If there’s such a thing as virtual hero worshipping, then I have it, for Marc Andreessen. I revere him not because he started Mosaic and Netscape, thus helping usher in the Internet era.
It’s also not because he married the daughter of John Arillaga, whose name I saw placard on every which building at Stanford, where I spent my happiest years and found the best of friendships.
These accomplishments have certainly built Marc Andreessen a persona that’s revered across Silicon Valley. Yet, what I most admire about Marc is the writing he did for his blog. Every sentence in every posts conveyed wisdom, that we knew, he had accumulated in the many years spent building successful and unsuccessful companies in Silicon Valley.
Through his earnest writing he was helping build a better world by educating and encouraging entrepreneurs. It had certainly affected the decisions I made in life.
I’m saying all of this because I am a bit disappointed in his interview at the D9: All Things Digital conference where he was asked: “Is there a bubble–and did you cause it?”
There was no way he could have answered, “Yes, Walt and Kara, there is a bubble.” Any start-up investor whose success depends on an optimistic public market already has his hand forced in answering that question.
However, the reasoning behind Marc’s answer seemed disingenuous.
A bunch of people think there’s a bubble, so therefore we think it is not.
If everybody’s euphoric, then I’m concerned. “If we’re back here in three years and nothing’s changed and nobody’s worried, I’ll be horrified. I’ll wet my pants on stage.” There’s no history of an equity bubble that has not affected the public markets in a major way. Read “The Go-Go Years.” Fast-forward to today, in 2011: Apple’s PE is 12, projected to be 10. Microsoft’s is 7.2, next year 6.8. Google 13.7, next year 11.3. Cisco 7, next year 5.5. “PEs in single digits are what steel mills trade at before they’re going out of business.”
What these things tell me is the public market hates tech. It’s tremendously scarred by 10 years ago.
Maybe that was an intentional homage to deceased Red Herring magazine because Marc made a classic use of red herring. None of the companies mentioned above had their roots in the tech bubble that came tumbling down in 2001. Of the companies from that era that did survive, the most well-known is Amazon, whose P/E is 83.9.
The most worrying example of the current tech bubble, as deemed by the public, is LinkedIn, whose initial pubic offering saw its stock price rise 90%, leading to a valuation that’s over 500x net income. The buyout of Skype by Microsoft received less attention, yet had valuation multiples even more outrageous than LinkedIn’s: a buyout of $8.56 billion in cash, while the company carried a net loss of $7 million and long-term debt of $686 million. Marc Andreessen invested in both companies.
Marc never bothered answering the second part of the question, “Did he cause the bubble?” No one person can be faulted for causing an equity bubble. If anything, the blame should be laid on Microsoft and LinkedIn’s institutional investors. The blame could also be shared by the U.S. government for setting interest rates so low for so long, artificially inflating the equity market, but that’s a tangent.
Regardless, Marc has no control over the investment decisions made by those parties. However, he does indirectly affect euphoria surrounding tech companies by the valuations he set for his own investments. The latest of which was his $100 million investment in Airbnb at a $1 billion valuation. The company’s previous investment was a comparatively minuscule $7.2 million.
The company is in a great market and critics don’t fully know its details, such as growth metrics, but with supposed revenue of $25 million, how quickly will Airbnb need to grow to be comparable in revenue to Skype’s ($860 million) and LinkedIn’s ($292 million). Keep in mind Airbnb’s valuation is 1/8th of those two companies.
Later on Marc backtracked and admitted there is an equity bubble but it is only affecting one company, LinkedIn.
The true answer to the bubble question is that we just don’t know. Unlike the companies of a decade ago, there’s actual substance and growth behind today’s web start-ups and, as Groupon has showed, plenty of innovative business models generating real revenue and value for the world.
Yet, could Marc have answered such a question with unbiased observation or even with some ambiguity or uncertainty? Not when his words have so much influence.