Michael thinks the first bubble has been misunderstood.

Question: What lessons from the first tech bust can we apply to Web 2.0

Lewis:    Yes, I take a more sanguine view of the internet boom and bust than of the other panics in this anthology but also than most people of the time.  I don’t think it was a giant con.  I think it was a giant misunderstanding of what was going on.  It’s true people said things that weren’t true and there were lots of cynical people who were exploiting people’s enthusiasm, etc., etc.  But in the first place, innovation has a public good aspect to it.  Research and development has a public good aspect to it.  It’s hard for the people who innovate to capture the benefits of innovation.  So given that, there’s probably a systematic underinvestment to innovation in research and development, and in its mad way, the market compensated for that by throwing a lot more money at innovation than it probably should have.  The internet when it happened was so obviously transformative and it is so obviously transformative as you were demonstrating here that you couldn’t help but wonder what was going to come out of this commercially on the other end.  You couldn’t help but speculate all kinds of crazy things.  And the markets just sway with that.  So people were facing lots of possible different futures in trying to figure out which was the most likely and it was very hard to do.  What would please me immensely is that the other stock market became then cynical about internet companies, but they are not anymore.  Google was able to come down the pike a few years later and look at Google.  But the venture capital industry did not dry up right after the internet bust.  But people basically, people at the bottom of it, and people with money basically understood that in a weird way this basically worked, that we funded a lot of really great companies.  And, yeah, we made mistakes in what we funded.  There were great excesses.  There were things that probably in retrospect if we thought about a little better we would have funded.  It was hard to know at that time.  It was more of an honest mistake situation.  But if you look at just the financial side of the story, the Wall Street side of the story, there is a connection between that boom and bust and the others in the anthology, and it’s this that people basically didn’t understand internet companies, and it was in other situation when there was a black box and Wall Street dreamed up a language to try to persuade people that this actually made sense to put money into Pets.com or whatever it was they were selling.  You know, all of a sudden, revenues did not matter.  Eyeballs matter.  So there was an aspect to the story that is similar to the aspects of all the other stories that part of the excess was due to people not actually asking the simple questions in achieving some kind of understanding about what they were doing, real understanding of what they were doing before they threw money the way they threw money at an investment.