubbles do result in something different, in a leap forward. And yet, the bubbles still happen, as do their commensurate crashes.

"Bubbles can be good.”
This is true. Bubbles can be good. They are still bubbles. The benefit of bubbles are moot to whether or not a bubble is happening. “Are we asking if consumer web/app technology's impact and influence on mainstream culture and ordinary people will decrease? I can't imagine so,” Anil Dash commented on Branch. It is an important point. Bubbles do destroy value, but good things can come out of them. This is probably more about the internal morality debates that many of us in tech have - are we helping the economy or hurting it? We may well be helping it, but it will still be a bubble, and someone else will bear the cost.

Nowhere in the definition of a bubble does social good enter into the equation. Carlota Peres predicates her whole seminal book on the fact that bubbles drive all major innovations. They do, however, come with costs, which she outlines in gory, devastating detail.

"Prices are in line with value"
The Public Markets are Fine, For now. Investor Chris Sacca colorfully sums it up: “As you guys know, I am also a very active late stage investor. Business on that end is entirely different than in the 90s when I first got to the Valley. Facebook, Twitter, LinkedIn, etc are all real businesses with CAGRs that would make a hockey stick blush and reach for the Viagra.”

Blodget points out that the IPO market is open, but it is far from robust. This is true. The bubble is not in public markets.

Yet many bubble deniers continue to use public market data to defend the private markets. Investor Chris Dixon does so in the Branch debate by saying, “In particular, in every bubble in the past, P/E ratios of securities bought and sold by non-professional investors were way higher than the historical average. During the dot-com bubble and housing bubble, P/E's were over 40…. Current P/Es in tech are a reasonable 17 (historical average for S&P is 15).” Blodget uses Apple as an example, showing that it’s P/E ratio is a reasonable 15.

Mark Andreessen echoed these sentiments last week when he said “If we're in a bubble, it's the weirdest bubble I've ever seen where everyone hates everything. If you check tech stocks that went public recently, it's nose down to the ground. We're now 15 years of flat stock market returns. That's a weird bubble.”

And yet public markets are irrelevant unless we’re arguing a narrow bubble of public market tech stocks only, which no one is arguing. It’s a red herring.

Public markets are tight right now partially due to tech stocks doubt, but the main reason for the lack of IPO access is due to larger issues with the recession we are currently in, and slowly working our way out of. This will change.

Previously, I had commented on how as pressure for tech companies to IPO increases , the public market tightness will come under attack. This absolutely came to fruition with the JOBS act, and Blodget as much as gives up the game in his recent presentation in a footnote that says ”The JOBS act could begin to change this. Fingers crossed…”

So let’s move on, then, to where most bubble-believers argue that the bubble is forming, in the private markets. As we’ve said, the hardest part of bubble identification is figuring out whether the prices have decoupled rationally or not. Whether “intrinsic values” are still being considered. Many bubble deniers concede this, such as Chris Dixon, who said of early stage private companies "those have never been valued by VCs on purely financial metrics." This is, of course, true, but could be interpreted to tacitly admit that pricing is not at “intrinsic value.” Of course, things still need to be “considerably at variance” and “high volume” to be a bubble, but this does effectively concede that things are not at intrinsic value.

There exists a large body of work explaining the apparently irrational yet defensibly logical pricing of tech startups - quality of the founder, mobile trends, social trends, competitive funding environment. If you look at something like this Quora thread, you’ll see a lot of talk about normal valuations, with some admissions that they are mainly guesswork. Indeed, it’s comical how many different Quora threads ask the same question in different ways. Poke around. Also often mentioned are whether the founder is still at their job, the quality of the founder, and whether they have a prototype. It’s worth noting that none of these three factors are related to the economic definition of “intrinsic value.” I’m not saying they don’t matter - they’re factors I base my own investment decisions upon - and god knows what ELSE we’re supposed to use. But nonetheless, they are irrelevant to economic theories of bubbles.

Chris Dixon recently conceded that “certain stages of venture valuations do seem over-valued, in particular seed-stage valuations and (less obviously) later stage ‘momentum valuations.’” He explains this by talking about the proliferation of seed stage investors who are investing in what they believe in (I would be one of those) and in the momentum stage by non-inherent-value decisions such as “VC’s who want to be associated with marquee startup names, the desire to catch the next Facebook before it gets too big, and the desire of mega-sized VC funds to “put more money to work.” He counters this by saying that Series A seems under-valued. Dixon rightfully points out that it’s hard to have a public debate about this due to confidentiality. He’s right. So basically Chris is saying there's froth in early stage due to lots of angels (like me) and froth at the late stage because of "momentum" valuations (ie tumblr and foursquare, groupon etc). In the middle, around Series A, he thinks that there's not frothy valuations. He may be right. So can it be a bubble if there's a sober moment in the process from early stage, to series A, to "momentum" valuations? It's an interesting point of view. I do wonder, though, If there's froth before and after sober Series A, however, does it really matter? And for what it's worth, personally, I have seen plenty of froth in Series A as well.

One thing I will cave on. Dixon makes the excellent, eye-opening point that “This doesn’t mean the investors think they will invest and then get some greater fool to invest in the company again. For instance, at the seed stage, intelligent investors are quite aware that they are buying the dream but will need to have numbers to raise a Series A.” I admit I hadn’t thought of that in exactly that way before. Yet if our bubble is in Social Mobile, a world still primarily of light revenue, I wonder what metrics those valuations are based on? Revenue is, after all, the only metric relevant to "intrinsic values." But most Series A rounds I've seen are still very light on revenue. The metrics used to establish value are based on users, who will, hopefully, one day be turned into revenue. Most of those valuations are, in my experience, fairly optimistic about per-user future revenue.

Andreessen’s method of market potential multiplied by likelihood does a good job at addressing these concerns. Though as we’ve seen, interpretations of the numbers can vary widely.  And none of those, however, work in situations like YC’s new “Apply without an idea” program, or the funding of some founders without any idea (i.e. Jakob Lodwick)

I’ll admit that we can’t get anything off the ground if we fund everything at zero or near zero valuations. We have to put a stake in the ground somewhere. But in terms of a strict definition of a bubble, it’s hard to deny that intrinsic value, from an economist’s point of view, hasn’t been thrown out the window.

In a recent controversial (in tech circles) NY Times piece by Nick Bilton, Paul Kedrosky,  an investor and editor for Bloomberg, explained “It serves the interest of the investors who can come up with whatever valuation they want when there are no revenues. Once there is no revenue, there is no science, and it all just becomes finger in the wind valuations.”

Chris Dixon partially affirmed this last week by saying “The argument that sometimes startups get better valuations without revenue is somewhat true.’

In the end, it’s anyone’s guess. Investor Chris Sacca sums up the conundrum on the Branch debate by saying “It's easy to moan about valuation creep on the seed stage deals, and I cringe at some of the entitled attitude I see around these days. However, for all the whining, I will concede that two of my best performing deals ever, Twitter and Instagram, were done at roughly $25mm and $30mm pre respectively. So, what the fuck do I know?”

It’s a mess. It’s a constant debate. But if we can’t know prices are too high, we certainly can’t know that they’re reasonable, and, thus, the defense crumbles.

The “greater fool” inversion.
Bilton, who was on the Branch thread, parries for the bubble believers: “One of the signs of a coming bubble could be seen with the high valuation of start-ups. Viddy at $370 million; Foursquare at $700 million; Pinterest at $1+ Billion. All of these companies, and many others, have very little, if any, revenue. When start-ups reach such high valuations, they are left with only a handful of suitors that can acquire them. If there is no buyer, these companies have to go public, which is where the price-earnings ratios become a problem and confidence can wane.”

To which Michael Arrington shot back “A lack of buyers is an excellent indicator of a not-bubble. The greater fool theory assumes there's always someone dumb enough to pay more.” Apparently because the number of buyers is limited, the greater fool theory is not in play.

I love this. The flaw here is that the whole point of the greater fool theory is that this is true until it’s not. One day the music stops.

Barring that, Bilton is correct: pressure is coming to push these companies public, before their ready (see below), thus, the “greater fool” argument is still in effect.

