The Tech Bubble

“It may be only a few days into 2011, but tech investors seem to be partying like it’s 1999,” wrote the Wall Street Journal yesterday, talking about investors getting lathered up over Tech.

To read the news, the world is facing a tough economic environment. Governments are having trouble servicing their debt. Good jobs are hard to come by. Investors are continuing to hoard gold and cash. Many say that we’re still deep in a recession and the market is going to correct. And for every indicator pointing to a tech bubble, there are a dozen more that indicate there isn’t one.

Some articles are saying it’s 1999 all over again. They’re close. It’s actually more like 1996. After some recent brainstorming with digital media expert Bill Gossman, here are five reasons why:

1.       Tech is sexy again. Apple and Facebook have transformed the mobile and social web, respectively. Apple has made mobile cool and accessible; it has changed the nature of the relationship with wireless carriers, and even though it levies a tax on those who distribute via its platform, it has spawned incredible creativity in the form of hundreds of thousands of applications. And it has transformed the music industry in the process. The company’s market cap is now north of $300B.

If the old web was connecting clients to servers, and people with content, Facebook has made people the new content. What you do, what you post, what you share, who you are connected to is all content on the Facebook platform.

2.       Platform disruption. We’ve just gone through a period of incredible platform invention and innovation. The browser stole the show from Windows, and now Facebook and Apple are stealing the show from the browser. But these platforms are different in one big way that is going to continue to spawn incredible new amounts of innovation: they give you distribution. Sure, they tax you for it, but they deliver incredible distribution. As a result, we’re going to see more innovation, but it’s going to leverage the platform disruption. And did I mention the cloud?

3.       Investors reducing allocations to venture capital. In the early to mid ‘90’s, leading up to the Internet bubble, investors did the same thing. Meanwhile, entry prices on private market investments started to go up, because active investors were more eager than ever to get into deals. Whether Facebook is an anomaly or not, once it’s public, more investors are going to want to get back in on the excitement. That will likely result in more capital going into the private markets, further driving the tech bubble.

4.       Public market tech value opportunities are few and far between. If you subscribe to the Warren Buffet model of public market investing, and you’re looking for value stocks in tech with great growth potential, they’re hard to come by. On the other end of the spectrum, the seed investment market has become similarly highly valued.

5.       The 15 year cycle. Although there is no way to predict the market, there is evidence that IPO cycles tend to peak every 15 years. Enough people have to forget the last bubble for there to be a new bubble.

Now, it’s no sure thing that we’re going into a tech bubble. In fact, a black swan event could create major disruption and shake the market again. But if history is any predictor, a lot of indicators are lining up to pave the way for another tech bubble.

Mobile, social, and cloud here we come.