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October 30, 2007

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Don Jones

I'm a big fan of what Bob Metcalfe said recently - bubbles are great for technology. The reasoning is that they indicate over-investment in a sector, which attracts more kinds of technology development. When it crashes, the smartest innovators pick through the pieces and re-combine them to form great companies.

Bubbles aren't so good for most investors, though.

devin

The $1B valuation of Plenty of Fish was purely hypothetical and just a joke. That valuation was made in reference to how much Facebook makes each year vs. how much POF makes each year compared to FBs valuation after $240M was pumped into FB by Microsoft.

BTW, this is NOT a bubble.

Challenge: Historically, how would you say this is similar to the bubbles of past, not just the sentiment of the bubble of last?

Cheerio :-)

Don Dodge

Devin, The Plenty of Fish valuation was certainly a joke in my book, but I'm not sure the author or founder feel it is unreasonable. Bubbles always get started by making comparative valuations to other bubble companies and saying "why not me?". That is why I wrote "I'll trade my two $50K cats for your $100K dog". Both are crazy.

BTW, saying "This is NOT a bubble" is clearly Stage 1 of the bubble phase.

This IS a bubble because we are seeing the following;
1. IPOs for companies with no profit, and in some cases no revenue.
2. Valuations for companies that make no sense on any valuation metric.
3. Companies turning down huge acquisition offers in hopes of an even bigger offer in the frenzy.

I think we are in Stage 2, with a year or so more to go. When Google misses a quarter it will mark Stage 3..and the markets will drop like a rock. It will get ugly. But this time small individual investors will not be hurt. It will be the VCs and hedge funds that get hammered.

G

Don:

I agree with your hypothesis on Bubble - Stage 2. I would even suggest you are being kind in your timelines. Stage 2, 3 & 4 usually happen in rapid succession. Stage 5 lasts for quite some time.

Whether it is technology, or something - bubbles have the same basic characteristics - much like the current real-estate bubble - driven by the "insane money" fueling the boom - to end up in a bust.

And you are also right regarding the catalyst for the bubble - it is always the good ones like Google who will set the match to the explosives - either as you put it, with earnings suprises, or with potentially failed acquistions like YouTube. No one cares if the a small company hits Arrington's deadpool. It is the big ones that matters to the market!

hack

Here's an interesting hypothetical scenario: Google decides to intentionally pop the bubble early (they could easily engineer a big miss by inverting all the accounting tricks tech companies usually use to beat the numbers), then they use their big cash reserves to buy up everything they want on the cheap. Now that I think about it, they'd be fools not to.

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