As an aside, Economists do not currently find the “greater fool” theory to be true, despite such believes being “prevelant among practitioners”

“No one is getting hurt.”
The argument here is that this is just a bunch of rich people gambling, it’s only in the private markets, and no one else is getting hurt. Your mom and dad aren’t going to get hurt.

This is so not true. Public pension funds have always been a massive source of venture funding. Says the Times recently, for example, “By September 2011, retirement systems with more than $1 billion in assets had increased their stakes in real estate, private equity and hedge funds to 19 percent, from 10.7 percent in 2007, according to the Wilshire Trust Universe Comparison Service.” Even in staid Europe, Pensions makes over 10% of the VC funding, The Economist points out.

Your mom and dad can still get hurt. This is not just rich people’s money. Not even close. It may ease our conscience to think that, but it is a lie.

Low costs in early stage startups
Paul Kedrosky made a point in the Branch debate I had not thought of before in terms of bubbles, and it’s an interesting one. “There does seem to be more activity at the early-stage than is justified by outcomes, & it is frequently happening at higher valuations than would seem prudent. Having said that, the costs are low, so, in the same way the Cambrian explosion led to most modern forms of life, cheap speciation (with high die-offs) is an unsurprising ecosystem response to incident energy..”

Basically, yes, values are high relative to intrinsic values, but startups are so cheap now that it doesn’t really matter if a bunch of them die off. Good will be done.

To me, this seems to be a combination of the “bubbles can be good” argument and the “no one is getting hurt” argument. I’ve tackled each individually, and should point out that  both are specifically not relevant to the definition of the bubble, and in aggregate, damage may still be done if capital is being diverted from other, more useful sources. Recall the recent Tweet heard round the world by ex-Facebooker Jeff Hammerbacher, as highlighted in a recent Business Week article that expounds upon this point: “"The best minds of my generation are thinking about how to make people click ads. That sucks."

There you go.

Why I think we are confused.

So what the hell? Seed stage bubble, rationality at Series A, then bubble again in “momentum.” Bubbles can be good. It’s gambling but it’s not. WHY DOES ANY OF THIS MATTER? It is easy to get confused. And here, I think, I would like to introduce some new factors into the debate.

We’re carrying baggage from last time

Many debates refer to “1999 style bubble.” NASDAQ insanity. Billions (Trillions?) of dollars vaporized. Our parent’s savings decimated. The dream of the internet halted. It hangs heavy over all of us. Many of us learned about bubbles for the first time (for my part, dating a Texan in college, my first real world experience, after studying bubbles in college, was the late 1980’s Texan real estate bubble). Much of our understanding of bubbles comes from NASDAQ’s rise and fall. The layoffs. The irrational exuberance. We are attempting to pattern-match.

But what if we are pattern-matching only the trappings of the bubble. We’re trying to avoid repeating our past mistakes. We speak of revenue in companies, though it is economically irrelevant to a bubble. Investor Dave McClure sums this line of thinking up when he says “there is SUBSTANTIAL revenue and even profits being generated by a much larger # of companies than ever before.”

We talk about P/E ratios of public companies. Ditto. We talk about how the economy as a whole is depressed, NASDAQ isn’t rising to the stratosphere. Though we felt and remember these things viscerally, they are all irrelevant to economic theory. We are addressing old criticisms when debating a current topic.

We also use the word “Bubble” to talk about all the cultural ridiculousness from the dot com era. Stupid parties. Bankers as tech moguls. 12-year-old founders. There was a lot of silliness in the dotcom era, and some of that silliness is happening now. This is neither evidence of a bubble or evidence against. But boy, does it bring back bad memories.

When we debate what’s actually going on, now, however, we must strive to remove all of that from our thinking.

Some people have an interest in milking it

I don’t want to spend too much time on this one. It’s tacky. And I don’t want to attack anyone personally. But remember: many people, including myself, are heavily invested in this trajectory continuing for a good long while, and getting a ton of these companies to IPO. Would a newspaper man be impartial talking about whether the newspapers are dying or not? Would a screen printer have an impartial opinion on desktop publishing? I’m not interested in going ad hominem, but there exists a substantial economic body of work around economic signaling and markets.

It’s early in the bubble

In his recent presentation, the multitude of slides Blodget shows of industry trends now vs. the dotcom bubble look, on first blush, as if they are different. The massive, spiraling peak we see in any chart of a bubble, ex post facto, hasn’t occurred yet. Yet if you look at 1997-1999 and compare it to 2010-2012, they are eerily similar. Bubbles start, grow, peak, and bust. That whole cycle is a bubble, regardless of where you are on it. Is this bubble early? Late? I’d probably wager we’re maybe a year or two in and it’ll peak in 2 or 3 more. But it doesn’t matter. That whole journey is the bubble. And I believe we’re in it now.

Words, words, words.

You’ll notice a lot of people saying “Boom” lately. Blodget, after saying there’s no bubble, throws in the word “boom” at the end of his presentation. MG Seigler starts the Branch.com conversation with “It's boom times, yes.”

In economics, a bubble consists of a boom, and then a bust. That’s it. Boom sounds nice, boom times, boom boom boom. Booms come with busts. Within a specific industry, booms plus bust equals bubble. End of story as far as economics go.

“Boom times,” the fun one, conjuring images of the wild rest or a factory towns or smiling Wired covers, are associated with the economy as a whole. These booms also go bust, but it’s a longer economic cycle than a bubble, so it sounds less threatening (though paradoxically potentially far more damaging). It’s semantics, and irrelevant to the larger conversation.

There’s not a lot we can do about it

This is, basically, true. There’s probably not much we can do about it, except for talk about it, hence, the endless debate. Matthew Ingram from GigaOm says on the Branch thread “But is cynical gambling behavior in tech or startups any different from what happens in the stock market or any other market every day?”

Gambling comes up often these days when talking about tech. There is substantial economic debate and theory going on about whether the stock market is gambling or not at this point, and it’s an interesting discussion. The strongest traditional argument is that value is created in the stock market, and gabling is zero-sum. This is still probably true (though, again, there is debate about this on a macroeconomic level). Some economists believe that bubbles can create value over the long term (Peres) but they are still bubbles, and there are still losers.

Additionally, sticking to our common definitions of gambling, all this does is reinforce pricing is against intrinsic values.

It may not matter

MG Seigler on Branch says “All boom times end eventually. But calling this a ‘bubble’ implies this time is going to ‘burst’ with far reaching consequences. I just don't see that.”

This may be rational. Most economists agree that bubbles can cause economic damage and are interested in discovering why they happen. But most economists also agree that there are benefits (Peres, Schumpeter’s “Creative Distruction,”) etc. It’s irrelevant to the “are we in a bubble” debate, but I believe that we all viscerally want to deny being in a bubble because we equate bubbles with the devastation wrought in the dotcom boom and the recent housing market boom, though those levels of devastation are not required for a bubble. Big bubbles take economies down with them. But bubbles don’t have to.

In 2007 or so the English synth pop band Depeche Mode was beginning work on their last album, Sounds of the Universe. By this point in their storied career, Depeche Mode had sold over 100 million albums. Their 8th album had gone platinum in the US and number one in eight major countries. Their 7th had gone triple platinum. They had some cash and they were going to put it into their new record.

Toward that end, Martin L. Gore, the primary songwriter in Depeche Mode, decided that he wanted some new gear. Not new, exactly, but rather old, vintage analog synthesizers (along with a boatload of guitars). And he wanted a lot of them. Said the engineer on the record Luke Smith, “Martin was buying all of the kit he’d ever wanted, along with any new and experimental gizmos that tickled his fancy. We started with a lot of gear, and by the end of the session there was a veritable smorgasbord of devices available to satisfy any palate.” Martin even credited the spree to the sound of the record: “I don’t think we can play down the effect that the parcels arriving every day had on the record.”

He was, to quote musician and analog collector Sean Drinkwater, “buying up every Steiner, EMS and EDP synth in existence.” Anyone shopping for analog synthesizers noticed that many of the Ebay auctions were ending in higher-than-normal prices. The specialist online sales outlets were all sold out, and synth prices skyrocketed. Frenzy ensued, and prices continued to skyrocket. Eventually, Depeche Mode got all the synths they needed, and prices began to decline.

And in the end, unless you were a synthesizer collector, the whole thing did not freakin’ matter one bit.

