If This is a Bubble, When Will it Pop?

If This is a Bubble, When Will it Pop?

I posted a video the other day of Fred Wilson and Chris Dixon talking about whether the current rise in venture spending is a bubble or whether the big pocketed tech companies (Apple, Microsoft, Google) and the IPO market can support it.  If this thing is a bubble, it will, as bubbles do, continue to look like a normal bull market until it bursts all over us.  The question is, what will cause it to burst?  As long as the IPO market continues to look strong and the tech giants are still spending money (even though sometimes the returns are bad), investors will continue to throw money at the bubble.

As you might have guessed from the fact that I’m writing this article at all, I have a theory and its name is Pandora.  Pandora is a company that has not yet made a profit and, last week, filed to raise $100M by going public.  I’m not saying this WILL be the beginning of the end, but I’m saying it could be.  It’s not hard to imagine  the following scenario:

  1. Pandora’s stock rises quickly the first few days or weeks while NY investment-types and idiots everywhere think, “oh man, that thing on my iPhone is public, this is great!”
  2. The record companies make some change in licensing that isn’t that big of deal but makes negative news for Pandora.
  3. People rethink the fundamentals of Pandora, it’s lack of profit and how susceptible it is to the whims of other businesses and industries.
  4. Pandora drops 20%+ in stock value over the course of a month or so.
  5. Investors lose confidence in tech companies’ chances to have successful IPOs.
  6. Facebook and other companies already on their IPO road show for Q4 and 2012 IPOs start to reconsider.
  7. With the IPO market closing there is less competition for mature startups so Google, Microsoft, Apple lower their offers.
  8. VCs see less money and lower both their valuations and the number of deals they do.
  9. Startups crumble under a lack of VC funding.

Again, I’m not saying that Pandora WILL be the straw that breaks the camels back, I just think it might be.  Any time you suspect a bubble and find yourself reading a story about an unprofitable company going public, it’s a good time to watch closely.