28 Jul 15 Industry Insights
There’s been a lot of speculation about the state of the tech industry and whether we're caught in a bubble that's about to burst. But is this just the stuff of apocalyptic fairy tales, or do we have a genuine cause to be concerned ?
Are we facing tech bubble 2.0?
Like the meteor that hit our planet millions of years ago, the impact of the 2000 dotcom bubble and it’s collapse radically changed the fabric of the technology ecosystem - some businesses were wiped out completely, others took a serious hit, and others - like Amazon and eBay - recovered and have since surpassed their dot-com-bubble peaks. These impacts of course had ripple effects on the rest of the economy.
But are we really seeing history repeat itself? With the rise of ‘unicorn’ companies and their valuations skyrocketing beyond $1bn, it’s reasonable to worry that there an irrational level of optimism and excitement is driving investors to fund companies that lack the metrics to indicate it as a worthy venture.
There’s nothing wrong with the fact that there are visionary firms that are seeking to grow in emerging industries and that these are receiving a high valuation, but when these valuations are made when there are zero earnings and investors are betting completely on future expectations, a healthy degree of scepticism would probably do us all some good.
Why? If these investors get spooked by a major shock in the broader macroeconomic or geopolitical scene – say because a serious conflict emerges or if there is a sudden downturn in a big economy – many of these people will pull back from the market and they might even seek liquidity for their illiquid private company investments. This won’t just hit the unicorn companies hard but most of the other startups further down the food chain, perhaps preventing early stage startups from getting the critical funding they need to get their product on to market. Those who get hit the hardest will be the companies who are spending cash like they’re on a wild night in Vegas as they’re assuming there’s plenty of cash available for top-line focused growth.
But why are there so many investors now? Let's take a closer look at the state of the technology market.
The truth is – as Lou Kerner eloquently explains in an entry on Quora – that the data suggests that today’s market is in no way comparable to the Tech Bubble of 2000.
We're seeing new types of investors
One of the reasons why more and more people are investing in tech startups is not just because they are becoming wildly optimistic about this sector – it’s because the interest rate is so low that this has become a more viable investment option. Investing in tech startups may still be a bigger risk, but for people who don’t like seeing their hard earned cash collecting dust in a 0% savings account this has become a more appealing option.
Are we dealing with an economic bubble or just market forces?
As Kerner reminds us, the tendency of markets to oscillate between being overvalued and undervalued is actually a natural results of capitalism, not by the formation and collapsing of economic bubbles. The rise and fall is due to imbalances in the demand and supply curves which is subsequently corrected by market forces.
... Or are we entering a new post-capitalist economic system?
The way people evaluate technology-led companies before making an investment decision has fundamentally changed and throws many of our treasured economic principles into the air.
When evaluating a business you would normally look at its capital value - the ratio of it’s yield to physical capital. The value of dotcom businesses and many tech startups today, however, is based heavily on knowledge, information and communication and therefore require entirely different evaluation criteria.The relationship between reward and effort, or intelligence and capital has become extremely arbitrary and volatile. The development of new evaluation criteria may signal the emergence of a new economic system, one which will replace capitalism.
If you think about the change humankind saw when we moved from a feudal system to a capitalist system, you can start to imagine just how profound the repercussions will be if really are on the cusp of this shift.
Finally, technology isn't isolated to one industry - it's everywhere!
Not only is out understanding of the economy seemingly outdated, but our own definition of the technology industry. Technology is no longer isolated to one sector; it is impacting and infusing all existing industries. And if a business isn’t becoming technology-led, it’s unlikely to survive. For this reason, there is no little reason to lose faith in the tech world and the startups which are driving innovation across each industry and sector.
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