This Saturday's Wall Street Journal article, Investors Get in a Lather Over Tech, implied there might be a bubble in privately-held tech start-ups. Reading between the lines, I observed that the companies attracting the funding were actually web software companies, rather than Internet infrastructure of any sort I believe that the bulk of private tech investments is going into start ups involved with social networks, e-commerce, gaming, and mobile apps. The referenced WSJ article states, "Around San Francisco's South of Market neighborhood, dozens of start-ups have sprung up in the orbit of Twitter, Zynga and Yelp, Inc. The race for good software engineers is heating up again, and enticements like signing bonuses and free cafeterias are on the rise."
The Journal article notes that improved liquidity (in the financial markets) has made it easier for venture capitalists to sell tech-company investments into the public markets. Last year, 46 venture-backed companies went public $3.4 billion in proceeds, up from the eight IPOs that raised $903 million in 2009, according to Dow Jones VentureSource. With exits in sight, venture capitalists, investment banks and angel investors have all piled into smaller companies that want to be the next Facebook, Twitter, Zynga, or Groupon. According to this article, "some small companies with no revenue, and some with no product, got funding at lofty valuations." If that's not a bubble, I don't know what one is!
Counterpoint: Meanwhile, there is actually a dearth of investment in start-ups dealing with Internet infrastructure, WANs, or LANs. The VCs and angel investors I've talked with in the last three months indicate that they're not evaluating these types of start-ups. In the past, they were the foundation for networking innovation. Cisco became famous for acquiring such networking companies and integrating their products and engineers within the company.
To amplify the lack of network infrastructure investments, here is a reply to a reader's comment on a related article (Silicon Valley Bubble or Barrier for Web 2.0 Startups?):
"I have been told that "infrastructure" has become a dirty word for both entrepreneurs and VCs/ angel investors. That's because no one wants to invest in telecom or distributed computer infrastructure companies- at least not in a US based start up. Yet that's where the core engineering skills are needed. All the mobile apps, mobile payments, games, e-commerce, etc have nothing to do with science or engineering."
I have previously opined that the two giant telcos in the U.S. (AT&T and Verizon) have been neglecting their non triple play customers and haven't offered any new wireline services to business customers for many years. And I don't see any innovation in network infrastructure coming from large established equipment companies, other than higher performance routers from Cisco.
An article in the October 2010 issue of Scientific American –A U.S. Broadband Deficit?– cited a recent study (by the Berkman Center for Internet and Society at Harvard University) which concluded that U.S. broadband service is "not just slower and more expensive than in tech-savvy nations" such as South Korea and Japan, but the U.S. has also "fallen behind infrastructure-challenged countries such as Portugal and Italy."
The United States is supporting Internet expansion in a limited way, through President Obama's $7.2 billion Broadband Stimulus Program. But the first $4 billion of that initiative was dedicated to expanding broadband access to rural areas and widening the available spectrum size over the next 10 years. But what about improving the speed and quality of service for existing broadband wireline Internet subscribers? Without advances in wireline network infrastructure, this stagnant state of broadband Internet access in the U.S. is likely to continue. If the advances don't come from start-ups or government grants to established players, where else will they come from?