The hallmarks of a bubble in tech are many, but in general, it is agreed upon that:

• high valuations without corresponding track records,
• an increase in the number of deals,
• lots of hype, media frenzy,
• turnover and profits no longer matter,
• the prices of 'subject' domains going through the roof,
• everybody trying to get in on the action,

are all good indicators of a bubble in progress.

Right now, I think it is safe to conclude we’re in a bubble, even if some experts are pretty outspoken in stating the opposite.

The reasons why I think that we’re really there is that all of the items above seem to be very strongly present. Let me show you with examples:

High valuations, no track record

For instance, colo[u]r.com just raised $41,000,000 from Bain Capital, Sequoia Capital, and Silicon Valley Bank, for a mobile app that marries mobile, local and social. They even have coupons in there somewhere, it’s a buzzword bonanza, what could possibly go wrong. Raising $41M means that their valuation is already a multiple of that, and that is very impressive given their lack of a track record to date.

It’s possible that Color has some kind of hidden secret which justifies that valuation, but for now, none is apparent. Color has bought their hard-to-google-for domain name (color.com) for a significant amount of money ($350K previous owners here), but when you have that kind of money in the bank, such expenses are small potatoes.

A $41M investment at this stage in the life cycle of a business is normally associated with either something that is technologically complex, and thus capital intensive, or that requires new processes to be designed from scratch. I don’t know how big a percentage that $41M represents, but let’s assume that this is for 49% (the highest percentage that would make sense at this point), you’re still looking at North of $80M in valuation.

The phrase “irrational exuberance” comes to mind. Now, fortunately, the rest of the market is not as overblown as this, but you have to wonder what was the match that lit the fire the last time a bubble went bust.

It’s not quite tulip bulbs, but it makes me wonder. Of course the people at those investment companies are not crazy and they would never invest such tremendous amounts of money on unproven concepts knowing they could lose it all.

An increase in the number of deals

It may be my personal perspective, but it seems as though not a week goes by without some other example of a deal where I’m wondering if I’m the one that’s crazy. Valuations of hundreds of millions of dollars for companies that have barely come alive, I’ll probably never get used to it.

Typically those kinds of things would happen once every year or so: Twitter (I still don’t fully grok their business model), Facebook and so on.

But lately, the frequency with which these nine figure valuations and new investments are being announced, seems to have gone up dramatically. Of course, it is possible that all this makes perfect sense, and that indeed, these investments are all solid, but I can’t shake the feeling that quite a few of them make no sense at all.

Lots of hype, media frenzy

After the .com implosion there was a fair amount of time when the tech press toned it down considerably. Gone were the large numbers from the headlines. No more X buys Y, where X is some established player and Y is some new kid on the block that has a fancy office with pinball machines, a hip domain name, and an in-house chef. Remember when Yahoo! bought broadcast.com for $5.7B? And how Yahoo bought geocities.com for $3.6B (now defunct; I host a backup copy, which cost me about $2500 to make at http://www.reocities.com/ because Y! pulled the plug. They didn’t even try to sell it.), and a whole bunch of others?

Reading these announcements today, it is almost painful.

The hype seems to be mostly fueled by these huge numbers, without the numbers being related to actual achievements.

Turnover and profits no longer matter

Just past the .com bust rationality ruled, turnover and profits were no longer dirty words. Valuations were back from stratospheric to more reasonable multiples, and if you pitched a VC, assuming they were still in business, they actually had an interest in the monetization, rather than how you were going to glue as many eyeballs to your site as possible.

Advertising expenditures were suddenly brought in line with the expected return on those advertisements, first CPC based ads started doing the rounds, then even more directly, performance based advertising gained traction. In other words, you, the publisher, make money when the advertiser makes money. It made good sense.

Today, the eyeballs are back in force, and losing money hand over fist is no longer shameful.

Subject domain prices went through the roof

During the previous bubble the price of one-word subject related domains went totally crazy.

Recently, candy.com sold for $3M, insure.com for $16M, and quite a few others for many multiples of millions of dollars.

The interesting thing here is that in this age of search, a one word subject related domain is far less effective than a totally unused easily pronounceable word. And there are plenty of those up for grabs, for $7.95, or thereabouts. What if dropbox.com was called filefolder.com, or airbnb.com was called beds.com. Buying a domain that is subject related may be smart (but not even that smart) from an SEO point of view, but from a branding point of view, it is actually a hindrance rather than a help. If a word already has a solidly established meaning, you are not going to be facing an easy way forward trying to be heard in the millions of mentions of the word already out there on the web.

Everybody trying to get in on the action

During the .com boom everybody (and I really mean everybody) suddenly was active on the stock market and making (virtual) money hand over fist. Everybody was an expert on entrepreneurship and making deals left, right, and center. VCs were investing in the most ridiculous ideas, and the companies they funded took on established players on their own turf by paying for customers. It wasn’t rare at all to see companies with $1M turnover on a $5M advertising budget, all in the hope that once the company was established, these start-up losses would be recovered.

And we’re seeing this again today. The fabulous successes of Google, Facebook, and several others are fueling the hope for many VCs and entrepreneurs of hitting one out of the park, of getting the kind of once-in-a-lifetime payout that form the stuff of legend.

So, as far as I’m concerned, it’s official, we’re in a bubble.

Today, fortunately, it’s (still) not quite as crazy as it was in 1999. VCs and angels have learned the hard lessons of the late 1990’s and remember that real turnover and profits do matter. The economy is still in a dump, so regular people don’t have enough disposable income yet to be very active on the buying side in the stock market. But I fear that is currently the only thing that stands between us and the next .com bust.

Once the buy side on the stock market becomes stronger than it should be, and every start-up suddenly sees the possibility of those three magic letters (I, P, O) as their possible future, then it’s time to get out. The previous bubble took five years to form and about two months to go pop. I’m not sure if that timetable is trustworthy, but we definitely seem to be accelerating along the curve.

So, if you’re an entrepreneur, ride this wave to the top, but remember the lessons of old, and don’t get burned because the real money in the 1990’s was made by those that got out, not by those that stayed in.