So Tech stocks are taking big swings, investors are rolling in dough and Venture Capital is infusing obscene amounts of money into the Startup scene. Doesn’t it all appear a little too over-confident? Just like a fairy-tale romance? There are just too many analogies with the erstwhile dot com bubble to not pay attention. It sounds almost like everyone’s falling in love with Tech stocks at first sight.
There is an unprecedented deal volume in the Tech sector, mostly based on the assumption that the user base of the acquired company would continue to grow at the same rate it is doing now. Rewind to 1995. There was a major jump in the number of internet users who were regarded as potential consumers by Tech Startups and it led to hundreds of companies being founded weekly. This illusionary growth was cut short when the market corrected eventually in 2001, business spending declined and several tech companies got mired in litigation for unscrupulous business practices.
Has anyone ever heard of Pets.com? It’s a classic example of a dot-bomb. It started off as a promising new e-commerce platform for online pet-supplies retailing in 1998, went public a year later and went bust the next year. The main problem was a trial-and-error business model. It has several parallels with the new kid on the block, Fab.com (Ring any bells?).
Everyone knows about SnapChat. It’s the only website which allows you to be your goofy self without worrying about peer-recognition or feeling pressured to post only high-quality content as the content deletes itself soon enough. This company has NO revenues but it is still valued at USD 4 billion. The lack of a sound business model is reason enough to ponder when it will go bust like so many other overvalued dot com startups did 13 years ago.
There are a few characteristics of Tech stocks that signal sturdy and stable growth over time. This might not interest speculators one bit but a long term investor most certainly looks for these qualities in any Tech stock he picks up.
The Company should :
- Understand customer’s needs
- Target them with ad campaigns that have measurable results
- Have a clearly outlined Long-Term Strategy and Measurable Goals
- Have a good sense of possible competition and ways to deal with it
Certain Venture Capitalists do seem to be overly buoyant about all this frenzy around Tech stocks but they just might be slipping into a sloppy mess. Let’s just hope that sanity is restored and programmers with fat pay packets don’t end up being shown the door. Amen!
Sequoia put $8 million into WhatsApp and took out $3.5 billion two years later. Booyah
What is this? The Economist?
Four quick thoughts:
1.) Up until about 1983, people also thought PCs and business computing was a huge bubble. (I wasn't there, but I'm quoting the chief backer of BEA systems who got into venture capital back in the late 1970s.) It turned out to be one of the biggest revolutions since the automobile. 2.) If interest rates rise, that's especially bad news for growth stocks and firms whose present value comes from distant cashflows.
3.) Social media ultimately depends on a limited resource- peoples' time. There aren't a lot of barriers to entry and there's going to be a lot of competition. The economic moat protecting the business's long-term value isn't exactly as wide as it is for a bricks-and-mortar business like a railroad or a chemical company.
4.) When a VC firm is chasing me and a friend down with $100K to invest because we gave a pitch at a startup contest, the market is getting a little frothy.
I'm not short tech, I'm not terribly underweight tech, but I'm a little underweight. If this is 1983, I don't want to completely miss the rocketship; if this is 2001, I don't want to be overexposed in the crash.
Valuations are high; but this is not a bubble. A bubble is when people buy something because they think it will keep going up and they'll be able to sell it to the next "fool" down the line irrespective of the assets value. This is not true today because of the sheer scale of mobile. We're not talking page views - these are real businesses, many of which haven't turned on the "revenue switch" just yet. There are many blog posts on possible business model for snapchat. Being able to hold someone's attention for 6 seconds (as opposed to a millisecond with email marketing) is a very valuable thing, so yes advertising will come. I suggest going through Benedict Evan's slides to see the sheet scale of mobile. http://www.slideshare.net/bge20/2014-02-incontext
By that definition, it wasn't a bubble in 2000 either. The tech stocks are massively overvalued and probably in a bubble. It's not going to pop anytime soon since a rise in interest rates is not even on the fed's radar right now.
almost everything ever good for society starts with a bubble...railroads, radios, cars, aviation, electricity....
Considering how low VC returns have been over the past 10 years, I'm surprised people even talk about it any more.
Median VC returns suck, but the dispersion is huge. Truly top quartile VCs have always beaten the stock market in the medium/long term. They've beaten the top quartile of the stock market as well.
Now bad VCs can be worse than lottery tickets.
Great post by IlliniProgrammer.
I honestly think most of these "tech" companies are complete bullshit but whatever.
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