Boom or Burst: Debate Points For And Against Whether We’re Actually In Another Tech Bubble

By Himanshu Sareen

With the Nasdaq topping 5,000 last March many in the VC world began to stoke the fires once again about whether or not we’re currently in a tech bubble similar to the 2000 dotcom burst. Unlike arguments that are clearly black and white, the debate over whether we’re really in another tech bubble has some major gray area for experts to cover. For example, one look at Mark Cuban’s now famous harangue of the current investment economy pushing us closer and closer to financial ruin will get you a compelling argument for why we’re currently in another bubble. On the other hand, there are many equally compelling arguments for why we’re not in a bubble akin to 2000. In this post I won’t go as far to say that we’re in a bubble or not. I will, however, offer up some points of view that speak to both sides of the debate.

Being Patient to go Public Vs. Mega Valuations

During the 2000 dotcom bubble there were a number of companies that rushed to IPO without ever generating revenue. Today, however, we’re seeing companies take more time before going public. This could hint in the favor of a bubble burst not being in our immediate future. People who argue for the fact that we’re in a bubble, though, would point to the fact that VCs and Angel investors are rushing to fund private companies. These days it’s all about finding the next Facebook in the early goings instead of backing an already publicly traded horse. As Cuban says in his blog post:

“To the investor, it’s the hope of a huge payout. But there is one critical difference [between now and the 2000 bubble]. Back then the companies the general public was investing in were public companies. They may have been horrible companies, but being public meant that investors had liquidity to sell their stocks.”

Obviously Cuban here is advocating that the current state of the market will lead to a much harsher deflation than the 2000 burst. On the other hand, VC investing in startups is still much lower than the peak of investment during 2000. (the numbers for 2000 and 2014 were $105B and $48.3B respectively). Of course, the fact that there was an increase in investments from 2013–2014 of 61% could be indicative of a trend of what’s to come, for now, however, the safest thing to say is that the jury’s still out on whether we’re really in a bubble/how bad that bubble burst would really be.

There are More Unicorns than Ever Before

According to a Business Insider Article in June there are now around 102 ‘unicorn companies’ worldwide (which is the same to say that there are 102 companies valued at a billion or more dollars). That’s a lot of companies breathing rarified air, right? Well, the fact that there are so many highly valued companies out there might be one of the strongest indicators pointing towards the fact that a bubble burst is, in fact, imminent. Take into account companies like Snapchat and Pinterest which have sky hi valuations ($16B and $11B respectively) but who don’t, as of yet, generate any income. Even stalwart Uber is reportedly operating at a $470M loss. All this makes leery economists terrified that the economy will soon be trending down in a big way. As stated above it seems like a big difference between now and 2000 is the fact that VC’s are rushing to inflate the value of companies instead of companies rushing to go public. Eventually though, all big companies will need to go public in order for their investors to see a return on their initial investments. If, for example, multiple companies that are roughly the size of Uber are rejected by the public market, this could have serious implications on the economy.

A Different Type of Investor, a Different Type of Market

A HUGE difference between now and the 2000 dotcom bubble is the amount of Tech Stocks in the market index. According to CNN Money, “Technology stocks made up about 65% of the Nasdaq Index in March of 2000. Now technology makes up only 43%. That’s still “tech heavy,” but it’s a lot less of a weight.” I’d have to agree — shedding 22% of what was on overly heavy tech market allows VC’s and every day investors alike to diversify more broadly. And while VC’s are still heavily investing in tech companies they’re spreading those investments around to many different startups with the hope that even if most of their investments fail, they’ll be able to hit a home run with at least one company.

Final Thoughts

Saying that we’re not in a bubble at all would be a tad facetious — with every boom also comes a bubble, just as how every up tick is eventually followed by a down swing. However, it would also be slightly flippant to say that the current tech bubble is every bit as egregious as the 2000 bust. Unlike the dotcom fiasco, many of today’s surging companies are either generating revenue already, or have salient revenue generating models in place that keep their current valuations high. So then, when the Nasdaq topped 5,000 in March? You can either look at that as a harbinger of the economic hardship to come, or you can view it as the market finally regaining what the dotcom economy lost. One thing is for certain, and that’s that the only way we’ll know for sure if this bubble is as bad as the last one, is if/when it actually bursts.

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