We learned our lesson last time

Many people believe that the tech sector has been sufficiently chastened and are more careful this time. Dave McClure says “The far greater trend is towards more rational co's & pricing compared to 10-12 years ago.”

I’m tempted to say, “Irrelevant! Bubbles have strict definitions!” But in actuality, there is some validity for this point of view. Some economists agree. Studies have been performed where “bounded rationality” (the limits of investor’s knowledge) is mitigated over time with learning.⁠1 The studies were done with repeated trades with personally-known participants, but it’s not completely irrational to say that we’ve learned from the past bubble and may not make the same mistakes again. I hope so. It does, however, remain to be seen, and economic theory has not performed similar studies in the real world where people don’t really “know” each other. As an aside, there’s some interesting potential here on what it means to know someone, via social media and blogging, but I digress.

The Sustainability question

On the Branch debate, McClure nails it when he says “the more relevant issues to discuss are: (1) are there companies at incubation, seed, series A/B/C, or pre-IPO being ‘overpriced’ by investors, (2) is that happening at an ‘unsustainable level’ (ie, at some point will it be re-priced lower), and (3) is the trend towards more or less of that occurring now or in the future?”

He concedes points (1) and (3), so (2) is the big one.  Is it sustainable? Right now it can feel that way.

But things are happening.

We’re in a depressed economy, and VC is the one place exhibiting big returns. An analyst friend of mine says that the Instagram deal and the Facebook IPO are causing a frenzy with hedgies and high net worth individuals. And here I must apologize for bringing up Instagram. I agree with Chris Dixon that the Instagram deal is irrelevant to the existence of a bubble, and indeed it was a market price, not a valuation price so economists would agree as well. But the fact is rich dudes not in tech are freaking out over it. They are blown away by the breathtaking speed of wealth creation from the deal - who wouldn’t be? Many people on the Street are saying that that deal turned heads in a way even Facebook hadn’t. More money is coming into tech because of Instagram, whether it evidenced a bubble or not.

So what happens if the JOBS act, Instagram envy, a rebounding economy and the Facebook IPO concoct a perfect storm and cause a giant amount of new capital to flood the VC market?  Will prices stay the same? Or will we see an accelerated upward spiral? Will they still be sustainable then?

Are any of those four things NOT going to happen? We’ll have to see with the Facebook IPO but if all goes according to plan, this bubble could well be kicking into high gear.

We Believe in the Internet

The internet has massive potential. I believe this. We all do. We don’t like to call it a bubble because doing so belittles the transformational power of the internet. It makes the layperson go “Oh, just ignore that, it’s a fad.” The internet is not a fad. I believe that. Anyone in tech believes that. It’s why, despite everything I write here, I continue to invest in early stage internet companies (and, I confess, I may be a bit susceptible to the greater fool theory).

No one wants to beat on their baby. We love the Internet. All this talk of a bubble makes people doubt it. We don’t want people to doubt the Internet. For many of us, it’s the future. We remember people belittling the Internet after the dotcom bust, and it stung. Promise unfulfilled. It is very, very hard for me, at least, to talk about tech being hyped, because I love it so. It requires unrelenting intellectual honesty, and I can’t deny a massive amount of anxiety saying these things when I think about my own overwhelming exposure to tech in my investment portfolio. But I must. It sucks for me to say it, and I am not acting, yet, with my personal investments because of my belief that we are in a bubble, but I should. As much as I hate that. In the end, even though I see it coming, I’m gonna try and time it as much as anyone. Because I love the Internet, and I don’t want to get out.

Mr. Webb.

A year ago this month my old agency made a joke website. The Barbarians were, and still are, quite fond of the joke website. This one, though, people seemed to really dig. It was called GroupMeh. It was a "revolutionary, game-changing social network for the tragically apathetic." It was a big hit with the nerderati. I was reminded of this this weekend while at Coachella, when I ran into two of the co-founders of GroupMe, Steve and Jared. "Oh you were one of the guys who did GroupMeh." Jared said. I was slightly embarrassed, but then I started rambling on about how we wanted to take it further.  I started babbling incoherently about our plans for GroupMeh. It was awkward. But the whole encounter reminded me of an idea that has been bouncing around in my brain, and a few other brains, for a few years now, even before GroupMeh (or GroupMe). The antisocial network.

When we launched GroupMeh we included a signup page that asked people for a reason why they wanted to join. Many of the comments people left were touching, and sad, and all too human. For example: "Reason? I moved in to a new city more than a year ago. I still have zero friends. Correct. Zero! Couple of banks are after me. Not to mention that I've never been in a relationship in my life. And I am 29 already!" Or how about this: "Got dumped by my girlfriend of ten years after living together for six months. Now live alone 20 miles away from hometown so utterly alone. Alienated all my friends for this girl. She's very successful while I have a middling job with no future, no friends, no prospects. Oh also work overnights so very little human contact at work." Not everyone has friends.

GroupMeh convinced me and several of my coworkers of the need for an antisocial network. After the success of GroupMeh, we submitted a proposal to Kickstarter elaborating on the concept of an antisocial network. We brainstormed all sorts of great ideas about the functionality of the site: a different randomly generated "anti-social" network every time you log in. The only emoticon is a neutral smiley face. Yelp for the best restaurants to go to alone. Trending and popular topics are omitted (God, I would love that one). Or how about this potentially very useful feature: friends you don't interact with frequently are automatically dropped.

Several of the most pervasive and important web tools were developed by pre-existing startups that iterated and continued development in an ongoing manner until they hit on something truly revolutionary and useful. The YouTube Flash video embed. AdSense. The Facebook Like button and its Google +1 twin. Facebook Connect. The Reblog. They are all incredibly useful.

And all of these are in some manner "social." But this should come as no surprise, since all of these were invented by companies with SOCIAL products, constantly iterating.

In this age of privacy, however, I can't shake the thought that if an ANTI-SOCIAL network could continue to develop and iterate, eventually it would find some truly useful privacy features, over time. And considering the massive debate about privacy we're having right now, wouldn't it be nice to have someone developing in the same rapid, iterative, continuous process as the social networks and most of our other web products?

What if we constantly iterated on privacy?

We have Diaspora, of course. Diaspora is the Kickstarter-funded social network with an increased focus on privacy. But Diaspora is, in some ways, at odds with itself. Bear with me here, but if we put sociability in the same camp with sharing and, thus, transparency, it's hard to see how we can expect truly great privacy features to come out of any sort of social network. It would seem to me that we need an equal and opposing camp, that of introversion or anti-sociability, not sharing, and privacy. Disapora is a social network thinking about privacy. This makes about sense as an oversharing introvert. This is not to say that social people don't always want to share everything to everyone.

There could definitely be a niche for Diaspora and I mean no disrespect. I just think that perhaps there is a need for innovation in privacy technology, in the same way that Facebook constantly innovates on sharing, and Google constantly innovates on search. I, for one, would love to see what 2-4 developers, a designer (or anti-designer) and a product person could come up with in the typical runway of 24 months, developing, iterating and innovating constantly on the concepts of anti-sociability and privacy.

One could argue that the early results would perhaps be pretty predictable. Maybe, though it only took my coworkers ten minutes to come up with the very intriguing concept of auto-unfriending anyone you haven't communicated with in a set amount of time. And that, alone, is a pretty interesting feature. I, for one, would not be opposed to Facebook implementing something like that. That has real privacy value. And imagine what they could think up after a few months! Imagine what a bunch of anti-social users would suggest as features.

I can't shake the feeling that eventually some real, useful privacy functionality would come out of the exercise. Auto-un-liking of brands based on consumer sentiment. Auto-unsubscribe of emails based on lack of response. The constant re-setting of all privacy settings to their most strict unless they are continually undone. The possibilities are endless!

Would any of this be implemented in the larger world? I don't know. I can't help but think that a few of them would prove so compellingly useful someone would HAVE to implement them. And if the larger "social" networks resisted, perhaps new upstarts would gain a competitive edge through them. Because, after all, Facebook knows it can be potentially toppled.

Of course, this is basically impossible to fund in this day and age, given that the only real way for a web product to get funding is to not just have it have users, but to have it have users engaged in a viral loop, continuously adding more users by recommending their friends as additional users. Which is why, originally, we resorted to Kickstarter. We figured there were enough antisocial people out there who would pitch in a few bucks to get the ball rolling.

