Are we in the midst of another tech bubble?25 September, 2014 / Articles
The bubble. Among the things that lead normal, well-balanced people to conclude that the IT industry is crazy are the valuations at which internet companies are launched on the stock market and the prices these companies pay to acquire apparently minuscule start-ups. One thinks, for example, of the $104bn valuation of Facebook when it launched in May 2012. Or of the $19bn that Facebook then paid to acquire WhatsApp last February. And then there’s last Thursday’s flotation of the Chinese internet firm Alibaba in New York, which valued the company at $168bn. (The really big news here is the flotation’s confirmation of the shrewdness of the 2005 deal in which Yahoo acquired a 40% stake in Alibaba for $1bn; Yahoo still owns 22.4% of the company and is expected to sell off some of that after the IPO.)
These are not just telephone-book numbers, but astronomical ones. And not surprisingly they are leading some people to wonder if we’re in the middle of another tech bubble like the one that spectacularly popped in 2000. These fears were given an extra boost by a report published last month by PricewaterhouseCoopers that showed that venture capitalists in the US are pouring increasing amounts of money into tech companies. In the second quarter of this year, for example, venture capital investments in seed stage, early stage and expansion stage companies were up 55% over the corresponding quarter last year, which apparently is the largest quarter-over-quarter growth since the last quarter of 1999 – the last gasp of the first internet boom.
This raises two questions. First, is history repeating itself? The answer is no, because history never really repeats itself. All booms have some generic features in common – outbreaks of irrational exuberance, for example, and availability of cheap money. But the specific circumstances of each boom are different. In the first internet bubble, for example, much of the money was blown on buying servers, renting offices and trying to buy market share in improbable or nonexistent markets (think of Pets.com and Petopia.com). In the current boom, instead of buying servers, startups rent computing time on Amazon’s Elastic Compute cloud service; their “offices” are often virtual (at least at first) and they’re not spending fortunes on advertising. In fact, they’re not paying for advertising full stop. So even if things were to go belly-up there’s less at stake.