Byline: Daniel Lyons
Are we headed for another hangover?
Remember that crazy dotcom bubble in the late 1990s and the huge bust that followed? It looks like we're about to sit through the same movie all over again.
That's what Fred Wilson, a well-known venture capitalist, has been saying lately. Wilson, who runs Union Square Ventures, a New York-based VC firm, says he sees "storm clouds" on the horizon, and he worries that we might be headed toward another disaster. "When I look at where we are right now, it reminds me so much of 1999 and frankly it scares me," Wilson wrote recently on his blog. The 49-year-old venture capitalist's fear is understandable. In 1996 he cofounded a New York venture fund called Flatiron Partners, which did booming business investing in Internet companies--until the bubble collapsed, wiping out a bunch of its portfolio companies. Wilson and his partner pretty much shut down Flatiron in 2001, while still helping to manage some of its portfolio companies that had survived.
Undaunted, Wilson and a different partner launched Union Square Ventures in 2005, and he's riding high once more, with smart investments in some of the hottest new companies on the Web, including Twitter, Foursquare, and Zynga. Nonetheless, Wilson has grown nervous in recent months. He says too many investors are pouring money into Web-based startups, driving valuations to ridiculous heights. In days gone by, the rule of thumb was that a company with two or three employees would be valuedat $5 million or less. But "today in the early-stage market we're seeing two- and three-person teams that are getting $30 million, $40 million, $50 million valuations, and I think that's not right," Wilson said onstage at a Web 2.0 conference in San Francisco last month.
Wilson doesn't want to name names. But you can find some pretty wild deals without looking too hard. Quora, founded by former Facebook employees, is a new Web site where you can ask questions and get answers. In its first round of funding the company was valued at $86 million, according to TechCrunch, a blog that tracks Silicon Valley startups. Foursquare--a site that lets you tell people what bar, restaurant, or other …