Dot-bomb redux? The truth about 1999 vs. now

Last week I went to a software startup pre-release party in the SOMA district of San Francisco. It was a hot ticket — maybe 250 people in attendance, an open bar, and a bouncer to turn away those who lacked the proper QR code.

The startup’s CEO strutted across the stage in a manner eerily similar to the posturing I witnessed during the dot-com boom 15 years ago. Instinctively, having lived through the endless parties and subsequent bust that made me consider leaving the Bay Area forever, I found this flashback alarming. It wasn’t the first time I’d had this feeling. For example, the opening of GitHub’s new SOMA digs, complete with a full-scale replica of the Oval Office and a ribbon cutting by San Francisco mayor Ed Lee, also gave me the chills.

[ Also on InfoWorld: Tech boom! The war for top developer talent | 7 simple rules for hiring great developers | The lowdown on code academies | For quick, smart takes on the news you’ll be talking about, check out InfoWorld TechBrief — subscribe today. ]

For a reality check, I turned to PricewaterhouseCoopers’ MoneyTree and discovered that in 1999 VCs invested $10.3 billion in software … and in 2013, nearly $11 billion. Gulp. Now, adjust those 1999 dollars for inflation and they’d be worth more than $14 billion today — plus, 1999 also saw many more billions pour into other categories related to the dot-com boom, such as “media and entertainment” and “consumer products and services.” So we’re not at ’99 levels yet, just headed there: 2013’s $11 billion represented a whopping 28 percent rise from the $8.6 billion invested in software by VCs in 2012.

How much should we worry about bubble trouble? Let’s break it down, because there are important distinctions to be made between then and now.

Business models Remember “the new economy”? Even now, I get a funny feeling in the pit of my stomach remembering that phrase. The nimbleness of the Web was going to change everything; the Nasdaq (like housing values years later) was never going to go down. Just stick “dot com” on the end of something and it would bury its brick-and-mortar analog. Meanwhile, investment bankers were pumping and dumping dot-coms at a furious rate.

It’s completely different now, beginning with the obvious: Nobody invests big money in “websites.” In tech, software startups are where the action is, the bulk of those being cloud or mobile or open source software plays (sometimes all three). There are exceptions, but business plans are much more serious and road maps to profitability much more detailed. Whether the revenue goals for these new companies are realistic is another question, but hey, that’s why venture capital is risky business.

Turning to enterprise The shift in VC funding to enterprise has been dramatic. According to the research firm CBInsights, in 2011, based on the top 50 deals of the year, less than a third of VC money went to enterprise and the rest to consumer; a mere two years later, in 2013, the reverse was true.

This does not seem to be shotgun investment, at least compared to the days of dot-com excess. You have to give credit to the average enterprise startup for focusing on an actual business problem — or, in many cases, a technology problem. Last year, for example, I attended an Andreessen Horowitz event featuring a panel of D-to-D (developer-to-developer) CEOs, all of whom delivered SaaS solutions to programmers.

Both SaaS and open source offer the opportunity to sneak into the enterprise under the radar of those who hold the IT purse strings. In some cases these offerings add entirely new functionality; in others, they replace licensed software with less costly and/or superior solutions. But can SaaS or open source ever hope to extract the fat revenue streams savored by licensed enterprise software vendors such as Oracle or Microsoft? Even at scale, it’s hard to imagine, despite the recent valuation of the open source NoSQL vendor MongoDB at $1.2 billion.

Technology development Here’s where I think the biggest difference lies between 1999 and now. At the risk of repeating myself, I don’t think I’ve ever witnessed an explosion in technology like the one we’re currently experiencing. From NoSQL databases to 3D printers to the Internet of things to JavaScript innovation to SDN to big data everything — whew — there’s an avalanche of emerging tech to sort through.

I don’t want to insult anyone retroactively, but it seems I keep meeting young, brilliant technologists with much greater frequency than I did even a few years ago. Maybe management kept them locked up before, I don’t know. There just seem to be a lot more of them now, which makes sense, because the young ones grew up digital.

The market for talent Here’s where 1999 and today look frighteningly alike. I remember an exec pleading with me in 2000: “Do you know any Java programmers? We pay a bounty!”

Today demand for talent may be even higher. But employment requirements have become much more specific, with elaborate tests and screening processes. There was a “warm bodies” aspect to the dot-com boom, with investors crazily touting growth in headcount as evidence of promise. In 2014, ventures are competing over elite talent, often fighting bitterly over rock star developers with special skill sets.

Everyone is hoping that a new crop of code academies will help realign supply with demand — although, clearly, not everyone should learn how to code. Meanwhile, around here, rents and home prices keep climbing as nouveau riche technologists run an increasingly hostile gauntlet in their Google buses. Will that ever change? We’ll see.

Marketing budgets Here’s a big difference: In 1999, startups spent profligately on promotion. San Francisco Muni bus advertisements were sold out six months in advance and that awful sock puppet dog was on TV. In 2001, the grocery delivery startup Webvan stuck a Webvan sticker on each cupholder attached to each seat in the newly built stadium for the San Francisco Giants baseball team — 42,000 of ’em. The stickers outlasted the company by at least a year.

The bust killed such over-the-top shenanigans instantly. Today, consumer startups tend to rely on app store promos or social media. And mass marketing has never made much sense for enterprise.

Exit strategies To isolate the important truth in all this, let’s return to the cavernous SOMA venue in which the startup release party I witnessed a few nights ago was held. Yes, the cockiness was there. Conspicuously absent, though, was the bombast about how the company’s new way of doing business would change the world. The audience was almost all programmers, and the punch lines from the stage were almost all technical — greeted with oohs and ahs by the neckbeards.

In 2014, real, useful technology is being built. Most of the startups will be gobbled up by the incumbent beasts of the industry and will never see an IPO. Yes, I believe there will be a day of reckoning when revenue numbers from SaaS and open source startups fall dismally short of VC expectations; Google, IBM, Oracle, and VMware can’t buy every little venture with nice bit of intellectual property. But for now, at least, this boom clearly contains a vastly bigger technology payload than the boom 15 years ago that went so dramatically bust.

This article, “Dot-bomb redux? The truth about 1999 vs. now,” originally appeared at InfoWorld.com. Read more of Eric Knorr’s Modernizing IT blog. And for the latest business technology news, follow InfoWorld on Twitter.