Wednesday, April 13, 2011

Smart Talk on the Venture Capital Bubble Cycle (four years to the next peak?)

From Venture Capital Dispatch:
If at least one bright spot emanated from the financial crisis, it’s that the economic despair washed away, for a short time, endless talk of an Internet investment bubble.

If you’ll recall, nearly every newspaper, technology blog and geek fest debated whether there was a “Web 2.0″ bubble in 2006, the year Google bought YouTube for $1.65 billion, Facebook Inc. was valued at–gasp!–$750 million, and TechCrunch’s Michael Arrington talked up a personal investment in a canine-crazy social-networking site called Dogster.
To wit, a sampling of headlines from 2006 and early 2007:

A Few Signs of Froth Do Not a Bubble Make (May 19, 2006, New York Times)
It Feels Like 1998 All Over Again (May 22, 2006, BusinessWeek)
Is ‘Web 2.0′ Another Bubble? (Dec. 27, 2006, Wall Street Journal)
Bubble, Bubble Bubble (Jan. 7, 2007, TechCrunch)

This debate dissolved almost as fast it appeared, thanks to Wall Street’s historic collapse and, to a much lesser extent, Sequoia Capital’s much-publicized doomsday presentation.

But now, Facebook is worth more than $50 billion, unproven upstarts like Color are banking $41 million, venture capitalists are crying FOMO! (fear of missing out), and irrational investment behavior is seeping into deals. It’s impossible, again, to escape the incessant chatter about bubbles.
And unfortunately for our tired ears and eyes, the venture industry may be blowing bubbles for four more years.

Last week, the National Venture Capital Association’s annual conference concluded with a panel discussing the future of venture capital. In front of hundreds of VCs in Boston, moderator Bill Sahlman, a professor at Harvard Business School, inevitably turned to the subject that typically elicits eye-rolling among investors.
“Let’s just talk about bubbles for a moment,” Sahlman said a half hour into a discussion that was in danger of devolving into promotional platitudes. “There’s a bubble. Anyone who thinks there’s not a bubble hasn’t lived through previous bubbles.”

Not so fast, said panelist Brooks Zug, a senior managing director at HarbourVest Partners, which has invested more than $8 billion in venture capital. He says he has closely studied the peaks and valleys of the venture business, and it takes 13 to 17 years to move between peaks among cycles–the first occurred in 1969, followed by 1983, and finally 1999, he said. “We are probably four years from the next peak,” Zug said.

That jibes with what some investors know as “the Patterson cycle,” a hypothesis by veteran venture capitalist and Accel Partners co-founder Arthur Patterson, who believes tech-investment cycles consist of eight years of growth followed by six years of retrenchment. Patterson says the current growth period began in 2006 and should last until 2014....MORE