The Other Side of the Next Big Thing

The Wall Street Journal listed top 50 startups. This is the third year WSJ releases the listing. These startups range from communication, health care, money management, and Internet. These 50 are picked out of 5900 candidates, i.e., about 1% (heard the saying 99% startups failed? probably where the number came from). They are based in the U.S., have received an equity round of financing in the past three years and be valued at less than $1 billion, as the aim is to identify lesser-known start-ups.

Picky readers already pointed figures on the list: Tabula Inc, whose started in 2003, still the Internet Bubble Age, is on the list. Maybe only the VCs investing with them want to give it another "push" after almost 10-year ride. 37 out of 50 are from California, the balance from largely other high tax blue states, New York, New Jersey, Illinois. Texas. Therefore, the credibility of the list is questionable. The previous list might have also included renewable energy, which is dead this year.

So indeed, startup is a fad business and sometime, sexy to some. Extending a startup is an IPO. Startup cofounders now enjoy buzz among investors as an initial-public-offering candidate. They are getting daily invitations to baseball games, lunches with investment bankers and fancy society dinners.

For the past few years, the tech frenzy has concentrated on young-gun Web guys including hoodie-wearing Mr. Zuckerberg and Groupon Inc. Chief Executive Andrew Mason, who run easy-to-grasp companies touching millions of consumers. As the social networking IPOs struggle, tech companies that make harder-to-understand products for businesses are snagging attention with stellar IPOs and strong growth. The tech guys often wear conservative dress shirts and slacks instead of the Web uniform of shorts and flip-flops. Some drive 10-year-old Honda Civics. Many are downright ancient by Silicon Valley standards—at least in their mid-30s.

What is behind the tech turning trend? The capitalists. When startups are getting offers for free luxury box seats from bankers, venture capitalists, potential auditors and business partners to San Francisco Giants' baseball games. WSJ reports that a venture capitalist David Sze at Greylock Partners, who invested in Facebook and LinkedIn Corp., says he felt the change last month in meetings with engineers and tech executives to discuss future projects. Mr. Sze says everyone politely asked what he was up to—before revealing that what they were really interested in was technologies for businesses. Early investors who had eye-popping IPOs are hot commodities. Everyone tries to grab their attention.

High flying stock prices is easier for companies to get talents as a significant income is from stocks and options in tech world. In the capital chain that investors pay the talent bill and get fantastic stock return, the risk of a broken chain is that either the supply (i.e., capital) or demand (i.e., high stock price) can't follow. Problems often emerge when the flow grind to ground. Investors need to be aware this problem by looking at the balance sheet and zoom into the stockholders' equity to detect problematic signs.

But in the end, this is a tech bubble ready to pop. You can either catch the pop or catch the burst.