Unfortunately, Kickstarter declined our project. They didn't really say why. They just said "Unfortunately, this isn't the right fit for Kickstarter." Of course, this isn't entirely surprising. Kickstarter is a pretty friendly company. And I can't say I blame them. After quitting my job, I briefly thought of starting up this project on my own, funding it on my own. I got really excited about it for a couple of weeks, but then I realized I am an intensely social person and, besides, I didn't want to be "that guy."

But the need, I am convinced, still exists. And so, I give it to you, world. Someone, please, start an anti-social network. I will kick into your seed round.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

Mr. Webb.

Instagram, Instagram, Instagram! Oooh fun times! OMGPOP was exciting enough, but this! So exciting! What does it mean! What does it mean! A few weeks ago I tweeted that I wanted a nice big juicy acquisition to get all excited about. Chaos! Excitement! Inspiration! Copy cats. Looks like I got my wish.

Another thing that strikes me looking at Instagram and OMGPOP, is that I think what we are seeing is that the new tech titans are vulnerable. The days of people jousting fruitlessly against the dominant tech titan—Google—are over.

Back in the day, it was so, so hard to attack Google. Many tried. All failed. Cuil and Bing gave it a shot to no avail. WolframAlpha is a different sort of animal, but it's hard to see it making any serious inroads into Google's domination. And while I love the new DuckDuckGo, I don't see it making a dent.

Of course, one could argue that Facebook is the threat to Google's search that we have all been waiting for. The thinking is that Facebook is building a social graph of people's tastes, along with their friends. And in many cases, that information can yield a much better result than a Google search. Type "which camera should I buy" into Google, and type it into Facebook. Which gives you the better results? Google may be finally facing its first serious threat in the form of Facebook, which is exciting.

That may be. But first, how depressing is that? Facebook? After all that? They're the answer to our prayers for a Google counterweight? Secondly, if it takes a $100 billion IPO to be the threat, then this just illustrates how invulnerable Google's search business is.

But Zynga and Facebook? They seem more able to be toppled. It seems possible to knock them off of their throne. Two companies, OMGPOP and Instagram, came out of nowhere and became viable competitors. That's kind of amazing. It's amazing to me that Instagram got 30 million users in no time at all. It's crazy that Draw Something can get 50 million downloads in 50 days. It's mind blowing that Pinterest went from nothing to 10 million users in the blink of an eye. It's amazing how fragile it all is. Facebook may be the first viable threat to Google, but its own market dominance is by no means assured.

Facebook seems determined to not go the way of Friendster and MySpace. Early on, that was all you heard. Why is Facebook so much better? Why won't everyone just abandon it the way they abandoned MySpace? We've heard less of that as Facebook's user numbers reached the stratosphere, which MySpace never even touched.

But there were also Facebook's smart actions. It didn't sell. It acquired small companies that helped them out or posed a potential threat—Gowalla, Beluga, Hot Potato, FriendFeed. It seems all too aware that its market is far less defensible than Google's was. Seems to me that everyone learned a lesson from Twitter and Facebook: whatever it takes, don't let these companies get anywhere near 100 million users. Buy them now before they become your main competitor. Instagram was getting too close, especially with its recent launch on the Android platform.

It's true that Facebook seems aware that its position is vulnerable. And with this acquisition, it proves that it is not afraid to make bold moves to defend itself, much as Google did with YouTube and Zynga with OMGPOP. Yet still, it also proves that it NEEDS to defend itself. That the king can be dethroned. That a new force can come to power. That the small guy can still topple the big guy, provided he can resist the monetary temptation along the way. I think this is interesting. For me, personally, I've been growing tired of new social apps. I think a lot of people have. Yet the success of Draw Something and Instagram (along with Pinterest, Path, etc.) have proven that not everyone is. There is, perhaps, more latent disquiet over Facebook's dominance than I gave credence to.

So, what's left? Now we have Tumblr at 50 million blogs (not users), Foursquare at 20 million users or so, Pinterest at 10 million (again, crazy!) and Path, gaining two million users in two months. What will become of them? Will we witness all of our favorite apps being snapped up? Will all of the best tools be owned by two or three big companies? Will the web be conglomerated? Will the buyers be smart enough to not mess them up? Will the users just move on to the next big thing? Where is all heading? Is buying users the same as earning them? I don't know, I don't know. But oh what fun! I hope they all get bought for ridiculous amounts. I hope Apple buys Twitter and Netflix! I hope Baidu buys Path! I hope Google buys something I don't use, because you know they'll go mess it up! I hope all these companies buy companies I'm actually invested in, but I think I'm not allowed to say that. Chaos! Social upheaval! Raise the capital gains!

Oh now, I'm bringing myself down. Massive wealth disparity. The decoupling from the economy as a whole. Ugh. Then there's the sheer size and magnitude. Instagram's last investors literally doubled their money over the weekend. It does seem to have "bubble" written all over it, doesn't it? I mean, I'm constantly worried about the "bubble," as I repeatedly talk about. And a billion dollars is some pretty serious crazy money. But I admit that I am having a hard time moulding the Instagram purchase toward a bubble narrative. Facebook's IPO is estimated to value the company at a hundred billion dollars or so. It's really not that much money to them. Zuck's a smart guy.

Would I buy Instagram with 1 percent of my net worth? Oh man, yes yes yes.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

Mr. Webb.

"You know how this works from here on out. We start with a bunch of piddly shit. Your Topaz, your White Knight cologne. We add your midsize stuff. Maybe Mohawk. We still got Vicks. That's big. Next we worm our way into a few niche companies. Get something sexy in a good neighborhood. A pharmaceutical. Maybe if god is gracious, a car. And then, we go public, open an office in Buenos Aires and Elvis plays at Tammy's sweet sixteen." - Ken Cosgrove, "Mad Men"

Ah, the good old days. The 1960's were the heyday for the agency IPO. PKL kicked it off in 1962. Grey, FCB, and J Walter Thompson all followed later that decade. David Ogilvy took Ogilvy public in 1966 and claimed Warren Buffet as an early and long-term investor. Agency IPOs continued in through the latter half of the 20th century. The renowned Saatchi brothers took Saatchi & Saatchi public in 1975 in a reverse merger. Australian agency John Singleton Advertising in 1993. Media agency CIA in 1998. Japanese agency Dentsu, a unique blend of ad agency and media agency, pulled it off just in time in 2000. The Saatchis, extraordinary in their financial dexterity, pulled off another IPO of their new agency M&C Saatchi in 2004.

That was a lark. While the occasional agency IPO has happened in the 21st century, the agency IPO has been a rare bird indeed.

Despite Warren Buffet's protestations to David Ogilvy against conglomeration in the 1970's, conglomeration took off in the 1970's and 1980's with corporate giants like WPP and Omnicom coming to dominate the agency landscape. Perhaps the final nail in the coffin of the agency IPO was struck with the public offerings of the digital agencies at the end of the 1990's, with Razorfish and Agency.com both IPOing with valuations in the hundreds of millions of dollars before crashing in the dot com crash. Though both still survive in name, the founders lost control of their agencies and both were sold for a song during the crash.

Since then, conventional wisdom has all but abandoned the concept of an agency IPO. While growing and running my agency, it was never a realistic possibility to go public. Our advisors would explain that IPOs for service companies were rare and not generally profitable, or just not done. The shadow of the implosions of Razorfish and Agency.com loomed large over the agency landscape, especially at the digital agencies. Not one, to my knowledge, has gone public in the United States since.

When starting my agency, you heard the same refrain. Razorfish and Agency.com were widely mocked as stocks that were sent into the stratosphere on faulty fundamentals, and then plummeted and were destroyed. Razorfish peaked at a valuation of an admittedly hefty $4.7 billion on a few hundred million of revenue, an absurd amount in a heady economy. The stock plummeted in the crash and the company was sold for a pittance. It was somewhat redeemed later, however. After the company was acquired  several times, it was eventually sold off by Microsoft for $530 million in 2009. Now, $530 million isn't $4.7 billion, but nor is it zero. I would take it.

