Why We Aren’t In A Tech Bubble (Yet)

Tech Bubble? I Don’t Think So.

Having lived through The First Great Tech Bubble – the era of Pets.com, Whoopi Goldberg & Flooz, and billion dollar valuations of companies that never made a profit – I feel qualified to speak on the topic of today’s booming tech sector. The question on everyone’s mind is: Have we replaced Pets.com with Groupon.com, Flooz with Bitcoin, and found ourselves, a mere 11 years later, on the precipice of The Second Great Tech Bubble?

A Quick History Lesson

Irrational exuberance is nothing new; one need only look to the history books to find stories of speculative tulip bulb economies, predicted apocalyptic Raptures, and other such outrageous beliefs and popular delusions. In order to figure out what’s going on today, we need to take a few steps back and figure out how exactly we got here.

Rewind back to the mid-1990s: the “World Wide Web” had become a thing, TIME Magazine heralded it as a major advancement, WIRED magazine was a newborn and declared all magazines “Tired”, and the TODAY show started putting these crazy things called “Internet addresses” on television screens (check it out at 0:37).

Few really understood what it was all about – but most people knew something was happening, because all of a sudden companies were coming out of nowhere and dominating markets, pulling in significant revenue even if they weren’t making any profit (eBay, Amazon, craigslist, to name a couple). People began connecting to the Internet more and more, with the number of users literally growing by 50% year over year, and Internet traffic doubled every year. This in turn spurred the growth of Internet Service Providers, and created cable ISPs, DSL technology, and investment in fiber optics for managing the projected bandwidth demands.

The thing was, nobody actually knew how to make money online. Internet advertising was so nascent that no one actually believed in it, and even giants like Doubleclick were having a hard time making their case to ad buyers. E-commerce (man, nobody even says e-commerce any more) was this crazy theoretical thing, and no one could guess whether people would be willing to buy dresses and shoes over a computer without ever actually trying them on. It was a time where people could try anything, experiment with an idea as a web site, and see what happened.

Because no one really “got it” we ended up with a cadre of hucksters who approached venture capitalists and investment banks with their palms out, claiming that they would create the “premiere web portal for pet food” and take over the world because everything would soon move to the Internet, and they would be there first. And being first mover wasn’t a bad strategy by any stretch of the imagination, it worked great for a number of companies; but somewhere along the way, in their haste to reap the rewards of the gold rush, people forgot that companies need to actually make money at some point. For whatever reason, these “new era” Internet companies thought that strategies like offering free shipping no matter how much products weighed, operating at a loss for years at a time, or otherwise giving away the farm would be their ticket to customer loyalty and Internet domination. There were companies that tried to deliver anything to anyone for free in 30 minutes or less (and then when they folded, their CEOs won the “free money for life” lottery).

But Internet Fever wasn’t just limited to entrepreneurs and investors – eventually everyone became an investor, as companies “went public” and the general population started paying for a piece of the action. Companies started compensating their employees in common stock options in lieu of money, and the big payoff was working towards the Initial Public Offering (IPO). Back in the heyday, it seemed like there were multiple IPOs every day of the week and people were quitting their jobs to become day traders of Internet stocks. Everything was going great until somebody realized that the growth wasn’t really as big as they projected, bandwidth wasn’t getting used up and users weren’t coming on board fast enough, and that the combined value of several hundred Internet companies was somewhere north of a trillion dollars and represented almost 10% of the entire stock market. But even that process took years – there were plenty of articles in reputable publications decrying overvaluing companies with no money, trading at incredibly inflated stock prices… most people just didn’t want to hear it. The economy started to stall, prices fell and everybody panicked, and the eventual market crash after 9/11/2001 pretty much sealed the deal.

What’s So Different Today?

So let’s get back to today… what’s driving the excitement about tech companies now, why should anybody even be “rationally” exuberant? In the past it was the rate of user adoption and expansion of high bandwidth service that was the basis of overly optimistic growth projections; today’s high-tech explosion can be traced back to just over four years ago, to a perfect storm of two technology trends:

January 9th, 2007San Francisco, California – Steve Jobs unveils the iPhone, and makes everyone wait six months to a year to get one. It’s hard to argue at this point whether or not the iPhone is having an impact on the world, but we’ll discuss this further in just a bit. Watch the YouTube link above; it’s a bit amazing to watch this video and realize that everyone is seeing an iPhone for the first time. We take this kind of functionality completely for granted just four and a half years later, but at that time, the crowd really is just stunned by what they’re seeing.

March 14th, 2007Austin, Texas – The founders of Twitter accept the South By SouthWest Web Award after taking the convention by storm. The media blitz surrounding Twitter’s coming out party is further escalated over the coming months by a flurry of new applications built using its Representational State Transfer Application Programming Interface (their REST API, a web service which allows for near effortless integration with third-party applications).

Particularly insightful readers may have already guessed what I’m getting at by citing these two moments in history. The incredible growth we’ve seen in just these last four years is, in fact, completely driven by software development. Apple introduced the iPhone App Store just a year after its release creating a true Renaissance for developers – never has a direct-to-consumer distribution channel like this existed, and Apple’s followup Mac OS App Store has done the same thing for desktop software. Some scoffed at analyst predictions that the App Store would make over a billion dollars for Apple; now other companies are scrambling like mad to implement their own.

The barrier to entry for software development has now become so low that any programmer with enough skill and about US$1000 can blossom into a massive, multi-national software giant (Rovio, anyone?). Applications rich with data, features, and functionality are literally popping up over weekends at hackathons thanks to the API infrastructure laid out by companies like Foursquare, Facebook, and Twitter.

Signs of the Bubblepocalypse

Veterans of that first bubble will be the first to shoot back and say: “You’re describing exactly the same situation as before, people with little more than an idea are starting companies and getting funded ridiculous amounts of money by VCs!” True enough; companies are being founded during 48 hour trips on buses, and at weekend events in cities all over the world, and some of the companies that continue to make real products are getting investment and being valued highly. Speaking of value, do you think people worry about whether Facebook and Twitter are really worth as much as some analysts say? And what about all that VC money that’s being thrown around anyway? It sure does seem like we’re seeing a lot of optimism and exuberance, just like those heady old early Internet days.

The youngest of our current generation of programmers and entrepreneurs may not have a grasp on the scope of what happened back in 2000, where companies bought these startups with no working business model for billions and sold them later for millions (not even close to a MySpace scale debacle here, we’re talking a couple more orders of magnitude on top of that). But I would say to peers who went through it with me that the difference is that today’s go-getter is starting off with a working prototype, some kind of minimum viable product, and can monetize instantly either through subscription or app store payment.

This is not to say that the dangers of speculation are not present. Valuations of Facebook and Twitter and Foursquare may be high, but they are also all monetized or monetizing, and they’re making money with ads or by providing services – a far cry better than companies back in the day with zero income. To date, we’ve only seen really big spending action on the part of venture capital investors, and any kind of speculation on shares in companies has only happened in private transactions in unregulated “second markets”. If somebody gets forty million dollars from a VC and blows it, that’s not a bubble, that’s just a bad investment, and it happens all the time. We’re nowhere near the IPO mania of eleven years ago, nobody is day trading companies with inflated prices and no profits… it may be that bankers and financial types are lying low after nearly collapsing the economy (yet again) with their latest round of bailouts. If we’re lucky we could have another five years or so before they come back to wreak havoc and drive valuations up like the bunch of crazed, greedy monkeys they are.

In the meantime, I suggest you learn how to code and start your own business. It’s a lot easier than you think, and that application idea you’ve had forever is actually possible today – if you’re willing to invest the effort!

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