Doomed to repeat it?

Technocratic Tirade

AlbertHsiung_online

Stop me if you’ve heard this one.

Google, Amazon and other players from Silicon Valley were raking in massive valuations from their shiny, new industries. There was gold to be had in California, and prospectors flooded in. Suddenly, everyone’s crazy, crowded-bar, five-drinks-deep ideas were being taken to the bank. Fresh-faced college graduates had tech startups on their resumes and Porsches in their driveways. Computer science departments grew exponentially, enrollment reaching double or triple the numbers from just a few years ago.

I’m talking about a time when the introduction of new computer technologies and unprecedented communication speeds shattered and rebuilt industries wherein mutual access between consumers and companies let anyone start a business — when no one was quite sure where we were going but definitely wanted to be richer for it. I’m talking, of course, about the late 1990s.

This story ended like every other bubble has: As matter rushed inside and the bubble swelled and swelled, the infinitely fragile membrane shielding the empty air inside spread itself too thin and popped. The expensive effects of a few major corporate snafus rippled outward throughout the industry. Suddenly, everyone saw the overvalued startups and their unworkable business model for what they were — money holes. Companies once worth multiple millions of dollars dropped 70, 80, 90 percent in their stock prices. Others failed entirely, dropping straight into bankruptcy. And computer science enrollment declined as roving packs of unemployed programmers returned to school for something more topical.

The analogies to today almost make themselves. Venture capital is hitting a peak, with more deals closed, more money exchanged and bigger valuations than we’ve seen since the dot-com boom. Half-baked ideas formed around the hot, new tech of the day — the mobile Web — are sprouting into new businesses day after day. And like the collapsed giants of the early 2000s, companies are following a “get big fast” mentality, growing volume without any attention to earnings.

Have we, in ignoring the lessons of history, found ourselves repeating it? Is 2015 the dot-com bubble with new faces and new buzzwords? It seems many investors in the larger public market have learned their lessons. Tech startups going public are fewer and further between; those that do are valued cautiously, their stocks oftentimes falling in price from their IPO. Gone are the days when technology was such a mystery that simply prepending an “e-” or appending a “.com” would significantly raise a company’s stock prices. It’s just private firms, not the investing population of the world, that are gambling on Silicon Valley hot shots.

But a more limited catastrophe is nonetheless a catastrophe. The capital is flowing, the businesses are sprouting — and the revenues aren’t existing. Investments are thrown at these new entrepreneurs, who all seem to overlook the minor business detail of making money. Startups are largely following the dot-com-era strategy of growing as rapidly as possible at the cost of … as much as it takes. Growth over profits, fame over fortune. They spend millions on marketing and offer lengthy free trials and obscenely low costs to entice new users. Their annual losses pile and pile with — for many absolutely nonmonetizable ideas — no end in sight.

Pets.com burned through $300 million of venture capital by spending massively on marketing while simultaneously selling all of its goods at a significant loss. Then it collapsed. Jet.com has raised more than $220 million in venture capital and is estimated by its CEO to lose money on every sale for at least the next five years. When you only lose money for every customer, all that your size means is bigger losses. Disruptive new technologies don’t mean neglecting basic, fundamental financial and business sense.

These companies don’t have a business model — at least, none that anyone understands. Their valuations are, to analysts, a complete mystery and, to investors, a pipe dream — a fanciful, speculative chase after the next big moneymaker. It sounds like a good bet: Your friends are using them, they’re all over the news, they have a billion users. But seemingly no consideration seems to go into how much these companies actually make. Twitter, the household name, as famous as it is, posted a net loss of $500 million in 2014 and has yet to turn a significant profit. Uber, despite its audacious $50 billion valuation, has lost money year after year. With no cash reserves and no stable plan, once the market is subject to the inevitable turbulence, someone big will drop out of the sky.

Once there’s a high-profile crash, everyone gets nervous, and all of a sudden, no one wants to fly. Venture capital, once a life-giving flow through the fertile Silicon Valley, dries up. The backers keeping unsustainable businesses afloat start demanding results or pull out, leading firm after firm to quit or fail. The veneer stretches itself too thin, the bubble pops, and we’re back where we started. I’m counting down to the crash — 3, 2, 1, it’s a happy New Year, with everyone splayed out across the floor, hungover and clutching their stomachs, lightly groaning their resolution: “Never again.”

 

Albert Hsiung writes the Monday column on STEM student culture. Contact him at [email protected].

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  • VictorCharlie

    You can’t really fault the side effect of a free market. Run-away exhuberance just indicates that we have new technologies that we are still experimenting. Point of comparison: is Greece doomed?

    One thing investors can learn from the dotcom bubble, don’t mortgage your house to buy stocks of companies that you can’t explain to yourself of what they do.

    As of current state of the tech industry, I’d worry more about the M&A trend – specifically in the semiconductor sector.

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