Lately, I’ve heard a lot of people talk about whether we are experiencing another bubble, or if the market is merely frothy. The bubble question is a topic for another post. Today, I’d like to talk about what people mean when they say “frothy,” and explore more about why that’s the word du jour.

Frothy? What’s that?

I’m not sure where the term started, but it has garnered main stream acceptance, appearing in both the Wall Street Journal and the Financial Times this week. In this context, frothy is used to describe the frantic, frenetic, and often unpredictable behavior seen by investors. Previously, this frothy-ness (frothiness?) was seen mostly amongst venture capitalists. Valuations for new companies vary wildly, and seem to have recently gone through the stratosphere.

A couple of “frothy” examples:

Color, a photo sharing app, recently raised $41 million in their first round of financing. This is not the value of the company, mind you, but rather the amount of financing the company raised in its first round – meaning the investors perceived value of the company is at least $82m, likely more. For an app (of which there are millions), that shares pictures (of which there are many), with no clear competitive advantage, killer technology, or extreme differentiator.

AirBnB, a company that allows you to rent a room from an individual in a city you might be visiting, recently raised $100m, achieving a valuation of more than $1 billion. While AirBnB has more of a track record than Color, the idea that a couch-surfing site is worth $1b has to raise some question, no?

Where Does Froth Comes From?

It’s easy to find examples of “frothy” valuations and investments, but where does froth come from? It’s actually quite simple: uncertainty. Lots of things are happening, and they are all happening very quickly. This pace and scale are driving people to make more, larger bets in hopes that they will come out way ahead, like early investors in Google, eBay, PayPal, and Facebook have.

The tech news from yesterday, Wednesday June 1, illustrates how much movement is happening in this space, and why it’s driving continued froth from Silicon Valley to New York City. Remember, all of this happened in the same day:

Shaquille O’Neal announces his retirement via Twitter. Not only is Shaq retiring a relatively big deal, but the way in which he did so is also important. Shaq’s already big on Twitter, with 3.8 million followers, but he used a relatively unknown site to post his retirement video. Tout, the site in question, received more than 500,000 unique visitors yesterday – a number that most startups will never achieve in their lifetime. Not only does Shaq’s announcement continue to validate Twitter as a viable news platform, but it illustrates how one tweet can change the fortunes of an entire company. Speaking of Twitter, they made some waves of their own…

Twitter announces their own photo sharing service. Twitter announced that it will begin its own photo hosting service, which apparently came as a major surprise to market leader TwitPic. With more than 2.1 million tweets per day containing photos, this is not an insignificant move. In fact, it likely wipes out the market for most third-party services like TwitPic, Yfrog, and Lockerz. Each of these venture-backed companies – and with it, their investors – are now going to have to figure out what to do to continue to keep users, generate revenue, and remain relevant.

Microsoft announces Windows 8. With their latest installment of the world’s most-used operating system, Microsoft has gone back to the drawing board and created an operating system that incorporates some of today’s most technologically advanced features: real-time updated information on the main screen, built on web-friendly technology like HTML5 and JavaScript, and able to be displayed on any screen size from a cell phone to a stadium’s TV. This is a major shift for Microsoft, with some calling it their biggest since Windows 95. It will change the game for anyone who uses a PC, and likely even for those who don’t.

Google Launches “+1”. Continuing to try to understand the social sphere, Google’s latest effort allows users to “publicly give something your stamp of approval. Your +1’s can help friends, contacts, and others on the web find the best stuff when they search.” Adding this sort of user-generated content could significantly improve not only Google’s standing in the social realm, but their search results (and ad displays) as well. Time will tell how this new move will play out, but for now it certainly impacts similar sharing services like Digg, Reddit, and others.

Rumors: Nokia Sold to Microsoft for $19b. Only one day after Nokia announced that they would miss analyst estimates and shares fell 7%, rumors ran wild that Microsoft was in talks to buy the handset portion of the company for a cool $19 billion dollars.  Nokia’s CEO denied these rumors in multiple appearances, but it didn’t stop people from buying up some of the stock that had fallen so far just the day before. Is there a deal? Will it go through? That’s what everyone wants to know at this point, and only time will tell.

LinkedIn announces “apply button.” In the midst of weak job growth numbers, LinkedIn announced that they would roll out a feature allowing users of the world’s largest professional social network to apply to jobs with the click of a button. Since there are a record number of job applications taking place these days, it seems like a large market ripe for disruption. Some people are admittedly skeptical of this project, but following their recent IPO, nobody can blame LinkedIn for continuing to push the envelope with continued innovation.

Impact of Froth

Think about these examples for a minute. All of that – major corporations, millions of users, billions of dollars – happened yesterday. These are fundamental changes in behavior, commerce, and communication, all together on a random Wednesday in June.

Investors and entrepreneurs are struggling to stay ahead, and consumers are struggling to merely keep up.

This is why the market is frothy, and will continue to be so for some time. It’s become a full-time job to just keep up, much less stay ahead. While frothy might not be the best word to describe this phenomenon, one thing is clear: froth is here to stay.

Do you think we’re in a bubble or just ‘frothy’?