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Tech Startups Party Like It’s 1998

And we all know what happened after that


First came the analogies to 1999. As valuations of companies like Facebook, Groupon and Twitter began to hit the tens of billions of dollars, some decried the return of an Internet bubble. 

Then came the skepticism. A backlash against bubble talk — usually in a calm, if patronizing tone, often from people who had a stake in the overvalued web companies. Facebook, Groupon, Zynga — all of these are profitable. Most IPOs in 1999 hadn’t even the whiff of profitability.

Both views have some validity. And both are a little off the mark. We aren’t in a bubble. We aren’t back in 1999. It’s more like, say, 1998. 

That year, venture capitalists were finding it easy to raise money. Exit strategies were growing more common through IPOs or M&A deals. Venture deals were flowing disproportionately into the Internet sector. All of this laid the foundation for what would become a full-force dot-com mania. 

And all of this is happening again in 2011, according to the most recent venture data. 

According to data from Thomson Reuters and the National Venture Capital Association, 36 venture funds raised more than $7 billion in the first quarter of 2011, a 76% rise over the amount raised a year earlier. It was the strongest quarter for venture capital fundraising since the third quarter of 2008, which as you recall, was right before the last financial crisis.

One thing lending encouragement to those venture capital funds is that the financial markets seem more receptive to venture-backed investments. In the first quarter, 14 venture-backed companies went public raising $1.38 billion, up from the $936 million raised a year earlier. Meanwhile, 109 companies found exit strategies through mergers and acquisitions. 

Venture capitalists also invested more money per each deal in the first quarter. NVCA said 736 startups received venture investments, down from 787 a year earlier. But the amount of money that was invested in them rose 14% to $5.9 billion. In Silicon Valley, however, the growth was much stronger: VC firms invested $1.75 billion in startups, a 42% rise.

Another research firm, CB Insights, looked at VC investments by industry. It calculated that 286 Internet companies received an aggregate $2.32 billion in the first quarter, an 83% rise. Overall, Internet companies received 31% of venture dollars invested in the quarter, up from 21% one year earlier. That’s quite a rise when you consider that startup costs are lower for web companies than for solar-panel makers or networking companies.

So if anything, we’re reliving 1998 (only with Justin Bieber instead of the Backstreet Boys). Venture investments are certainly not obscene (yet) but they are on the rise – and sure to keep rising. The two factors constraining VC investments in recent years — sparse fundraising from institutional investors, a dearth of exit opportunities — are loosening up.

And like last time, high valuations are a critical part of the mix. The bubble of the late ’90s was spurred on by successful IPOs like (NASDAQ:AMZN) and Netscape. This time, it’s coming from companies that refuse to go public as long as they can help it. But Facebook, Groupon and others will go public in the coming months. If successful, their IPOs could add to the froth.

What’s more, lesser-known startups are beginning to receive VC investments at valuations that seem a little questionable. Flipbook, which makes a fancy RSS reader for Apple’s (NASDAQ:AAPL) iPad, is valued at $200 million. Glam Media, which handles ads for blogs aimed at women, is valued at $750 million and plans to go public this fall. Lockerz, a “social shopping” company, raised $30 million last week. 

Bubbles don’t emerge out of nowhere. They require years of quiet simmering before they even start to boil over. Just because we aren’t seeing the irrational kinds of investments of 1999 – a dubious standard to measure against, if there ever was one – doesn’t mean dumb deals aren’t being made. Or that they won’t get even dumber if the complacency that is entering the private equity market continues.

Article printed from InvestorPlace Media,

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