Every day seems to bring a new social network and a bunch more apps. And there are more gadgets coming out every day. Which leads me to ask:
Will the Tech Bubble Burst????
And, right now, I’m hearing rumbling — like thunder in the distance — that might herald in a bust.
Remember when the Dot-com bubble burst in 2000? It caused a 1 day drop in the NASDAQ of nearly 2% of its value.
History of the Dot-Com Failure
History is a good teacher, so we can learn a lot from what happened to the Dot-Coms in the last decade.
Having lived through the boom and bust of the Dot-Coms, and, having predicted the bust 6 months before the first failures happened and over a year before the official burst in 2000, I see a similar pattern emerging here. (You can read my interview predicting the Dot.Com bust in the Huntington Herald-Dispatch, but it predates their electronic archives)
Fueled by exuberance over stupendous successes like eBay, Amazon, and Google (even though the were bleeding money), investors tripped over themselves to get a piece of the next multi-billion dollar tech giant. This exuberance cause venture capitalists to sink billions of dollars into tech offerings without due diligence — mainly on faith in fairly shaky financial projects.
Investors from large funds to individuals clamored for ownership, driving stock prices into the stratosphere despite low P/E ratios. For many Dot-Coms, venture capital and sale of stock were their only income covering massive expenditures. Yet, soaring stock prices made these entrepreneurs and their investors overnight millionaires.
Monetizing the Dot-Coms was always problematic because too many offered essentially the same solution in a marketplace where survival depended on massive numbers of users and some sought these users among target markets too small to support the numbers needed for profitability.
Just as the Dot.Com boom produces some massive successes, it produced large numbers of massive failures, such as Pets.com and The Learning Company whose failures cost investors billions of dollars.
Do We See Some Similarities to the Tech Bubble?
Looking at the similarities between the Dot-Com bubble and the Tech Bubble we see some dramatic concerns that the tech bubble burst is at hand. It might be 6 months or several years before the tech bubble will burst, but I think it inevitable.
- First, the number of new apps introduced into an already saturated market is a serious concern. According to a question raised on Quora, nearly 600 new apps become available EVERY DAY just for the iPhone alone. When you consider all the Android apps, Computer apps, and new social media platforms, and SAAS (software as a service) it boggles the mind.
- These apps, platforms, and SAAS require massive numbers of eyeballs to even approach sales. And, there aren’t enough eyeballs for all these products so a few will survive, but most will fail just as the Dot.Com’s did before them.
- Vast quantities of cash are being thrown at these start-up tech firms. Many have true potential, but a number will never turn a profit. Investors are attracted by the up-side potential, which is enormous if you back the next Facebook or Pinterest.
- Investors aren’t looking at traditional metrics before investing in the tech bubble for fear of missing out on an enormous payout.
How to Prepare for the Tech Bubble Burst?
My advice is the same as it was in mid-1999:
- Slow down and do your research. It’s tempting to jump into the tech bubble, but remember the old adage: “Bears get theirs; and bulls get theirs; but pigs get nothing.” You may not come away with billions, but you may not lose billions either. Look at how much investors lost on MySpace, which no one predicted would fail as spectacularly as it did.
- Ask yourself — “what consumer or business problem does this technology solve?” If the answer is unclear, you should probably stay clear.
- Do a full environmental scan before investing, especially an analysis of the competition and market potential.
