The Venture Business is a Bubble Business

by: Paul Kedrosky

Lots of people talking about the TechCrunch party last Friday, and many musing whether 700 people on a VC's patio (plain on a snake's patio!) denotes some sort of bubble 2.0 for all things web 2.0. Typical is Dave Hornik:

But despite the excitement and anticipation surrounding the party, it didn't feel like 1999 to me at all. The talk was not about who's the latest millionaire. The talk was not even about who's got the biggest traffic or who is growing fastest.

And that's the problem. Building companies for a supposedly fast-growing market without significant numbers of people getting stupidly wealthy shows that capital is almost certainly misallocated here. To justify so much money going into early-stage companies doing web 2.0-ish stuff, we should be seeing more hand-wringing about the absurd amounts of money being made by a select few entrepreneurs. But we're not.

Remember my rule: The venture business is a bubble business. The industry owes its existence to its participants' ability to find and exploit liquidity bubbles in technology markets. In this case there is a bubble, but it's entirely at the company creation end of things, not the liquidity end (i.e., IPOs and M&A), which makes it the strangest and least economically rational technology bubble I've ever seen.