Even though Razorfish survived, grew and prospered and eventually became worth a substantial amount of money, the conventional wisdom was forever changed: services companies didn't scale. They relied too heavily on people, talented people, rare people,  and thus weren't worthy of IPOs. This, apparently, wasn't because they couldn't make good money, but rather it appeared that it was because they didn't make ridiculously large returns - perhaps unrealistically large returns.

Despite the fact that both agencies and tech startups rely heavily on the employment of thousands of hard-to-find developers, along with business development staff, one type of company, the tech startup, is considered dynamic and capable of boundless growth, while the other is considered staid, low-growth and difficult to scale. Apparently hiring 10,000 sales people at Groupon, for example, is dynamic. But an agency that needs 10 business development executives doesn't scale. Go figure.

So, aside from me and other agency owners being thwarted in our quest for millions, what's the big deal? Who cares? If you're a brand, you should care. If you own any company that relies on advertising, you should care. If you're in real estate, you should care.

Why?

Because without the IPO, agencies are unable to retain the best talent. This is most painfully felt with developers, who can not only earn hefty salaries, but are tempted with the legendary stock options in tech companies. Developers are becoming some of the most important workers at agencies, and with the rise of social media, they are becoming even more important. It's also true for analysts, account people, and, more and more so, graphic designers. All of these positions are highly in-demand in advertising, tech startups, and finance. Only advertising has this handicap.

Worse, brands and agencies are at a crossroads when it comes to agency compensation. Compensation levels are declining, and profitibility is being squeezed out by the rise of procurement in advertising purchasing. No less an ad visionary than Lee Clow, creator of most of the Apple advertising we all know, including the legendary 1984 spot, has stated that advertising agencies are "paid like they're doing the client's laundry."

I know, I know. "Advertising. Who cares." But digital "agencies" are not just advertising agencies. They are high-end web development shops. And the same is applicable for specialized web development shops that don't do any marketing at all. We all suffer for it. We see it in the crappy websites we have to endure when booking an airline ticket. We see it when we go to a local restaurant's website and see a crappy flash website no one wants to use. We see it when trying to look up anything on any government website, ever. Developers are in dire supply in the United States. And developers who want to work for a company that doesn't offer stock options are becoming virtually non-existent.

There are so many horrible websites that all of us have to use every day. They're not horrible because people are stupid. They're horrible because it's impossible to find great developers when you don't have stock options and can't hold out the carrot of a possible seven figure payday. Because of this, our Facebook page may load in milliseconds, while our bank sites barely work at all. The more I think about it, and the more I endure the misery of poorly built websites, the more depressed I get. I'd like to say that there's some sort of hope on the horizon, but I honestly can't see one. The debate between agencies and clients on compensation is eternal, and holding companies like WPP and Omnicom aren't going anywhere any time soon. But at least it helps to understand what's going on: that the finance industry's antipathy towards agency IPOs is directly responsible for many of the bad sites we endure today.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

Mr. Webb.

In one of my first Betabeat columns, I wrote about my concerns that the tech bubble has been only tempered by the larger economy. Once that economy rebounds, the unbridled enthusiasm in the tech sector will take off and the bubble will enter into the danger zone.

Even earlier--one year ago next week--I wrote my most popular blog post of all time. It was entitled "on the bubble." I wrote it on my Tumblr. It was hella popular. Really. I wrote it one Saturday afternoon, in an almost stream of consciousness rant. I woke up, had some soup, and grabbed a Diet Coke and started writing. You can tell, when you read it (and do!) that it sort of hangs together, but that I come across new ideas as I'm writing it.

The basic premise of the piece, if you don't feel like reading all 2,000 words of it, is that we are in the early stages of a tech bubble, and that most of these companies are funded by advertising, and advertisers don't spend enough money, worldwide, to turn more than a few of these startups into "the next Google" or "the next Facebook," even if all the ad money in the world went online. I still believe that. And I still believe that we're in a bubble.

Finally, in the follow up discussions around my bubble post, I made this observation:

"We’re already hearing rumblings from the tech industry about how SOX [Sarbanes-Oxley --ed.] is burdensome, and SOX needs to be reworked, and SOX is interfering in the tech industry’s innovation. But it is not. SOX is going to be doing its job in this bubble. And if you want to actually look to see when this bubble’s gone to far, I would actually say that one of the easiest ways to measure how close we are to bubble busting, is to watch the chatter around SOX or, god forbid, action that lessens it. We’re at the end, then."

Well, well, well. Little did I know it would come this soon.

Being a tech investor, one would think I'd be all for the JOBS Act. And there are some worthy things in there. I like going to demo days, where startups can pitch their new startup ideas to a room of people. It's arguable those are illegal as general solicitations. Most responsible demo days make some effort to ensure that the audience consists of accredited investors (those who can legally invest in private startups), but not all of them. The law is burdensome here.

And I kind of get that Kickstarter could be a great way for a company to raise money. There are times I'd love to put in maybe a grand into a company if lots of other people do. That should probably be legal for more people than just accredited investors. Part of me worries that the "good" investments (apologies for the intentional scare quotes) could get investment anyhow, and that would leave only the bad ones, but I think, in practicality that won't always be the case. I love Kickstarter and can see many great uses for it as a means to raise funds for a new company. And I recognize not every entrepreneur with a great idea has the network I do. Who you know shouldn't necessarily be an obstacle to getting your great idea funded.

But I cannot shake my concerns about the JOBS Act on a more macro level, for precisely the reasons I mentioned in my article a year ago. SOX was implemented for a reason. The last time there was a dot com boom, things got really out of hand when the investing expanded beyond the tech investor class. Chris Dixon has said, "I think it’s a good thing that the speculation on large private tech companies is happening in secondary markets where the risks are being taken by institutions or wealthy individuals. This is in stark contrast to the dot-com bubble of the 90s where many of the people holding the bag when bubble popped were non-rich people who bought stocks through public markets. Obviously this could change if we have a bunch of tech IPOs."

Whether the bubble exists yet or not in tech, it's still largely confined to the wealthy and the tech investors (though institutional and retirement funds are definitely migrating in). So. Now we're going to change that? We're going to gut the very regulation that is preventing us from making the same mistake twice right when we might need it most?

The bill is going to pass. I am grateful for the Senate's tweaking of the various limits in the bill to make things safer. I'm proud that the Internet community rallied around this cause, flexed its growing lobbying muscles and got the job done. I'm psyched that I won't be breaking the law by going to a demo day. And good on ya, Kickstarter, if you can start launching companies as awesome as the products you've launched.

But I can't shake my thoughts of the victims of the Enron accounting scandal, whose lives were profoundly impacted by their lies. Sarbanes-Oxley was not ill-conceived, and most of its more onerous provisions are not applicable to pre-IPO startups and small public companies.

More than that, I'm vaguely amazed that after our financial meltdown, amidst our collective guilt and realization that we missed our window for re-regulating our financial industry, that one of our proudest accomplishments is to DE-regulate further.

Finally, I can't shake my own words from a year ago: when we see SOX being gutted, that's a sign that the bubble is coming.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

Mr. Webb.

I was sitting at Crif Dogs. The one in Williamsburg. It was sometime around midnight. I was coming home from the Björk show at Roseland, and picking up some burgers and dogs for me and my girlfriend. I was a little tipsy. I like that place. People are very chatty. It is, however, a tad slow in getting you a to-go burger (though the dogs are quick). But it's worth it. Those are some good dogs and some very reasonably priced, quality burgers. I was sitting in the corner. I was reading "The Innovator's Dilemma." In other crowds in other places, I might feel a smidge of embarrassment for not having read it yet. At 1 a.m. in Williamsburg, my embarrassment would be that I am reading it at all, when I haven't read the Patti Smith book yet. Or the Keith Richards one. God, I am a bad aging rocker.

There were three dudes in the corner. Metal dudes. Like those cool death metal ones. One was obviously the alpha male. You could tell he was the alpha male because he was the smallest one and the other two were looking at him somewhat deferentially. And as you may know, death metal dudes don't often look at anyone deferentially.

Oddly, they happened to be talking about "websites." That's what they were calling them, though in our parlance we might call them "New York-based tech startups." This is interesting for two reasons: first, they called them "websites." Not "apps," or "tools" or what the heck ever. They still called them "websites." That was mildly interesting. Second, every site they were talking about was New York-based. That was also pretty cool. Yay New York.

