Bubble signs and bubble lessons
There’s more to the picture than meets the eye – Neil Young
I was standing in our workspace, in front of a white board with a marker in hand, drawing out a concept chart of a free space optic network for my team at the venture capital incubator I was working at back in late 1999. One of the interns phones rang at his desk as we wrapped up the meeting and I saw him turn white as a ghost and then green as a pine tree by the time he hung up the phone.
When I asked him what was wrong, he told me that one of his fraternity brothers had just called to tell him he’d now become a billionaire since leaving college early a year before. More specifically, a “B2B dot-com” company that he had founded had gone public just a few months into its existence, and was now worth more than $10 billion on the NASDAQ. His buddy’s nearly 10% stake in the company made him worth a cool one billion bucks. I asked him if his frat bro had sold some shares and he said no way. That $10 billion valuation was just the beginning, he was sure.
Not even eighteen months later, that company had gone unlisted and then bankrupt and his frat bro was left to start over from scratch in 2002 by the time the dot-com bubble finished popping.
Fast forward to this week, and Google bought Nest this week for $3.2 billion. Nest makes smart thermostats for the home, enabling people to control their thermostat and other things in their home through an app on your smartphone, tablet or from a website from any computer.
Let’s step back and put that $3.2 billion into some more Revolution Investing historical perspective, shall we?
Would it surprise you to realize that $3.2 billion in twice as much as Google paid for YouTube back in 2006.
$3.2 billion is also just about the amount of the offer from Facebook and Google that the guys at Snapchat recently turned down for their little operation whose age is still measured in months.
$3.2 billion in less than half of the $7.2 billion that Cisco paid for Cerent, a fiber optic switch company, back in 2000. It’s also about half of what Google offered to pay for Groupon back in 2009 and about half of what Microsoft paid for Skype in 2011.
$3.2 billion is less than 1/10th of the $41 billion of what JDSUniphase paid for SDL to create the fiber optic component “leader” back in 2000. $3.2 billion is more than the total value of the combined company, JDSUniphase, today.
$3.2 billion is about 1/30th of the $100 billion that Time Warner paid for AOL, also back in 2000.
$3.2 billion is half of the cost of the bill currently before the Congress that would extend unemployment benefits for another year.
Of all the aforementioned items, only YouTube has turned out to be worth the price paid. Snapchat is no YouTube and neither is Nest.
Here’s one final shocking way to put that Nest price into perspective. Nest would have to sell one million units of thermostats at a price point of $3,200 each just to generate sales of the $3.2 billion Google just paid for it.
Like I’ve been saying for nearly five years now, the pieces have been in place for a bubble-blowing bull market and a thermostat company selling for $3.2 billion is yet another example of it. That don’t happen at a bottom.
Today isn’t that day, but some day we are going to need to step back and let these bubbles pop again. Don’t be greedy while others are throwing billions around as if money were free.
