Irrational Exuberance in 1998 and 2011

Ben Bernanke, today's Alan Greenspan, courtesy of Stacy Herbert via Flickr.

Vivek Wadhwa, whose visit to Chile I discussed previously, tweets, “Silicon Valley loves failure so much they came up with a fancy name for it: pivoting.” Similarly, Ben Casnocha tweets, “Seeing companies promote their Facebook fan page in advertisements reminds me of when companies promoted their AOL keyword.”

I previously wrote that Silicon Valley is excessively tolerant of failure; silly new words like “pivoting” reminds me of the tech stock boom of 1995-2000.

In that epoch, my wife Mary managed an art gallery in Colorado featuring an exhibition from a San Francisco Bay area artist whose husband was a euphoric venture capitalist (VC). It was only about 3 years after Viasoft, the mainframe software company where Mary had become the second employee, first sold shares to the public on the NASDAQ.

Investment bubble

Technology investor enjoys playing with bubbles, courtesy of Bev Sykes via Flickr.

Viasoft and Netscape Shares Sold to the Public
Viasoft aspired to be a public company for many years, but the investment community would not allow companies to sell shares until the “pivoting” period was over and they were profitable for at least three consecutive quarters. Viasoft was forced for many years to simultaneously grow revenues and maintain profits, but was not consistent enough to satisfy bankers and investors until 1995.

Netscape went public 6 months later despite steep losses, and even after 16 years have passed, unprofitable companies are still sold to the public. In those days, hardly anyone wanted to work for a Silicon Valley startup; Jim Clark, the investor who founded Netscape, was only able to persuade one of the nine engineers who worked on the Mosaic browser at the University of Illinois, Marc Andreessen, was willing to join the risky new venture, even though Clark had already earned at least $100m as the founder of the spectacularly successful Silicon Graphics.

Dinner with Irrationally Exuberant VC in 1998
I opined to the VC that his industry had declined in recent years and transformed themselves from heroes who had built sustainable businesses into mere storytellers. It was hardly a great insight, since it was two years after Federal Reserve Chairman Alan Greenspan had delivered his famous irrational exuberance speech.

Like nearly everyone in Silicon Valley, the VC disagreed and said that there were great opportunities for investors. He thought the world was in a rare magic transformation and that the enormous increase in stock prices during the previous 3 years was justified. Although the potential of the web was obvious, the content was so bad that a new term, brochureware, was invented to describe the website of most medium and large companies of the epoch, and many small companies had no website!

The USA would have prospered more if investors had chosen to fix the electricity distribution system, averting the Northeast Blackout of 2003, the second most disastrous in history; it killed at least 11 people. Some people dismiss asset bubbles as harmless, but in reality, failing to allocate resources where needed is very destructive.

Mary and I earned and maintained our fortune by keeping our heads while everyone around us was losing theirs. We resent income taxes and other government wealth redistribution schemes that punish success and reward failure.

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