But that's not what was interesting about it. The alpha rocker was explaining to his two buddies what was up with each site, which one was currently cool to use, and which one wasn't. He was explaining misconceptions about each app. The details aren't important, nor are the sites. But it went something like this:

"I thought that site X was for such-and-such."

"No, dude. It's totally not. You use it for this and it's really awesome for this and besides the chicks are using it."

"Oh cool. What about site Y?"

"Yo, dude. Site Y is whack. Only douchebags use it. It's useless except for this one thing, and besides, Site Z is better for that."

His sidekicks listened intently. I could see them literally re-writing their opinions about each site. Deciding which one was okay to use, which one was cool, and which one they weren't going to bother trying out.

So. Same as everywhere, right? We do that. I do that, you do that. We tell our friends which sites to use, they listen. We're early adopters and our friends know it and they look to our opinions and our tireless efforts at trying every. Single. App. (Ugh, it's tiring, isn't it?) And telling them what to use.

Except. It's different. And here's my point.

Virtually all the marketing done on these apps, and most startup apps, is done to us: the early adopters. Tech startups invite us into their betas and target their PR to us and tell us to follow them on the Tumblrs they started, and invite us to their parties, and basically roll out the red carpet for us. And we gobble it all up, consume, evaluate, and get the word out. This works very well at early stages, when your audience is tech early adopters. The influencers are targeted, and they do the selling for you. Doubly so if you have a social-based app.

But as sites grow and progress, the target changes, and we often don't adapt our marketing to it. I was struck, listening to these guys, that the closest analog to this guy isn't anything in the tech industry marketing plan. The closest analog is Malcolm Gladwell's "mavens." The people we look to to understand what to buy and what to consume. Except they're not digital mavens. These death metal kids showed no signs of being particularly Internet-connected. They obviously would have listened to this guy about his opinions on leather jackets and whether or not Ghost from Sweden was a legit metal band (as an aside if the inverse is true and my tech friends will listen to me about metal bands, the answer is yes). These "websites" were one more thing in their consumer ecosystem. They weren't tech obsessed—only one of them even sported a smart phone. They were trying to decide which website to use in the same way they'd consider any other consumer item.

This is how the non-techie target consumer of a maturing website evaluates websites. They listen to mavens and influencers, but not necessarily digital ones. They listen to their peers and their role models, peers and role models chosen for their place in their entire, holistic life, and not just their digital life. And I believe we fail to reach out to them in any sort of significant way. Coming off of SXSW, I was surprised to see so many consumer app companies—Foursquare, Twitter, etc.—pack up shop when SXSW Interactive ended and music began. When you have more than 10 million users, you are not just targeting the interactive audience anymore. The primary question we hear about apps at that size is whether or not they can cross over into the mainstream, right? So why market just to the digital elite?

More and more I see companies struggling at this point. I wrote about it years ago in a slightly mocking way. I talked about how tech companies generally ignored marketing until there was the slightest decrease in their growth curve, or until they hit about 80 people, and then all of the sudden these companies that used to mock traditional marketing hire someone away from an ad agency and companies like my old agency suddenly got calls for help. I used to struggle with this problem endlessly. I could see the tech company's point of view on why traditional advertising wasn't perfect for them, and why they were hesitant to move money into anything that significantly increased their cost per user acquisition. I would endlessly experiment with different ways to solve this problem online.

But these days, I am thinking that perhaps the solution exists offline. It almost embarrasses me to say it, but perhaps its time to re-embrace Gladwell and "The Tipping Point" in the original, offline fashion. Perhaps it's time to recognize that as our tech company matures, the people we want to sign up just aren't as tech-targetable as the early adopters.

And while occasionally, maturing consumer tech companies do a few mainstream partnerships or cross marketing deals, the very grass-roots, maven-centric marketing that served them so well in their early days tends to wither on the vine, or at least not cross over to mainstream mavens. Tumblr and Twitter, as a counterpoint, do a decent job of staffing up in different areas of "community," with community hosts targeted to celebrities, or journalists, or authors or high-profile content creators. But I am continually reminded of the case study cited in "The Tipping Point," in which  Hush Puppies regained their cool when a few downtown New York hipsters started wearing their shoes. Just get out there and talk to the influencers and hook them up.

I think there could be extraordinary opportunity here. And it fits with the tech industry's zeitgeist of lightweight, targeted marketing rather than mass marketing. How hard would it be to identify influential users or potential users of your product and provide them with some tools, incentive, gifts or even a little cash to use your product and encourage others to do so? It is, essentially, what we do with the tech set, but as apps struggle to cross over to the mainstream, perhaps we should be doing this for a wider set of influencers? Is any company doing this? I haven't heard of one, but I think it could be powerful.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

Mr. Webb.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

Like a merchant marine making his annual port of call, SXSW Interactive sails off into the night. We feel vaguely dirty and exhausted, but also fulfilled and edified. Do merchant marines edify? I'm sure they do.

The frothy mix of tech, advertising and media, having arrived to the party through the years in that order, has been shaken-not-stirred to a bubbling brew of publicity-fueled frenzy where corporate alliances battle mightily to prove new business models. The modern equivalent of the SkyTeam alliance is now the tech company-big brand-media property. Are you a gold member of Twitter+American Express+Jay Z? Free show for you. A platinum member of the Foodspotting+Chow.com alliance? Free tacos. A million-miler on the Samsung+Twitter+Techset mileage program? Swag and laptop charging all around. Google, much like Virgin America, goes its own way with its mileage program, and the perks are as shiny and new as USB at your seat and WiFi in every flight: The Shins, The Ting Tings, Black Star and Jimmy Cliff. Also they took over the best bars in Austin (on Rainey St.) that hadn't been previously tainted by SXSW. I am bitter.

And, standing over on the side, like Bob Geldof looking at Peaches, is the proud yet slightly bemused mother, the official SXSWi festival. Brilliant, talented and inspirational on its own, it looks at the spawn that it has created with a mixture of pride and terror. For the festival itself has been stellar: the panels are as good as ever. The lineup has been fantastic. Crowds have been enthusiastic, perhaps goaded into increased panel attendance by two days of miserable, relentless rain.

We can only blame Bob Geldof for Peaches so much. I mean, yes, he got his start in rock music and spawned this thing that is kind of awesome and strange but sorta terrifying, but he can only be so responsible for it, and besides he's busy now trying to solve world hunger, educate the masses and eradicate poverty using the media. Plus, he's gotta take care of Michael Hutchence's daughter. Okay, maybe this metaphor breaks down here.

I love SXSW, and have come into it with an absolute, unequivocal assumption of positive intent. And I have had a good time (chiefly owing to my mantra of rejecting FOMO, and seeking out empty bars and small groups of good people.) But it is hard to be blind to the massive marketing efforts being expended here this week. SXSW has become a petri dish not just for technology, but for the technology, branding, and media conflagration that is becoming modern mass communications. The tech bloggers gave rise to mommy bloggers and politics bloggers, and SXSW Interactive attracts them all. Because a blogger is a blogger the SXSWi panels are still one of the best places on earth to learn how to be a better blogger. Malcolm Gladwell's tipping point philosophy blends with modern social media tactics and puts a giant marketing bullseye on the backs of everyone who attends, because a blogger is the modern day equivalent of the kid in the Lower East Side who sports a sweet new running shoe. It hasn't reached the hysterical levels of Oscars and Sundance gifting suites yet, but it will in the next year or two, without a doubt.

Thus, it was not without some measure of schadenfreude that I witnessed millions of dollars of promotional budgets literally be washed down the drain as two days of unprecedented rain shut down virtually every NikeFuel, Bing and parking lot bar. I mean, I have the utmost sympathy and respect for my friends who worked hard on all of these things. I feel for them. And I'm as responsible as anyone for this mess we're in, I admit. We are all here for work, so that probably explains our mixed feelings about this. We love our work, but I wonder if we don't also subconsciously know that this Jay Z/Twitter/Amex partnership isn't just a beta test for next year's Bonnaroo and Summer Stage. And do we feel okay about that? We'll save the in-depth soul searching for another day, but suffice it to say there are moments where it feels kind of icky.

