By: Sandra A. Swanson
“It certainly wouldn’t be good if a high-profile firm like Groupon didn’t do well,” says Jai Shekhawat, CEO of Fieldglass Inc.
In recent months, Chicago’s technology community has garnered buzz—and investments—from around the country. That’s reflected in the $215 million in venture-capital funding local businesses attracted in the second quarter, nearly double last year’s level, according to Dow Jones VentureSource, with much of the activity centered on tech-related companies such as SitterCity Inc. and Braintree Inc.
Of course, the biggest magnet for tech investment—and talk—in town is Groupon Inc. But lately, the spotlight has created some unwelcome heat amid the daily-deal leader’s recent revenue restatement, executive suite departures and a delay in its plan to go public.
In an August memo to staff, Groupon co-founder and CEO Andrew Mason wrote, “I’ve never been more confident and excited about the future of our business.”
Some industry observers have a less sanguine view, not just about Groupon’s potential valuation but about the prospect that a tech bubble is forming—and what might happen if and when it bursts. They point to tech companies Renren Inc., based in Beijing, and Pandora Media Inc. of Oakland, Calif. Both went public in late spring and within days were trading below their IPO price. For some investors, that can stir uncomfortable memories, harkening back to the fallout from the late-’90s dot-com frenzy.
INFLATED CONCERNS?
But there’s another perspective within the city’s tech community: The bubble concerns are inflated, as are the rumblings about Groupon’s possible IPO effect on Chicago’s tech sector.
“It certainly wouldn’t be good if a high-profile firm like Groupon didn’t do well,” says Jai Shekhawat, CEO of Chicago-based staff-management-software maker Fieldglass Inc. “But what will people do, stop entering tech?” Not likely, as far as Mr. Shekhawat, 48, can see.
In terms of a broader tech-sector view, he doesn’t detect a ‘90s-esque bubble forming. It’s a feeling Mr. Shekhawat remembers vividly, considering his company launched in late 1999, before the crash. During that time, he witnessed rampant waste of resources. “Companies were buying expensive software just to test it. Then it would end up on a shelf. No one would do that today.”
He acknowledges that isolated bubbles might be forming around certain ideas. “Couponing comes to mind,” he says, noting that most of those companies won’t survive. But their demise won’t harm the local tech community, and the people behind those failed companies will have valuable experience to take to their next venture, Mr. Shekhawat says. “I make the occasional angel investment, and I’m fully aware that the money is a risk, but we have an obligation to back entrepreneurs who are willing to go all out.”
As he gauges the health of Chicago’s tech community in coming months, he’ll look at investment flows into new businesses (especially money from outside the city) and angel investment activity. But the main indicator he’ll track is tech-sector hiring. His company plans to add more than 50 employees this year. “It hasn’t been easy finding good talent, even though we are a known technology firm in a highly centralized downtown location,” Mr. Shekhawat says.
EARLY DAYS
Lon Chow, a general partner at Chicago-based Apex Venture Partners who focuses on technology-enabled services, doesn’t expect the local tech industry to lose momentum anytime soon. “We are in the first or second inning of a nine-inning game; we are still in the early stage of development,” Mr. Chow, 48, says. He says he hasn’t sensed any anxiety over Groupon’s potential valuation. “And I personally don’t lose sleep over how it will affect what I do day to day,” he says.
He doesn’t anticipate a tech bubble either, although he has observed “bubblish” behavior in pockets of the industry and points to the late-stage consumer Internet segment as one example.
Rick Summer, senior equity analyst at Chicago-based Morningstar Inc., also thinks talk of a tech bubble is overstated. “If you look at where the public equity markets are trading, the technology sector is actually trading at or below market multiples,” he says. “It’s hard to have a tech bubble when you have $200 billion that’s really undervalued,” says Mr. Summer, referring to Mountain View, Calif.-based search giant Google Inc., which surpassed a $200-billion market cap in July.
He argues that bubbles aren’t all bad. That goes for the “90s bubble, too. “That dot-com bubble really created a lot of great investment in telecom infrastructure that is now all being utilized today,” Mr. Summer says.
However, if companies describe themselves as “like Groupon, but for X,” they do have reason to worry about a Groupon implosion. Those imitators will all fall by the wayside, and that’s good, in Mr. Summer’s view.
“You look at a forest, and sometimes when trees die, you hope for that lightning storm so it gets burned to the ground so the good stuff can really take flight,” he says. It’s all part of the innovation process. “It’s what we would all expect. Because hopefully you’re taking talented people away from less-than-good ideas so they can spend their time on better ones.”
© 2011 by Crain Communications Inc.