The trouble with bubbles

The seemingly innocuous word “bubble”, once associated only with children’s games and jacuzzis, has now become synonymous with Apocalypse or Armageddon.

The great high-tech bubble of the 1990s, which caught the public imagination so vividly, still conjures up nightmarish thoughts for many investors. And in recent times the “B” word has been used to describe impressive growth in a wide range of assets and industries. It has been applied to, for example, commodities, property, emerging markets, cleantech and just about every stock market around the world.

This week, the focus shifted to consumer video websites. Following the sale of Youtube to Google last year for $1.65bn, the sector (if it can be called that) has been under intense scrutiny. Dow Jones has even produced figures of US venture capital flowing into video-related start-ups and found that it doubled last year, to $682m.

The Financial Times seized on these figures to proclaim a bubble. The FT may well be right: with so much user-generated content, such websites have low barriers to entry, encouraging me-too competitors to set up. These new companies may well find it hard to survive because the first movers are unlikely to suffer many defections. As the FT points out, once a user uploads personal information onto a website, the chances he/she will want to share that with users on another site are slim. And once a site such as Youtube gains traction, word of mouth can ensure continued momentum.

That’s all very well, but does it mean a bubble is forming or has been formed? In 1995, the president of the Federal Reserve, Alan Greenspan, first warned of a bubble in the US stock markets. But anyone who heeded his warnings of “irrational exuberance” would have missed out on doubling their money over the next decade. The Dow Jones Industrial Average today stands at about 13,000, compared to less than 7,000 at the time of Mr Greenspan’s warning.

Although only history will tell us if Mr Greenspan was right in the very long-term, it is clear that an asset doubling does not necessarily mean a bubble has been created. An asset can rise tenfold and still not have behaved irrationally.

The real point here is venture capitalists are used to dealing with hype and rising prices – they are paid to make rational decisions. They are also paid to take risks, often in highly competitive markets. They are generally better at spotting the winners than public markets because they are closer to the companies.

Risks are built into the business model – a single success among several failures can still represent a successful investment strategy. By contrast, for retail investors and some institutional ones, a single failure can wipe them out.

So should VCs be worried about talk of a bubble in video content or in any other sector? No, because any VCs worth their salt pick viable, long-term companies, not ones that aim to catch a free ride

The Week's Deals

Twenty-four companies gained venture funding this week, ten were of undisclosed value. The deals raised a total of €56.9m, which is €4.1m on average.

Heartscape Technologies, the US and UK-based medical technology company, has raised $17m (€12.5m) from Scottish Equity Partners, Delta Partners, Investor Growth Capital and Radius Ventures. Heartscape has launched a device which it claims leads to the early and accurate diagnosis of heart attacks in hospital emergency departments. The funding will be used for the commercial launch of the device in the US in addition to further clinical development.

Garlik, the UK-based online consumer identity specialist, has raised £6m (€8.8m) in series B funding from 3i Group and Doughty Hanson. Garlik’s first product uses semantic web technology to help consumers track their personal data across web pages, public records and commercial databases as well as geo-demographic data and credit profiles. A monthly report is then prepared detailing risks and potential actions. The latest funding is for development of future products and rapid expansion in the UK

Silicon Hive, the Netherlands-based venture within the Philips Technology Incubator, has been spun out as an independent company with a $10m (€7.3m) investment from New Venture Partners, TVM Capital and Philips. Silicon Hive develops technology to license to semiconductor and consumer electronics companies that want to design fully programmable system-on-chips.

Netlog, the Belgium-based operator of social portals, has received €5m from Index Ventures, Atomico Investments, Janus Friis and Robin Klein. The company operates a pan-European network of sites under the ‘Facebox’ brand. Since launch in September 2006, the company says that its network has attracted more than 17 million registered users and already operates profitably under a model of user payment and advertising. The company now plans to accelerate the roll-out of additional sites in more languages and territories, and to further build up its commercial operations.

Elsewhere, RedMere Technology, the Ireland-based fabless semiconductor company, raised $5m (€3.7m) from Enterprise Ireland, Enterprise Equity (Ireland), 4th Level Ventures, Celtic House Venture Partners, Edgestone Capital Partners and private investors; Neocleus, the Israel-based online access security management company, raised $5m (€3.7m) from Battery Ventures and Gemini Israel Funds; and Brand New World, the Germany-based interactive mobile gaming company, raised €3.15m from Andreas Ritter, Joachim Bernecker, Sylvius Bardt, Creathor Venture, KfW Bankengruppe, Mountain Partners, T.i.B.i. and bmp.

See below for a complete list of deal headlines.

Did we miss anything? If you think we have missed a deal or know of a deal that is about to close then send us your deal news.

The Week's Exits

Tridion, the Netherlands-based provider of web content management software, has signed an agreement to be acquired by London Stock Exchange-listed SDL International for €69m. SDL is a provider of global information management products and believes that the deal will allow it to offer the industry’s most comprehensive global web content management solution for communicating with multiple target audiences on a global basis.

AMGas, the UK-based developer of low power infrared flammable-gas detectors for the oil and gas industry, has announced that it is under new ownership. No specific details of the transaction were released. Previous investors in the company include Scottish Equity Partners, Strathdon Investments and Aberdeen Asset Management. AMGas’ new owners intend to “invest heavily” to expand the company’s product range.

The MathWorks, the US-based provider of software for technical computing and model-based design has acquired PolySpace Technologies, the France-based software company, for an undisclosed amount. PolySpace provides embedded software tools for the automatic detection of run-time errors at compile time and has received funding from investors including I-Source Gestion and Seventure Partners.

People Moves

Matthew Palmer, former senior vice president of marketing at Disney, has joined Sweden-based online entertainment site Stardoll, opening its first US office. Mr Palmer will be charged with driving domestic growth of the brand, including partnerships with advertisers, music labels, networks, film studios and celebrities. Stardoll says it currently attracts 5.5 million unique users a month, 30 per cent of which come from the US.

John Weston, former chief executive of FTSE 100 company BAE Systems, has joined UK-based Insensys as non-executive chairman. Insensys provides fibre optic load measurement technology to the wind energy and aerospace industries. The company is best known for providing the electronically-controlled rigging on the Maltese Falcon superyacht, owned by Silicon Valley pioneer, Tom Perkins, co-founder of Kleiner Perkins.

Elsewhere, it has been revealed that Bobby Sarin has left his role as chief operating officer at The Cloud, the UK-based wifi network operator.

Most Accessed Companies

We7, the UK-based music download service founded by musician Peter Gabriel, has attracted a lot of attention this week. The company’s software platform, which is due to come out of beta testing in July, will provide a free point-of-use music download service in which tracks will be paid for by short adverts spliced into the beginning of the track. By listening to an ad-supported song a set number of times users will gain the right to access it without a commercial. The company recently received investment from the Quester Capital Management and the company’s management team.

Nujira, the UK-based developer of power amplifier technology for the wireless telecommunication industry, has also received a lot of attention recently. Power amplifiers are found in every mobile phone and base station and are critical to the transmission of wireless signals. Nujira’s products allow infrastructure and handset manufacturers to avoid the reduction in amplifier efficiency associated with new communications technologies such as wimax and DVBH. The company is backed by investors including 3i Group, Amadeus Capital Partners, Cambridge Gateway Fund, Cambridge Capital Group and the Cambridge Angels.

Other companies generating interest recently include m-spatial, ShoZu, and Genex BioSystem.