Pardon me for stealing a line from Prince’s “1999,” but I think it is relevant for the topic of whether Internet companies are currently suffering from Irrational Exuberance, creating an Internet bubble similar to the one in 1999 and bursting the following year.
“Dot-com fever stirs sense of dÃ©jÃ vu,” an written by Brad Stone and Matt Richtel featured today in the International Herald Tribune, discusses the idea that a great deal of Internet companies are overvalued, similar to the conditions that existed just before the .com bubble burst in 2000.
Up until the bubble’s sudden burst, investors valued fledgling Internet companies at much higher revenue multiples than they could possible ever realize, effectively creating unsustainable valuations. Investors were buying into unproven concepts, and unproven company founders were spending their newfound wealth unwisely. The article points out many similarities between pre-bubble 1999 to the conditions seen in today’s markets. The naysayers believe that today is different because many of the successful Internet companies are generating positive cashflow now, however, it seems like they are spending it recklessly on new startups without regard to potential revenue.
Like the original Kings of the Internet who wasted billions of dollars on unnecessary luxury items, the new Internet Titans should remember the failures of the past. A business is only as strong as its revenue and growth, and based on the experience of people in the online adult entertainment business, viewers don’t necessarily bring revenues. As Aaron Kessler of Piper Jaffray said in the article, Internet companies “are buying users instead of revenue and profitability.”