The 2017 edition of South by Southwest featured a “Startup Village” boasting an impressive set of speakers ranging from established tech companies, Beth Comstock vice chair of GE, to the nouveau tech disrupters, represented by Marty Weiner, chief technology officer of Reddit. New tech companies, such as Uber, have become increasingly important to the industry. However, Snapchat’s baseless IPO and the willingness of investors to bet on unprofitable businesses draws parallels to the dotcom bust of 2000 — bad news for startup based economies.
On March 10, 2000 the NASDAQ, an indicator for the strength of the stock market, peaked at 5,048.62 points. The following week, a firesale of dotcom stocks — internet companies with “.com” in their name — caused the market to crash, and a year later the index had lost 60 percent of its value.
Companies folded, retirement funds invested in the market evaporated and college graduates were left in an economy unwilling to employ them. The Silicon Hills of Austin, with a vibrant start-up scene and strong tech based economy, is uniquely vulnerable to doldrums in the tech industry.
In order to avoid another catastrophe, companies have avoided going public without strong backing by institutional investors, thus guaranteeing a viable business. Facebook was valued at over $80 billion when it went public in contrast to 1990s flop @Home, which was backed by a weak $0.7 million. Moreover, more and more money is being kept off public exchanges and is tied up in private money pools managed by MBAs and Ivy-league grads. The number of “unicorns”, private companies valued at more than $1 billion, sat at one in 2009 and by 2017 had grown to 188.
However, investors are not immune to bad investing. Research demonstrates that institutions like private equity, and venture capital firms especially, are prone to groupthink and overvalue companies because of the tight knit environment, Silicon Valley, they tend to operate in. This is more likely to result in unrealistic valuations for exciting “hot money” companies, and because Silicon Valley can act as an echo chamber, the unrealistic valuations will spread more quickly, creating a vicious cycle. Do not confuse private investing with security for common people; funding for these investments is still drawn in part from major pension funds and the impacts of bad investing can easily flood unrelated markets.
All that glitters is not gold. Digital native darlings like Twitter, Snapchat and Tesla represent a dangerous trend of well-funded companies with shaky foundations. Twitter has lost around half a billion dollars every year since 2013, and revenue isn’t expected to grow more than 1 percent each year. Snapchat was valued at $25 billion and recently went public despite posting losses of $514 million in 2016 and never turning a profit in any quarter. Tesla is constantly derided for being unsustainable and unable to iron out supply problems. But perhaps the best illustration of the rampant tech industry is ride-sharing behemoth — Uber. Despite being valued at $66 billion, more than Ford and GM, the company lost $2.2 billion last year, its business model is indefensible and its profitability is uncertain. Online retail behemoth Amazon is renowned for taking losses in order to invest back into the business, but even its greatest loss was only $1.98 billion in 2000 (adjusted for inflation). Uber has exceeded that number two years in a row and shows no sign of closing the gap. It’s incomprehensible.
A bubble has five stages: displacement, boom, euphoria, profit taking and panic. The Startup Village at SXSW enjoyed the windfalls of an industry feeling euphoria but it would be wise for financiers of tech companies to proceed cautiously. We should have learned from the crises caused by the hubris of ivory tower investors and C-suite executives in 2000 and 2008. Millions of ordinary Americans were stuck footing the bill and lost their livelihoods as the markets suffocated them. We cannot afford to let it happen again.
Hasan is a business freshman from Plano. Follow him on Twitter @UzzieHasan.