A number of startups in the US technology industry have seemingly high valuations. But the author argues that the current technology industry is fundamentally different from what it was in 2000 when the dot-com bubble burst.
What’s Inside?
The author discusses characteristics of the current technology industry that make it less likely that a market correction, such as the bursting of the dot-com bubble in 2000, would reoccur. But the author does highlight the risks posed by these characteristics.
How Is This Article Useful to Practitioners?
The author argues that the base of the technology industry is broader today than in the past. About 3.2 billion people now have internet access compared with 400 million people in 1999. Today, smartphones make geolocation applications possible for startups, such as Uber (a taxi service). These differences mean that most of today’s technology startups are already generating income. In 2014, the average US technology firm that made an IPO had income of $91 million compared with $17 million in 1999.
Public investors in technology have also been less bullish than in the past. In 1999 and 2000, 29% of the 632 technology IPOs doubled in value on the first day of trading. But of the 53 technology IPOs in 2014, only 2 had share prices increase dramatically.
Today’s technology firms stay private longer. Although it was once rare to find pre-IPO technology startups valued at more than $1 billion (“unicorns”), today there are about 74 such unicorns, collectively valued at more than $273 billion. Thus, the risk of investing in technology firms falls on a smaller group now. And being private gives a large number of technology firms more time to adjust to a market correction than technology companies had in 1999 and 2000.
But because these large private technology firms are not subject to wider scrutiny, commercially weak ideas may attract funding for longer than they should. The high valuations are also drawing a lot more regulatory scrutiny, such as in the case of Uber. In some cases, some unicorns have grown too expensive for a corporate buyer and cannot be listed on a public exchange for what they are actually worth.
Abstractor’s Viewpoint
The author makes an engaging data-driven argument that changes in the technology industry imply that the risk of a correction will not be as deep and as devastating as the 2000 dot-com bust. The author highlights the need for investors to be aware that the current high valuations still entail real risks and care should still be taken when investing in such firms.