March 10, 2000. Nearly a decade after the invention of the Internet sparked one of the largest economic booms in history, the Nasdaq Composite – an index of tech shares bought and sold on Wall Street – peaked at 5046.86 points, with a value of $6.71 trillion. In just a year, its worth had doubled thanks to a widely held belief known as the dot-com theory. The dot-com theory declared that for an online business to be successful, it needed to rapidly expand its consumer base, regardless of any early losses resulting from uncapped growth.
It’s an astounding notion, but greed often makes people shortsighted. The dot-com theory was all the justification investors needed to throw money at ideas based on the power of the pitch alone. 457 IPOs took place in 1999, most of which were high-tech start-up ventures, with 117 companies doubling their value in a day. It would work for some – Amazon wouldn’t see a profit until 2015 – but most had set the stage for their own demise.
March 11. The bubble bursts. In less than a month, nearly a trillion dollars is wiped from the industry’s valuation. Investors rally to protect themselves from the fallout, and for the next two and a half years, tech continues to crumble. By October of 2002, the Nasdaq hit 1114.11 points, marking a 78% loss. Businesses collapsed, the development of infrastructure slowed as communication companies amassed massive debts, and Microsoft was brought to court and labelled a monopoly.
Few companies saw the other side of the market crash. Few people too. As stock slowly started to rise, and new businesses came to the forefront of the sector, it seemed an entirely new industry had risen from the ashes, led by those who had either learnt from the mistakes of their predecessors, or had the foresight to avoid them altogether.
Yet history has a tendency to repeat on those who fail to respect it.
It is now early 2017. The Nasdaq Composite sits at a record 5574.12 points. Uber – the company that has come to embody the modern tech market – lost an estimated $3 billion in 2016, even as its valuation soared 15% to $69 billion. Chinese e-commerce giant Alibaba is still gaining in value following its record-breaking IPO in late-2014. Meanwhile, established brands like Twitter (once called “the company that couldn’t kill itself” by Bloomberg journalist Brad Stone) are floundering, and frauds like Theranos, the blood testing start-up that was valued at $9 billion even though its technology didn’t work, are taking advantage of the blind hype sweeping the industry as it did back in 1999.
The signs are all there: Silicon Valley’s doomsday is on the horizon. We even have a date.
Global Equities Research analyst Trip Chowdhry has stated that the tech bubble is bound to burst in March or April of this year, and this time is set to be even worse than the last.
“The only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity,” said entrepreneur Mark Cuban in 2015, explaining why so called ‘angel’ investors – investors who provide private capital to a start-up – are responsible for the insoluble structuring of thousands of American businesses. Considering most angel investors are either tremendously wealthy or work as part of angel organisations for the sake of lower risk, it’s unlikely to be them who face the most severe repercussions.
Amish Shah’s response to Cuban via Business Insider claimed that Cuban is confusing “innovation and democratisation with hot air”. Two years later, that’s proving to be wrong.
Over this period, true innovation has yet to arise. Smartphone growth rates have fallen flat, while the tech that was expected to succeed it, particularly wearables and virtual reality, are far from making a serious dent in the mainstream. Unsurprisingly, it’s been the failures in this market – the Google Glass’ and Oculus Rifts’ – that have dominated the attention of the masses.
It means that companies that rose out of the smartphone revolution have little competition. With such certainty surrounding their positions, their valuations have skyrocketed. Consider Snap (formerly Snapchat), which is purportedly preparing for a $25 billion IPO. With little means to monetising content, a primary demographic of young people with no purchasing power, and increased competition from Facebook-owned Instagram, Chowdhry thinks it’s worth only around $1 billion.
Bill Gurley, a partner with investment firm Benchmark who charted their investment into Uber, recently compared the tech funding climate to the mortgage industry pre-Global Financial Crisis. It’s a terrifying thought, one that should have even the Amish Shah’s on edge. It suggests that no matter how prepared investors think they are, the greedy short-sightedness of a few is bound to have devastating repercussions for all, and soon, if left unchecked.