Is there a new tech bubble?

Something I've been struggling with over the past few weeks is the issue of whether or not a new bubble in the technology sector is developing.

Twitter has been valued at $8 to $10 billion. Twitter hasn't opened their books, they've only promised investors that they are making money. Does this seem crazy to anyone else, especially considering that only 8-10% of the American population, depending on who you ask, are actually signed up for Twitter, with a far fewer percentage actually creating content with frequency?

Then, news breaks today that Color, a mobile photosharing app started by the creator of LaLa, received $41 million in seed money from investing groups Sequoia and Bain Capital. This is an app that not only produces no revenue, but just launched yesterday. So there's that.

That being said, there are several reasons why this bubble is dramatically different than that which happened in the late nineties:

• These investments are being made by private funds rather than individual investors.

In the late nineties, everyone who was anyone rushed to get an IPO valuation of as high as possible to get on the gold rush that was the dot-com investment boom.  And, of course, the banks were happy to facilitate such transactions.  However, this time, with the banking industry on its heels and public investors generally more wary than usual, seed money is being granted to start-ups by venture capital firms and private equity funds, thus limiting the systemic risk of a collapse.

• These investments are in the tens, not hundreds, of millions of dollars.

It's estimated that $300 million in investment capital was lost in Pets.com, the quintessential example of misplaced dot-com exuberance.  Aside from the astronomical valuations of Twitter and Facebook (Facebook's might actually be justified), a small portion of overall venture capital is being invested in startups such as Color.

• The market is still relatively new.

It is fair to these investment firms to say that nobody really knows the value of these technologies yet.  Especially when it comes to apps that deal with augmented reality and photo sharing (the latter of which has potential to have a breakout year), there are no definitive apps or experiences despite a relatively crowded marketplace.  Thus, there is significant opportunity for firms such as Sequoia to place what are essentially side bets on companies that may or may not have huge upside.  Which is, I suppose, what venture capital is.

I'm not ready to start ringing alarm bells yet.  However, it is somewhat distressing to see this much money poured into what are essentially beta tests with no model for revenue generation.  Fueling growth and innovation is one thing; placing unjustified bets just to make a name for oneself in the marketplace (cough, Bain, cough) is another.

-Taylor
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