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Summary:

A another bubble seems to be brewing and entrepreneurs and investors need to get ready, tread carefully and, most importantly, learn from the lessons of the previous bubble and bust cycle. To help with that, we sat down with five entrepreneurs and investors to hear their tips.

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The debate over whether we’re about to run smack into a second Internet bubble is getting as heated as a Nancy Grace interview (in the Valley version, Tot Mom is played by mobile startup Color).

There are some signs that bubble 2.0 is here: the huge valuations for social media sites like Facebook, Twitter, LinkedIn, Zynga and Groupon; a wealth of over-funded me-too startups,; and a wave of summer web IPOs. But there are also some strong indicators that it’s a bit different this time around: the frenzy is concentrated on social media rather than Internet companies across the board, and investors aren’t spending the same amount of capital as they did in bubble 1.0, since the costs of building web startups is rock bottom now as compared to the late 90’s.

But some kind of bubble seems to be brewing, and entrepreneurs, investors, and startups need to get ready, tread carefully and, most importantly, learn from the lessons of the previous bubble and bust cycle. To help with that, we sat down with five entrepreneurs and investors who received their fair share of arrows in the back in the first crash. Shutterfly CEO Jeffrey Housenbold, says at one point during the bust he had to lay off 400 people from a previous company, including the best man at his wedding. But all survived, and thrived, and investors like Vivek Mehra, a General Partner with August Capital, managed to usher in one of the most successful IPOs in the history of the Nasdaq via Cobalt Networks and then sold the company to Sun a year later (no wonder that he landed a Partner gig with his lead investor).

Here, we share with you the most important lessons they learned from bubble 1.0 that they think can be applied to a potential bubble 2.0.

Images courtesy of tlindembaum, Shutterfly, August Capital, Ask.com, Allegis Capital and Claremont Capital.

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  1. A bubble requires a great deal more than excess enthusiasm for a couple of tech stocks. Especially when they’ve demonstrated some ability to turn a profit on their own.

    You don’t need buzz concepts in the headline to have an interesting discussion.

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  2. The last tech bubble was burst by the Fed by ill-advisedly raising interest rates and causing a recession. The only way interest rates go up soon is if the Fed is crazy. I don’t see a localized bubble as bad. Has a tech bubble ever soft landed on its own without the milieu of rising interest rates or a recession? We’ll soon find out.

    As to raising interest rates to ill-advised levels, the entire last decade gave two examples of how not to do it. Interest rates need to be low because of productivity gains. We have entered a new age of innovation, like the industrial age, this time based on electronic technology. I don’t think the Fed has a handle of how much computers and smart devices/networks are changing the productivity equation for both consumers and businesses.

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  3. LosFelizRider Wednesday, July 13, 2011

    It’s interesting how the interviewees contradict each other on some points. It’s also interesting how some of them made out well by selling during Bubble 1.0.

    And, really, the head of Ask.com talking about focusing on building a great product? Ask.com has sucked ever since IAC acquired it and change it from AskJeeves.

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  4. I disagree. There are profound differences between DotCom 1.0 (2002) and DotCom 2.0 (2011). Most notably the VCs approach to investing now (execution vs. R&D dollars; and it’s this capital investment which largely drives up valuation pre-IPO) and that these newer dotcoms actually generate significant revenue (i.e., Zynga and Groupon). Their ability to drive high margin and good EBITDA will force correction post IPO. Here’s a post I wrote about these core differences:

    http://gigaom.com/2011/07/13/how-to-survive-the-next-bubble/

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