With venture capitalists, hedge fund managers and private equity groups putting billions of dollars at risk in an attempt to discover the internet’s next media darling, investors who remember the dotcom bubble could be forgiven for feeling a distinct sense of déjà vu.
Could today’s frothy market for media start-ups be a sign that the market is headed for another bubble? Most venture capitalists think not.
“The area where media meets tech is arguably overheated,” says Oren Zeev at Apax Partners, an early-stage venture capital firm. “But there are very good reasons why it’s hot. Digital changes everything. It changes the landscape and opens up new opportunities, and obviously investors are rushing into the game.”
Steve Jurvetson, a partner at Draper Fisher Jurvetson, says that, in spite of the recent attention paid to media start-ups, there is little risk of an industry-wide bubble.
“Money tends to be concentrated on the latest thing, and a few high profile deals get all the attention,” he says. “But at a given point in time, on average there is a scarcity of capital for good ideas.”
He says that while early-stage investments in media startups may be in the spotlight now, they represent just a small piece of the overall investment landscape.
Investors piling into internet media
Recent data show that VC investment in the media and entertainment sector is up significantly this year, with half of the investments focused on companies that deliver content to the internet.
But in aggregate, fundraising has yet to catch up to the heights it reached during the boom.
The National Venture Capital Association says VC groups raised about $25bn last year. That pales in comparison to the more than $100bn raised in 2000.
Another difference is that start-ups are coming to bat with stronger teams.
“I don’t think it’s as bad as the 2000 boom,” says Mr Zeev at Apex. “Back then you were seeing teams . . . that had trouble managing themselves, let alone a company.” VC teams have also become more savvy.
“I don’t see a lot of totally stupid deals, but I do see deals where I say, wow, that’s a really full valuation,” Mr Zeev says.
Are those valuations justified? Aaron Cohen, the founder of Bolt.com, a social networking site, says companies such as MySpace, YouTube and FaceBook have begun to attract new users at a faster rate than traditional internet groups such as AOL, Yahoo, and Google.
The danger, Mr Jurvetson says, is when speculation that is best done by private investors feeds through to the public stock market.
“I think you would have to see the IPO frenzy come back before you start to worry,” he says.
Fall-out from Enron and other corporate scandals means that this danger is reduced. “Right now Sarbanes-Oxley and other legislation is keeping companies from hitting the public market.”
In their drive to scoop up hot media properties, companies such as Google, Yahoo and Newscorp could be the most exposed to any bubble.
“Media companies are on the prowl, and investors are excited,” says Mr Jurvetson. “The bigger picture is these [bubbles] tend to be short-lived.”
Additional reporting by Joshua Chaffin