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Are we facing a new tech bubble?

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dotcom-bubble-burst

By Daniel Leach Canibano.

Unicorn:

1.“a mythical animal represented as a horse with a single straight horn projecting from its forehead”

2. ”a private technology companies valued at more than $1bn”

Unicorns… the fairytale-like phenomenon of the billion-dollar company. The term was coined only two years ago by Cowboy Ventures founder Aileen Lee and could be attributed to a mere 39 start-ups, a figure that has now quadrupled. A combination of low interest rates and easy access to funds has spurred investment in the technology industry, making Silicon Valley the new Wall Street — a haven for copious wealth and immense influence. The rise of the start-ups has led to speculation that we are ‘reliving’ the dot com bubble of 2000; which, when it burst, led to half of the internet companies being wiped off the charts and the Nasdaq losing 1 trillion dollars within a month. Whilst the opinions are varied, the question remains: are we indeed in the midst of a new bubble?

One of the characteristics of the dot-com bubble was the companies’ effortless access to cash to fund their rapid growth. A situation that is very similar to what it currently happening. According to research published by Pitchbook Data – an information and consulting firm — Silicon Valley investments accounted for more than a third of total venture capital invested in the US in the second quarter of last year (rising 45% from the first quarter) while median pre-money valuations in the Bay Area for late stage investments doubled. In the same period, you could find a quarter of a million angel investors (usually non-professional participants) throwing money at these start-ups. For the common Joe without a stringent investment strategy or big pockets, there even exist equity crowd-funding companies that provide the opportunity to invest in start-ups with minute amounts of money involved.

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A little over 10-years ago, one of most the infamous firms of the dotcom bubble pets.com raised $82.5mm in its IPO. The company wasn’t profitable and lost $147mm in the first nine months of 2000. A situation that is all too common nowadays. Securing 1 billion dollars in their latest private funding and currently worth over 60 billion dollars, Uber is by far one of the most exceptional start-ups the Bay Area has ever seen. Seemingly rising above all other start-ups, few know that the company lost $671mm in 2014 and was dangerously close to the $1Bn mark in the first half of 2015. Twitter and many other firms that are thought to be well established and profitable are in the same kind of financial trouble.

Historically, valuing firms at record high numbers has rarely been sustainable and eventually these numbers tend to head back towards the norm.  A 2016 CNBC article shows that VC funding is slowing down, dipping from $17.6Bn of 2015’s last quarter to $9.3Bn in early 2016. A sentiment of uncertainty that was reinforced by Pitchbook Data’s analyst Garrett Black stating that “[he] would advise companies looking to raise capital to close quick while financing is [still] available”. A survey carried out by First Round Capital reported that founders indeed expected it to be harder to secure funding in the near future.

From the abnormally high valuations, the rudimentary revenue models going public and the rapid deployment of funding, there are indeed quite a few similarities between the dotcom bubble and the current start-up industry. Nevertheless, this does not mean that we should expect both to end in the same catastrophic way. The dotcom bubble was — as we have seen — mostly based on hype and market euphoria (retail investors trying to make a quick buck). The current start-up industry differentiates itself with most firms having sound business models (largely thanks to VC intervention), having concrete revenues and (most) having some degree of profitability. The biggest difference however is that most of the unicorns or huge start-ups have been fueled by private investments (VCs or angel investment); which makes it impossible to see a market sell off that we experienced in 2000. It is in these investors’ best interest to strive to make these firms more lucrative or they will loose the huge sums they provided. Whilst we can all agree that there is an excess of “useless” companies, many others are bringing significant change and have become increasingly indispensable to the innovative and modern world we live in.

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