Technology IPOs: a Bursting Bubble?
It is easy to believe that history repeats itself, but sometimes it’s hard to recognize when it is. In 2019, with technology companies ruling capital markets, the question can be asked: are we repeating ourselves? In the 1990s and early 2000s the world saw a technological bubble grow — then pop. Nowadays, skeptics are worried by the seemingly common occurrence of tech IPOs failing to meet expectations. Snapchat and Uber are two companies who bore this fate, despite preceding bullish expectations from analysts. This piece will investigate the path history took and the path we seem to be on and attempt to determine if we’re headed to the same destination. To begin we’ll ask this question: what was the Dotcom Bubble?
THE BUBBLE
In the late 1990s, shares prices in technology companies were skyrocketing. Everyone wanted to invest in the tech industry to the point where simply adding a .com or e- to your firm’s name could elicit investor interest. Technology companies were popping up left and right ― and they were going public just as often. In 1999, 295 initial public offerings (IPO) were for technology companies; meanwhile the total number of IPOs in 1999 was only 457. In a crowded field, companies ― eager to catch the attention of investors ― poured money into advertising, at times at the expense of investing in their own good or service provided. Firms were loudly claiming they could change the world, despite not having any proprietary technology and often lacking the ability to turn their world-changing goods into profits. But, in fact, unprofitably was seen as the stamp of a true technology company. Due to the intangibility of tech companies, often times their words and ideas were all you had; evaluations were based on belief not balance sheets. As a result, between 1999 and 2000, the NASDAQ doubled in value without — as one researcher on the Dotcom Bubble said — “any plausible candidate for fundamental news to support such a large revaluation.” This bubble was marked by rampant, unsubstantiated speculation.
THE BURST
In March of 2000, after the NASDAQ composite stock market index actually peaked, the tides turned. By the end of March, nearly one trillion U.S. dollars had left the market. In November of 2000, CNN reported losses at $1.7 trillion dollars while other news outlets warned investors to get out while they could. A variety of factors fed into the bubble’s end: Japan entering a recession, Yahoo! and eBay ending merger talks, Dell and Cisco placing large sell orders on their stock ― the latter two which sent investors into frenzies. By 2002, must publicly traded technology companies had been shuttered. The bubble’s burst was swift and brutal.
WHERE ARE WE NOW?
In 2019, seven of the ten largest companies in the world by market capitalization are tech companies. Startups, once again, are seeing the tech industry is where the money is. However, unlike the nineties, the incredibly large size of the prominent technology companies and the innumerable subsidiaries they hold make it very difficult for new companies to join the market and quickly reap rewards, as was common in the nineties. Startups are now often in a David and Goliath situation. This framing is what makes the few companies which are deemed viable adversaries to Goliath (i.e. companies with the potential to actually succeed) attention-grabbing and seemingly worthy of heavy investment ― and, consequently, their failures all the more jarring.
However, we only see a sliver of technology IPOs on the everyday news; the minute sample on which people focus makes the failures seem substantial. But, when put back in perspective, there does not seem to be a huge rush to IPO for most companies. Companies are waiting years before deciding to go public, a testament to the careful consideration firms are going through before deciding to get listed. Nowadays, money at startups is being poured into R&D, not PR. Additionally, unlike the Dotcom Bubble, we are not seeing investors blindly throwing money ― these lackluster IPOs are actually a result of investors seeing that there are issues with these companies, which should, in turn, lower their evaluations. Investors today no longer count unprofitably as something they are eager to see. Bubbles are caused by over speculation and that does not necessarily seem to be the case in our day and age.
So are we in a bubble? We don’t seem to be. But, for a definitive answer, only time will tell.
