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Sunday, October 26, 2014

Are we approaching the Tech bubble 2.0 ?

Published on the Sunday Times 26th October 2014. (Business & Finance supplement)


Friday the 10th March 2000 was a black day for technology companies.  The Nasdaq stock exchange opened as usual at 9am, stock brokers were already expecting a disastrous day as in the preceding week hundreds of tech companies started going bust.




Earlier that week as many twenty year-olds, who were already millionaires after setting up their companies in Silicon Valley, were already bust and were moving out of their multi-million estates back to a small room with their parents as their companies declared bankruptcy.



10th March 2000, noon, the Nasdaq-Tech listings were already down 55% and by closure time the figure went further down to 78% as hundreds of tech-related companies suddenly went bust.  It was a complete washout, Silicon Valley which just weeks before was buzzing with enthusiasm amid new businessmen and employees arriving from all around the world suddenly went silent.  Banks immediately sent their repossession agents to take over entire buildings in the hope of recovering some of their debts.  Over that weekend Silicon Valley was transformed into a ghost town.


Many experts had been warning about this for years.  It seemed that the tech bubble which started at around 1992 as many people started investing in fancy online companies, with investors pouring money in even the most stupidest of ideas came to an abrupt end.
Some major examples include an online company, boo.com, founded only 1 year before the bubble burst burnt 135 million dollars in advertising without ever registering a profit.
The first social network, theglobe.com was lauched in 1994 and essentially offered the same services Facebook provides today.  In 1998 this company offered shares to the public for $9 and by 1999 it’s shares were trading at $100 only to go down to around 5 cents per share in the week the bubble burst.


The website broadcast.com had an innovative idea at the time, to transmit radio and tv shows over the internet.  Investors were literally pouring money in this company and it managed to raise 5.7 billion dollars.  The founders’ business plan however expected broadband internet connection to be available worldwide by the year 2000.  Broadband connectivity only started entering homes around 2008.  The company burnt all the 5.7 billion it was entrusted with in a matter of months and nearly no one ever managed to see any tv show over their service at the time.


Most of the ideas mentioned in these stories have become a reality today, Facebook is the new social network taking over from theglobe.com and Ebay became the new boo.com whilst Netflix became the new broadcast.com.  One could argue that most tech companies went bust because their ideas were too innovative for the year 2000 but it seems that history really is destined to repeat  itself and the lessons learnt just 15 years ago weren’t enough to stop greed.


Today it is estimated that nine out of every 10 new startup companies are failing, mostly because they grow too fast.  Some companies are having great success with one particular product or app launch and are expecting each and every product they launch to achieve the same profit levels.  The stock of King-Digital, producers of the hit game Candy Crush, is already dropping after the company failed to replicate the success they achieved with newly launched games and apps.  The same thing is happening to Zynga and Rovio, creators of Farmville and Angry Birds respectively.  It seems that these companies managed to have a lucky one time hit rather than a series of hits over the years which would be able to build a sustained business model.  These companies are simply not living up to the expectations when compared to their first hit.


King Digital’s IPO (initial public offering) price was set at $22.50 per share last April, and all shares were snatched immediately.  Today their shares are trading at $11, this means that investors lost half of their money in less than six months only because they expected that King-Digital to be able to replicate sales for all their games.


Other companies with absolutely no revenue, but just having a great idea are raising extraordinary amounts of money in venture capital, for example fab.com, an e-commerce company, recently raised $336 million, all this since launching in 2011 and without ever having registered a single dollar in profit ever since and having earlier this year fired 400 employees after it had to downsize as it couldn’t cope with the salaries being issued.
A photo messaging application developed by 3 friends during their summer break at university, Snapchat, which is also gaining traction in Malta, is being valued at over 3 billion dollars when in reality it has yet to register a profit.


Huge companies like Yahoo are once again starting to acquire companies for unrealistically high valuations just like it did in 2000.  Yahoo’s largest fiasco, back in 1999, was when it bought Geocities for over 3 billion dollars and never even recouped their initial investment.  Nevertheless just last year Yahoo bought Tumblr for 1.1 billion dollars, even though Tumblr is not expected to break even in the coming years.


Timothy Draper is a famous American venture capitalist who has in the past invested early on in successful companies such as Hotmail and Skype, before both were sold to Microsoft and earning him a thousand times his initial investment.  Draper was recently interviewed on the New Yorker where he stated that he believed that “Tech venture capital may have reached the top of it’s cycle once again”.


His theory is that after a recession, lots of people including intelligent business-minded youngsters lose their jobs, people notice it is easier to start a business instead of finding a job and millionaires with lots of extra cash suddenly find it more lucrative to invest in such startups rather than risking their money in the stock exchange or leaving it to rest in a bank with zero interest.  After some successful business stories are rolled out in the media people start thinking that they could replicate their success as well and investors start believing that anything they touch will turn into gold.  This leads to sloppiness and eventually to a market crash.


This is what happened exactly prior to the year 2000 crash and according to Draper we are now at a point where negligence is blurring business decisions once again, only to inevitably lead us to the unavoidable market crash.  Let us only hope that this time the cycle is broken before the inevitable strikes again.


Original Article Scan (from printed newspaper):
http://files.ianvella.com/techbubble26oct2014.jpg



Copyright notice : This article was written by Ian Vella and published on the Sunday Times of Malta.  Copyright may be shared between the mentioned author and entities.  Please do not republish without permission. 



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