Web Start-up Bubble leaves Internet Infrastructure in the dust

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?

0 thoughts on “Web Start-up Bubble leaves Internet Infrastructure in the dust

  1. Quote from Newsweek:

    "The sudden, meteoric explosion in value of online social media sites like Facebook and Twitter is eerily reminiscent of the rise, about 15 years ago, of the online businesses that created the "dotcom bubble." The Internet was far less widely used than it is today, with many consumers feeling a little queasy about sharing personal and credit-card information with businesses that lacked brick-and-mortar facilities. Still, visionaries saw the potential for the Internet we have today, so virtual companies sprung up and grew like weeds as investors threw money their way."

    And a caveat emptor:

    "

    Putting the hype aside, though, there remains a significant question as to whether Facebook's potential for generating income is more virtual than real. Goldman Sachs' investment has certainly bolstered Facebook's apparent value but investors in Facebook, including its employees, will eventually want to exit and take profits with them. If it turns out that Facebook can't live up to its potential for generating advertising revenue, venture capitalists who invest for the long term may get burned.

    One would hope that Goldman Sachs knows better than to inflate Facebook's apparent value to score a quick profit for its investors. However, investors are probably prudent to remember that, only last year, Goldman Sachs settled a huge securities fraud suit with the SEC, paying $550 million and admitting that its marketing materials associated with a complicated security were "incomplete." Goldman Sachs reportedly is putting the finishing touches on a report on its business practices and ethics that should issue later this month. Would-be investors in Facebook may want to read that report before putting their real money into a virtual enterprise. As the dot-com bubble demonstrated, potential profits don't always materialize."

    http://www.newsweek.com/2011/01/05/social-media-next-dot-com-bubble.html

  2. Thanks Alan for writing this article.  With such a large current valuation, what upside is left for Facebook?  That's a question posed in another article in the WSJ the other day.  Even, if Facebook were to grow as large as Exxon (the largest company by valuation), this would translate into 22.5% return for those new Facebook investors, which would be great, but might not be enough to meet expectations and Facebook might not turn out to be one of the best investments, at least at its current valuation.  

    http://online.wsj.com/article/SB10001424052748704055204576068230611823242.html

  3. Ken, I don't care to comment about potential upside for Facebook or whether it (and other web 2.0 start-ups) are overvalued or not.  That would be the subject of a completely different article.

    The thrust of this article is that the bulk of tech startups being funded are restricted to web 2.0 software companies.  There is no bubble in publicly traded tech stocks (especially large cap).  Further, the article notes that Internet infrastructure is not improving- at least not in the U.S.  Innovation often comes from start up companies, but those pursuing wireline Internet access or infrastructure are either non existent or struggling to raise money.  And that's in sharp contrast to the funding bubble for private web 2.0 companies!

  4. Regarding the infrastructure part of the equation, Dave Burstein had some interesting estimates for the U.S. market that I forgot about, until just now.  I infer from his numbers that the U.S is a more mature broadband market, at least relative to other markets, and that the growth area is in how the bandwidth is used (e.g. the applications referred to in your article).    

    As he points out, a lower cost, lower bandwidth broadband is adequate for many people.  

    http://www.dslprime.com/dslprime/42-d/3921-telcos-hope-half-of-us-getting-20-40-meg-dsl-lines-

    He estimates that 19 to 21 M homes in the U.S today have access to Fiber to the Home, growing another 3 to 4 M this year.  He suggests another 32 M homes have access to 25 to 50 Mb/s via FTTN/DSL with that expected to grow to 40M by year-end.  So, with something like 115 to 120 M households, at least 50% that can get decent speeds today (this is probably low, as it doesn't count  those who can get DOCSIS 3.0).

    He also suggests, in another article, that Vectoring Technology, can be used to increase the speed as necessary to compete with cable, which is rolling out DOCSIS 3.0 fairly aggressively.  

    http://www.dslprime.com/dslprime/42-d/3926-plan-b-from-shannons-law-doubling-speeds-with-vectoring-bonding

    The question he touches upon at the end of his first article, which is an interesting one, is what would happen if cable tries to gain market share (it has remained much the same over the past few years) by dropping the price to be more competitive with DSL.

  5. Pike and Fischer's new report  

    Higher Speeds, Bigger Values, More Features: New Data on Key Broadband Service Providers.

    Verizon has raised the speed standard by introducing a new tier to its FiOS service that delivers downstream speeds of up to 150 Mbps. And mid-sized cable operator Suddenlink has emerged as a speed leader, with a 107 Mbps tier that delivers one of the best values among the fastest Internet options on the market.

    For more details (including the Table of Contents) please visit http://www.broadbandadvisoryservices.com.

    High-Speed Internet Packaging and Pricing Strategies: 7th Edition visit http://www.broadbandadvisoryservices.com or call 1-800-255-8131 ext. 248

    Disclaimer: This author has no business relationship with Pike and Fischer
     

  6. Goldman's Facebook Deal Highlights the Dangers That Wall Street is Creating For Main Street
    Goldman Sachs Group Inc.'s (NYSE: GS) $2 billion deal to finance Facebook Inc. combines the worst features of the last two speculative manias – the dot-com bubble of 1999-2000 and the Wall Street financing bubble of 2006-08.

    At 25 times revenue and more than 100 times earnings, Goldman's Facebook deal smacks of the "dot-bomb" debacle. And the fact that this financing deal came to pass after a major Wall Street firm effectively drove a truck through two central features of securities regulation is more than a little reminiscent of the investment-banking shenanigans that fed into the global financial crisis.

    The fact that history is repeating itself on Wall Street shouldn't surprise us. Nor should the fact that the Wall Street "rent-extraction machine" is once again operating in high gear.

    One thing's for certain: One day the bubble will burst; and when that happens, the great bulk of the costs will be borne by ordinary Americans – as was the case back in 2008.

    As usual, what is good for Wall Street is bad for the rest of us. While the U.S. stock market remains below its 2007 peak and housing remains depressed, other markets – and especially commodities – are at record levels. This reality is bound to cause trouble.
     
    http://us.mc817.mail.yahoo.com/mc/welcome?.partner=sbc&.gx=1&.tm=1295024413&.rand=1osohc97pqi09#_pg=showMessage&sMid=22&&filterBy=&.rand=1267058453&midIndex=22&mid=1_23692611_AKrHjkQAANmTTTAxKAD96Vdmag4&fromId=customerservice@moneymorning.com&m=1_23698545_AKfHjkQAANBjTTBMjQu85R%
    2FV7aY,1_23696392_AKrHjkQAAEGfTTBJEgNEM34h2%2F8,1_23694959_AKbHjkQAALFVTTBH6wCeuWsEwFo,1_23694182_AKvHjkQAALG6TTBEHAIIlEnNXWs,1_23693328_AKnHjkQAAKf9TTA4bgtqUj70XQI,1_23692611_AKrHjkQAANmTTTAxKAD96Vdmag4,1_23692048_AKrHjkQAALDGTTAu7g6MZE0HIa0,1_23690510_AKzHjkQAAW1aTTAs3wOZmHYVbOo,&sort=date&order=down&startMid=0&hash=631e70b80afdf06a3c9e8a7d3a115886&.jsrand=6917474

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