The Dot-Com Bubble. For those of you that forgot - this is where a lot of people made a lot of money, and for those who didn’t time it right, lost a lot of the money they helped create. Welcome circa March 2000, when the NASDAQ window shut any chance to take your Company public. Prior to March 2000, the strategy was simple. Build a dot-com, let it be any dot-com, forget about making money, raise venture capital, and then raise some more. When you finally raised 3 to 4 rounds, you hired an investment bank – and went public. And, viola – companies went public and overnight some turned into billion dollar market caps, without every making a penny. On paper, at least.

This was when I first got introduced entrepreneurism. I started ClickAgents, one of the first ad networks focused on performance based advertising. I actually didn’t raise any venture capital – since truth be told I was nervous to take any. Looking back at all the different meetings I had, one conversation came to mind. This was from a prominent investor, who basically suggested that my strategy was “flawed.” ClickAgents was doing the exact opposite of most companies he saw. We were actually profitable. Which meant we’d be valued at an EBITDA (just like a traditional company) rather than a hyped up multiple on the perception that we’d make money someday. Needless to say, ClickAgents didn’t become a billion-dollar IPO, but instead got acquired by ValueClick for $40 million. Valued of course on real metrics (profitability).

As many of you know, I then started BlueLithium and last October 2007 – sold it to Yahoo for $300 million. We were growing rapidly and were also profitable. So, we were again valued on real company metrics (profitability).

What makes me nervous - we claim the economy is in a recession, but the Web 2.0 private companies aren’t. Some of the astronomical valuations – I’ve seen from various companies, almost makes me remember 1999 all over again. The big difference here is – back when the first bubble hit – the valuations were still low in the private markets, but the public markets exaggerated them. Which meant the investors, employees, and founders could eventually cash out when the company went public. In today’s euphoria, these Web 2.0 companies are getting skyrocket valuations during their investment round. When you look at the brutality of the public markets this year and what Sarbox compliance has required to take companies public – it makes you wonder what exit strategy do these companies have if they can’t go public. I guess, that’s simple – there hoping to get bought for an even higher price.

However, I’m not sure there are buyers at these levels. At least, not enough of them.

Here are some recent valuations:

1. Slide – a Web 2.0 widget company. I’ve met the CEO myself a few times, who I respect and think very highly of, but this is a company that recently raised $50 million on a $500 million valuation. It’s supposed to do $10 to $12 million in revenue this year. Not profitable.

2. RockYou – a Web 2.0 widget company like Slide but the “mini-me” version. Is rumored to close a round of financing in the $400 million range. The revenue is supposed to be smaller than Slide. And of course, not profitable.

3. Twitter – the Web 2.0 site that lets you tell your friends what you’re doing. No revenue, no profitability, and no business model. But, about to close a round at a $100 million valuation.

4. Facebook – a great product that has close to 100 million users worldwide. But, a $15 billion valuation on $150 million in revenue. A ridiculous multiple of 100X revenue.

Some of these companies have great products, features and great teams – but also great valuations on the hope that same day they’ll turn black. This is happening – when the memory of the dot-com bust is fresh with us from 8 years ago. If this is a bubble – which I believe it to be – I hope it doesn’t cause the economy to enter into a bigger recession.

I also hope this doesn’t wipe off valuable equity created from a lot of entrepreneurs, investors, and employees who end up waiting too long to make an exit.

People should always remember, in the game of musical chairs, the music always stops. And even if the music stops it’s okay – so long as you have a business that is rapidly growing with real metrics…