As cash pours into Silicon Valley, bubble worries emerge

  • Article by: Chris O’Brien
  • Los Angeles Times
  • May 10, 2014 - 2:00 PM

Venture capital rising to levels not seen since 2001. Companies with no profits going public. Billions of dollars being paid for start-ups.

These and other signs that the tech boom may be taking an irrational turn are leading some investors to utter the dreaded word “bubble,” waking up the ghosts of an era that many in Silicon Valley would prefer to keep buried.

“There is a clear consensus that we are witnessing our second tech bubble in 15 years,” hedge fund manager David Einhorn said. “What is uncertain is how much further the bubble can expand, and what might pop it.”

Venture capitalists and entrepreneurs insist that the Silicon Valley tech economy is not in bubble territory. Yes, they misjudged how fast the Internet would change the world a decade ago and let things get a little bit out of hand.

But this time, they say, the revolution of mobile and cloud services justifies big, bold bets. And most of the companies going public are profitable, with real businesses that are transforming the way we live.

Greg Becker, president and chief executive of Silicon Valley Bank, isn’t so sure. “There’s absolutely a frothiness out there,” he said.

During the dot-com bubble of 1999 and 2000, Silicon Valley believed the Internet was causing such a rapid revolution that there was ample justification for pumping billions of dollars into half-baked start-ups that went public.

Tech executives insisted there was no bubble right up to the moment when their hubris drove the region into an economic abyss. The tech-heavy Nasdaq composite index fell from 5,046.86 to 1,114.11. But the bubble grew so large that its bursting also dragged the national economy into recession.

Today, wealth is rolling through the Bay Area. Competition for talent is causing salaries for software engineers and developers to skyrocket. But if this all goes downhill again, Silicon Valley executives say the stakes are not as high as before.

“If you look at the amount of venture capital coming in, it is nowhere near what it was during the bubble,” said Jon Haveman of Marin Economic Consulting. “To the extent that there is a bubble, it’s likely smaller than it was, and it’s likely to be much less disruptive.”

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