Monday, August 22, 2011

It's not a bubble - the difference between valuation and long term value

Living in Silicon Valley, running a software company with big ambitions I hear the question a lot. Is this another tech bubble? Isn't is going to burst again?

The short answer is no.

Pundits covering tech tend to confuse valuation with long term value. We may well be in a valuation bubble but unlike the 2000 tech bubble the companies in question have deep, sustainable revenue models.

There are certainly some high valuations - per Fred Wilson's view of frothy valuations in April - and these are driven by investor demand. As Father Guido Sarducci so wisely said in the 5 minute university, Economics is about supply and demand. When a few companies have sky high valuations in the public and private markets VCs are chasing good ideas with too much money again and so the early stage and later stage valuations may be getting silly for most companies, but some will be worth it.

Valuation is very different than long term value. Technology, and in particular software, is where long term sustainable value is being built. And when I say long term I am thinking hundreds of years. Marc Andreesen wrote very eloquently about this in the WSJ on Saturday in his essay Why Software Is Eating the World. We are at the beginning of a long era in which technology will reshape every aspect of our lives in ways we are just now beginning to see.

Just as the Industrial Revolution developed over more than 150 years in the 18th and 19th centuries and reshaped machines, industry, transport and the very nature of where people chose to live and work, technology is now reshaping the way we communicate, are entertained, where we live and work and shop and it is rewiring our kids brains for a new world. I've believed this for 20 years and the ups and downs of the tech world over that period have done nothing to dissuade me from that belief because technology is steadily, consistently and dramatically changing our lives. (Want to get some perspective on the 150 year change last time around - spend a day in Ironbridge in Shropshire, England.)

It's happening right now because the pieces are now in place. As Marc writes "Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale."

The cost structure is right, the technology base is ready. In FirstRain's case we have built a highly disruptive technology that changes the way business people use the web for their critical decision making. As Roger McNamee says in his thought provoking talk "Everything is Changing", Google's approach to indexing has peaked. People want apps designed for their specific need (he cites his investments like Facebook and Yelp), not one app for all needs, and they want it on their device of choice - which is a smartphone or an iPad. In our case the business need is even more specific than that. Our users want a business web app so they can tap into the breadth, currency and power of the web as a data source, but they want it tailored to their specific business and role, and they want it in a cost effective way.

Marc and Roger are just two rockstars in silicon valley but most people here agree with them (and not just because we are all drinking the same koolaid). Yes we are dealing with some higher valuations, maybe that is a bubble, but the long term value being built in technology is real, and software is where it's at. And what makes it even better is it a continuously exciting place to build a career, or even a company.

1 comment:

mary voss said...

Well said, Ms. Herscher.

There was an error in this gadget