Maybe SXSW is becoming like NYU. You can learn anything. The professors are brilliant. But the temptation to drop everything and hit the Village or the Lower East Side or the meat packing district is fierce. Why should I go to a panel when I can see Cults play down the street with free beer and tacos and I can get there in a free pedicab? I SHOULD go to class, but... tacos! And so I find myself on the verge of turning into the curmudgeonly old granddad, retired and happy, hanging out in the sun with a margarita, having only attended two years of college, haranguing his grandkids at NYU to make sure they attend all their classes. Cake Shop is cool, sure, but CBGBs was cooler—and even so, I should have been going to class. And you should too. You could be learning something real and good from those fine people. At least until the rain stops.

Mr. Webb.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

Oh man. It is upon us! I am so excited! O frabjous day! Callooh! Callay! South by Southwest, here we come! I leave tomorrow. ARE YOU READY? I am so ready. I have lost count on which SXSW this is for me, but it's well over my tenth. Yes, it's changed a lot. Yes, it's huge now - and I hope it just keeps getting bigger. To my Austin friends, I apologize for saying this. I know you're sick of us. But we do really love your town. We love SXSW. And we are thankful for your hospitality.

It's just the best most wonderful week of the year for the internet industry, isn't it? I mean there are cooler conferences (DLD, Next Web). There are more exclusive ones - Summit Series (who just bought a mountain! WTF!), and the mainframe TED, which is sorta the Sparc Supercluster or Cray of tech conferences. Monolithic, kind of old school but still pretty awesome. SXSW Interactive, now entering its 13th year, is the big one. It's the closest thing the tech industry has to an E3 or a CES or Cannes or Outdoor Retailer. It is, essentially, the Internet's trade conference. Everyone goes.

Well, okay, each year there are a few curmudgeons bemoaning that it's gotten too big, a few cooler-than-thou insiders who simultaneously don't need a giant conference to meet everyone and also have also forgotten the serendipitous joy that accompanies meeting someone new, interesting and unexpected. Then, of course, there are the new tech founders, running 3-10 person companies that are heads down trying to get things done, yet already funded, and not ready to launch. They've got work to do. Many people skip at least one year in this manner. Godspeed and see you next year with your awesome new product. We'll drink a Shiner in your honor.

But for the most part, everyone else attends. And I do mean everyone. That's one of the great thing about SXSW - it's not a segment-specific conference. People from the gaming industry, bloggers from the midwest, corporate IT folks, and employees of large, enterprise software companies all attend too. Pornographers and journalists and advertisers - late to the game but in the past few years have made up for it with a vengeance. It's part of the charm of the conference. Unlike a lot of conferences or events that I find myself hitting throughout the year, it is not dominated by the VCs (though they're there), or the titans of the latest social web software. Though of course they too are in force. For SXSW has become their Pelennor Fields. Their Arena. Their Yavin 4. Each year dozens of startups duke it out to be crowned "the startup that took SXSW by storm." This is largely a myth, owing to Twitter's successful launch at SXSW in 2007 and Foursquare's the next year. Since then, each year pundits have eagerly looked for a new champion, but it hasn't really happened. But here's hoping that it'll happen this year!

So far, the smart money seems to be on the new mobile app Highlight, despite the fact it doesn't seem to actually do much. Something to do with meeting people. As I write these words, three different friends have signed up for it in the last hour, so hype seems pretty solid thus far. It has new competition in the form of Banjo and Glancee, and old competition in the form of Bump, Hashable, Addieu and Sonar, and none of them have gained traction, but, hey. Who knows? The SXSW hype can have a big impact. Last year we had GroupMe, Fast Society and Beluga. Two of those exited, one pivoted. So while there may have been financial success, none of them "won" in the way Twitter or Foursquare did, so perhaps things are evolving. Maybe the hype now just leads to a sale to a bigger, more-hyped company.

Some 15,000 people attended SXSWi last year, with thousands more just hanging out for the ride. One could reasonably assume that attendance will be up, again, this year, but luckily this year conference organizers have taken several steps to not make it feel too crowded - with panels being spread all around downtown (rather than primarily confined to the convention center), and more events to handle the crowds. So we'll see! Adventure!

If it's your first time, the whole thing can seem insanely daunting. Last year, I was bringing down a bunch of employees and I wrote a nice "how to prepare for SXSW" presentation that is still largely true this year. It's a good starting point. But I will offer you a few key pointers right here and right now if you're curious about how to best navigate this behemoth techstravaganza.

• Bring multiple phones and batteries. AT&T was burned two years ago by poor service and so last year they went all out to make sure service was good for the techno elite. Because who worst to piss off than every tech blogger and reporter in America? Nonetheless, who knows how it's going to go down this year. And also you find yourself out for hours. Personally I bring two phones on two different services, a power adaptor and a battery case. If possible, also wear a safari jacket and safari hat. Pretend you're a misplaced war photographer. This also makes it (slightly) easier to crash party lines. Embrace your inner Hunter S Thompson.
• Speaking of which, if you're a journalist or blogger covering the event, please attempt to write about the conference without using the word nerd, talking about people hooking up, or talking about drinking. Nerd is just a joke at this point (have you SEEN the Winkelvoss twins?). And the the unnecessary focus on the recreational just makes it sound like you've never been to a trade show in your life. Who's the nerd? The people at the conference, or the journalist that's been so sequestered behind a computer for so long that they're only just now discovering that trade shows involve booze and hooking up?
• On that note, I cannot stress this point strongly enough: reject FOMO. YOU ARE NOT MISSING OUT. That party may seem cool. There may be 200 people checked in there. Kanye West might be there. It doesn't matter. There are still interesting people to see and great things to do and you are just as likely to meet someone that can help you in your work at the empty bar next door. I swear to God this is true. The line of 50 people is almost never worth it. Go next door. I promise promise promise this is true.
• If you're looking for funding for your company, start by the bold step of going to places where you have to pay for your own beers. Because you know what? VCs do, at times, enjoy free beer (free beer seems to be the manna that SXSW runs on). But they often look at the crowd queueing up for that free bar, then look at the perfectly good bar next door selling Shiners and Lone Stars for a buck fitty and think to themselves "Screw it. I'm rich. Today I'm paying for my sub-$2 beer. Because I can afford it." So follow them there.
• Hit some panels. They are worth it. But when you do, first, don't be that person who asks a long, pointless question. Better yet, just don't ask anything at all. Just listen. When you go talk to people after the panel, be quick, courteous, give them your card, ask for theirs and move on. Yes, people still use cards - this is, after all the physical manifestation of the tech industry, and the card is the physical manifestation of Highlight and Bump. Or something. Don't ask me. Maybe this is the year the business card dies. See above. But were I betting man, I would not take that bet.
• If you must drink, I strongly suggest drunkenness during the day and sobriety at night. Both will be more fun, and probably more productive.
• Hang out with people you don't know. Go to something different and outside of your comfort zone. Get to South Congress. Stop at Home Slice. Get to the east side. Be polite to the locals. Don't trash their town. Eat barbeque. Eat at food trucks. As my friend Buster says, "accept all offers."
• If you're standing on the corner of 6th and Red River, pour one out for Emo's. You are missed.

Mr. Webb.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

I meet all sorts of people starting new companies. A ton of them are starting hot new tech startups and are out there looking for funding and often succeeding. Many more are starting much-needed service firms in high tech—providing much-needed services along the lines of iOS app development, web development, marketing, PR, content creation, and backend development. There are massively talented people in both types of companies. They do the same work. They hang out together, they have the same skills. They need each other.

Yet one segment of them have the potential to earn millions, and the other doesn't.

It makes no sense.

Red Hat doesn't really sell anything at all other than the consulting and support services around their open source Linux products. And I remember back when they IPO'd, everyone hailed it as a stroke of genius, the way of the future, the dawn of a new era, etc., etc. That struck me as really strange—most service companies are saddled with low revenue multiples, but for some reason Red Hat bypassed that. Removing all traditional revenue streams was part of the dot-com zeitgeist, and in 1999, Red Hat rode their service company to an IPO.

