Dot Com Crash Redux?

There are lots of apocalyptic movies out or coming out: I Am Legend, Cloverfield, even Jerry Sienfeld’s Bee Movie. On Wall Street, investors are nervous and confused amid very mixed economic signals. In the US, there’s a presidential election cycle, which creates additional uncertainty. Then there’s climate change. The general mood in the culture is one of anxiety.

In the context of all this, Greg Linden writes a semi-apocalpytic post about a coming dot-com crash, which he predicts will be worse that the first one:

The crash will be driven by a recession and prolonged slow growth in the US. Global investment capital will flee to quality, ending the speculative dumping of cash on Web 2.0 startups.

Venture capital firms will seek to limit their losses by forcing many of their portfolio companies to liquidate or seek a buyout. Buyout prospects will be poor, however, as the cash rich companies find themselves in a buyers market and let those seeking a savior come face-to-face with the spectre of bankruptcy before finally buying up the assets on the cheap…

The big players will not be immune from this contagion. Google, in particular, will find its one-trick pony lame, with the advertising market suddenly stagnant or contracting and substantial new competition. The desperate competition with dwindling opportunity will drive profits in online advertising to near zero. Google and Yahoo will find their available cash dropping and will do substantial layoffs.

I find the predictions a bit too dire here, but I do think there’s going to be some constriction and a Web 2.0 shakeout.

Much of the online M&A activity in 2007 (“$44.4 billion in reported deal value” per Peachtree Media Advisors) involved larger companies acquiring technology, marquee destinations and/or users. It’s this climate of acquisitions that sustains the VC money propping up what would otherwise probably be not viable online businesses. If the M&A activity dries up so will the VC money and many companies will suffer the fate of their Web 1.0 predecessors.

I’m not hoping for a recession by any means. But we’re almost certain to see some sort of slowdown — at least for a time. (But perhaps Steve Ballmer will singlehandedly keep the Internet deals flowing with his promise to buy 20 companies a year for the next five years at individual price tags of between $50 million and $1 billion.)


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