Root Music founder J Sider sits on a beanbag chair and sips a fruit smoothie from the kitchen in the Howard Street loft of his technology startup. He explains how the three-person startup, which began in his apartment last year, just got $2.3 million in venture capital funding. The now-10-person team will soon head to the South By Southwest Music Festival in Austin, Texas, on the company dime. “It’s a once-in-a-lifetime experience,” Sider said.
Now the largest music application on Facebook, Root Music is riding a rally in public and private funding for tech startups that has investors debating the existence of a new technology bubble like the one that burst in 2000.
VC funding is flowing, rents are up and IPOs loom as the sector shines like little else in 2011. Goldman Sachs’ $500 million investment in Facebook this month valued the Palo Alto company at $50 billion, or anywhere from 25 to 50 times its still-secret revenue.
“Technology has a certain panache to it that makes it subject to a little more bubblicious attitude than other places,” said Thornberg, who forecasts for the State Controller’s Office. “Facebook is valued so clearly far beyond what it’s making you have to scratch your head. … This bubble will only get bigger over the next year or two.”
Stevie Wonder played a Salesforce.com gathering in December, and Kanye West sang a cappella at Facebook last fall. But much is different from 2000, when companies like Pets.com raised $110 million during their IPO and closed the same year.
“If there is a bubble it’s not anything like the last one,” said David Lieb, a co-founder of 15-month-old mobile content sharing startup Bump, which just closed a $16 million round of private funding. “Companies are much further along and that is what’s driving it, not just an idea and a PowerPoint deck. It’s companies that haven’t raised money and have millions of users.”
Bump now intends to double its staff from 15 to 30 this year in its converted Mountain View warehouse full of beanbags, exercise balls, a company dog, surfboards and catered lunches.
“I think we have more types of drinks in our kitchen than employees,” Lieb said.
But as people’s 401(k)s finally return to pre-crash levels, tech companies are having fun too. Over at FarmVille-maker Zynga, employees enjoy free haircuts and gym membership, as well as acupuncture, massages and reflexology in the company’s “Zen rooms.” A culinary team makes lunch and dinner every day. Friday includes breakfast and happy hour.
Thornberg said the cash the Federal Reserve Bank is injecting into capital markets has few fresh places to go besides tech. “A lot of cash has been sitting on the sidelines trying to figure out what to do,” he said. “The investment guys are saying, ‘I better start putting some of this cash to work. What parts are doing well?’ And the answer is technology.”
For example, there must be at least 200 other clones of the daily-deal site Groupon, and many of the best ones are located in San Francisco, said BIA Kelsey analyst Peter Krasilovsky. Yet Groupon just rebuffed a $6 billion takeover bid from Google, and could fetch many multiples of that value in an IPO.
“I’m genuinely bullish on this,” he said.
“Before the bubble burst, you didn’t have to do anything to get money,” he said. “That one fixed a lot of stuff. Investors were way more cautious after that, and it’s been that way since.”
Social media may bring about the end of personal privacy, but the nascent tech bubble of 2011 has its privacy settings on “high.”
The investment bank Goldman Sachs drew attention from the SEC this month when it offered select investors a $2 million slice of private Facebook shares, as part of a $500 million round of funding, The New York Times reported.
The SEC would not confirm or deny the existence of any such investigation, but in spite of the increased scrutiny of such deals, the president of the National Venture Capital Association predicted last month that this kind of private funding will only increase in 2011.
“The improving exit market and a renewed excitement in the IT sector have engendered a confidence among VCs and the CEOs of the companies in which we invest that promises to propel the start-up community forward in 2011,” Mark Heesen wrote.
Unlike a decade ago, when public stock offerings ruled the day, companies today are choosing to stay private longer for a variety of reasons.
But privacy distorts company valuations and fuels bubbles, said Chris Thornberg, principal of Beacon Economics, which does forecasting for the state: “You get less sense of the moving parts.”
Heesen expects to see such behavior.
“VCs say Consumer Internet & Digital Media and Cloud Computing are the two sectors most likely to see investment ‘froth,’ a term used among the venture community to suggest overinvestment,” he wrote.
On the other hand, private funding tends to keep control of a company in the hands of its founders, and not shareholders with different goals, said SF entrepreneur J Sider, the founder of Root Music.
And up until now, Sider noted, it’s been hard out there on the NASDAQ.
“When the market is comfortable again, going public will look interesting and profitable,” he said.