Of course, in 1999, service companies could still go public with decent multiples, with Agency.com and Razorfish mooting successful IPOs in 1999 as well. Of course, Razorfish and Agency.com took a dive in the dot com crash, and with them the dreams of any service company of ever having a major tech IPO again. And while they both survived, it was in different forms, neither being an independent, publicly traded company again.

Red Hat, however, survived. Today, Red Hat's PE ratio is a staggering 67. For a service company.

I was reading yesterday that Dell is going to become an IT company now. HP was thinking about this a few months ago, too, right? They bought a company called Autonomy and were going to turn into some sort of consulting company. Reason prevailed on that one.

I can see why both companies would consider this, because the strategy proved golden for IBM some years back. IBM became more of a consulting services company, and in doing so shed their image of a loser in the operating system wars and became more of a bad ass, high tech McKinsey. Their stock commensurately rebounded. IBM has a price to earnings ratio of 13 (a price to earnings ratio is essentially the market cap, or value, divided by its annual revenue).

But start a services business today, in the tech industry, and you'll be lucky to get a value-to-earnings ratio of 2 from investors and VCs, or private buyers. The public market seems to be far more generous with revenue multiples for service firms than tech VCs.

So, now, why is that? What does the tech industry have against services companies?

The traditional answer has been that services companies are heavily reliant on specialists, and if those specialists left, the company wasn't worth as much. But it's not clear to me how this is any more true for, say, McKinsey or IBM than it is for Google, Groupon or Facebook. The other argument in the old days used to be that non-services companies were selling concrete goods, and had factories and the like, and even if a key person left, they could keep on selling. That makes sense, of course, though the transition of IBM and the hoped-for transitions of HP and Dell make me wonder if that logic hasn't been turned on its head. They still own factories, but their PE ratio goes up when they focus on consulting? And I suppose Facebook and Google have some physical property in the way of expensive data centers, but I hardly think that's what their value is based on.

Then, of course, there's the mythical algorithm—the belief that tech companies are somehow doing things in a more automated way, and make money with fewer people.  Never mind Google has some 20,000 people (with a PE ratio of around 20) and Groupon has over 10,000 and no profit.

Okay, okay, I keep harping on this, I know. What's the big deal? Tech companies are just awesome and doing cool shit and worth a lot of money and if they're overvalued, then what's the harm, right?

But these things have consequences. I love tech, I love the ability for it to disrupt so many industries. But the fact is that the valuations of tech companies, and the commensurate stock options that they can offer, divert employees from other industries. Because you can't offer really sweet stock options if there's no real chance your company's ever gonna break a revenue multiplier of 2. Believe me, I tried. This creates an economic incentive for talented employees to flock to the tech industry over other industries. What industries? Banking! Okay, that's probably for the better. Advertising! Oh no! Quelle horreur! Ha. Okay, but, what about health care? Green tech? Education? It can make a difference. Sure, if you have a high tech, dot com education, green tech or health care company, you can have a high multiple. But, then, I have yet to see education, green tech or health care be very disrupted by dot-com companies (though we are all, of course, keeping our fingers crossed.) But that is a topic for another day. Fact is, tech siphons good people away from lower-paying, important industries every bit as much as banking does.

Concretely, think about this the next time you need a kid to build your new iPhone app, and can't find one, because they are all working at tech startups. Why wouldn't they? If they choose the right one, they can make a payout ten times what they'd ever make building your app freelance. And if they choose the wrong one, they'll still make just as much as you'd pay them. I see this all the time. And it's directly tied to the tech industry's inexplicable, misplaced fetish for product companies over service companies.

Mr. Webb.

Rick Webb co-founded The Barbarian Group, a digital ad agency, and is now a writer and angel investor in the tech industry.

It's happening again. While perusing the never-ending flow of tweets and Tumblr blogs that make up the collective consciousness of the internet, like I do, I've noticed that over the last few weeks, it's become fun again to mock "social media experts." And so, in the wake of another successful Social Media Week, now seems a good time to stick up for this much-maligned digital wage slave. I admit I have gone on this rant before, and if you've heard me before, I apologize.

But it's time to toast the Social Media Expert.

First off, yes, it can seem silly for someone to go charge a small business to help them set up a Facebook page or a Tumblr or a Twitter. I mean, I guess by the same logic lawn mowers, dog walkers, hairstylists and house cleaners are mockable positions too. I mean, I can do all of these things. There are people who are better at it than me. Why not have them do it and do something better with my time? Something that I am good at? I guess the counter argument is that "Social Media Experts" are annoying in a different way since there's some perceived sense that they are ripping people off. Anyone could learn these skills, they're not actually that hard, and so-called Social Media Experts are preying on the ignorant. At my old agency, my partner has a small business on the side, and he commented that handling the social media marketing was so simple it was almost like a zen-like exercise.

I have been advising a great new company in the fast casual dining area. The woman starting the company is super smart, and a great entrepreneur. She knew, in the abstract, that social media was a great opportunity for her. But she didn't know where to start. She felt helpless. Have you actually tried to set up a Facebook page for a company lately? It's gotten so comically, hella complex. I was happy to help her - and I did it for free - but first off, it was not actually that simple, and secondly, she knew all too well she needed someone to help her with it. Because she, like many people, has a real business where social media is only a single component. This woman needs to hire, and find real estate, and source different quality foods and actually prepare them. She needs to make business plans and raise money and find partners and actually run her business. She knows she needs someone to help her with her social media marketing. Why on earth is that unreasonable? Why is it crazy that she would want to pay someone?

But the real reason this anti-social media marketing zeitgeist irks me is because everyone who says it has obviously not made an attempt at grasping the ramifications of social media marketing for a global corporation. Imagine a giant company, operating in, say, 60 countries, in 15 languages. Imagine the infrastructure that needs to be in place to make sure, say, a tweet in French from a Belgian journalist gets to the right person in your global organization in a timely manner. Imagine if you have multiple lines of business - say televisions and cell phones and laptops, all running in separate business units. Imagine making an organization that rapidly responds to a PR crisis in your television business in Australia while also launching a new cell phone with a Facebook campaign and blogger outreach in Europe while Walt Mossberg just tweeted at you asking for some tech support on his new laptop? How do you staff this? Do you work with agencies? Small agencies around the world? One big one? Do you run 24 hours? Do you run in each country or in regions?  What software do you use to manage the whole thing? Should you have one master Facebook page for your whole company around the world, or in each country? Or for each line of business? How do you even begin to ensure your 100,000+ person company responds to journalists, politicians, influential bloggers, and your customers in a timely manner, 24/7, around the world, in their language?

And meanwhile, all the while, irate customers are talking about how simple it is for your company to just answer them right away about their complaint. Worse, imagine if, over the course of a single weekend, some new PR debacle explodes while you are taking a day off, and "OMG why haven't they answered these grievous charges yet?" It happens.

Finally none of this even gets into social media MARKETING. What's the best place to run a campaign? How do I get more followers on Facebook? What are they even worth? Should I try and get their email address? Should I run a contest? What's a Twitter follower worth? If I give away 10 laptops to gain 100,000 new Facebook likes, did I come out ahead? How do I even do that math? How do I coordinate with my ad agency to launch this new product? Should I let them set up a new Twitter account? Should I let them tweet on the same account as my PR people and customer support people? What happens when the campaign ends? Who even hires the person tweeting? Is all of this cheesy? Should I even be doing marketing? Does it work?

These problems require complicated solutions. They require the perfect mix of full time staff in social, agencies to augment them, and clear  lines of corporate communication to the PR, customer support and marketing departments, among others. And to do this in the way that responds with apparent effortlessness and spontaneity, with appropriately rapid turnaround, requires a massive amount of politicking, bridge building and diplomacy. Never mind the software installation.

So, the next time you take a swipe at Social Media Experts, imagine you had just been stuck in the job of responding to all the tweets sent about Sony - Playstation and films and phones and televisions and hacks by Anonymous and their record labels and semiconductor operations. Imagine even finding the person in the organization that should answer each of those tweets. Imagine writing the guidelines for those people. Imagine accidentally asking a product designer a question, posting his answer, and then accidentally launching a press frenzy.

It's a thankless, crappy enough job without people insinuating that you have no skill.

So, hats off, social media expert. And thank you, for in your spare time, making things like cash cats.