Tech start bubble

Is There a Tech Startup Bubble on the Horizon?

There was a time during the early 2000’s when investing in technology was at a peak.

Brokers would cold call average investors all over the country, offer the latest, greatest technology stock offering and get more yes’s than ever before. Since that time, things have changed, dramatically. Brokers cold calling has pretty much come to a halt, everybody is skeptical, but we could be facing a bubble similar to the dot-com bubble that occurred from 1999-2001.

In fact there was a popular movie that recently came out based on brokers targeting the everyday investor:

WallStreet2013poster

The reason I bring up everyday investors who have very little knowledge investing in companies that are highly complex and difficult to understand, is because something similar is happening today.

Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times. … Buy into a company because you want to own it, not because you want the stock to go up. … People have been successful investors because they’ve stuck with successful companies. Sooner or later the market mirrors the business. – Warren Buffett

The problem that is beginning to become more prevalent today, is people who have no understanding of the workings of silicon valley, and how hit and miss technology, app, and social media companies can be are flooding the market with money. Everyday you hear of a new story of some guy who made his money through an inheritance, becoming an angel investor in some company trying to be the next Facebook.

Let me be the voice of reason in this situation:

If you have no experience in the industry you’re investing in, no personal relationship with the company, and the company has no goal date of profitability, you should not be investing in that company.

What we call the people who fit the description I just described are speculator’s.

And when too many unqualified speculators are propping up the valuation of companies who should have never been started, there begins to be an expansion of a bubble.

Don’t Take My Word For It

Tech bubble collage

I’m not the only one making these claims either. In fact, they’re starting to come up more and more and from people who are deeply ingrained in Silicon Valley.

Here’s a conversation that Tim Ferriss, author of The 4 Hour Workweek and also the host of my personal favorite podcast The Tim Ferriss Show, and Kevin Rose, a technology entrepreneur in the heart of Silicon Valley: (You can find the video here)

Kevin: So you think there’s a bubble going on right now?

Tim: Yeah, I do I think.

Kevin: But it’s not going to hurt anyone when it pops?

Tim: That’s not true, I think it will hurt people who are getting way too much money, with crazy terms, and bad businesses.

In my opinion, having somebody who is very much synonymous with angel investing in technology, making a claim that we’re currently in a tech bubble is a BIG deal.

I’m sure the majority of you have heard of Steve Wozniak, the co-founder of Apple, Inc. During a recent speech he had this to say:

I feel it’s kind of like a bubble because there is a pace at which human beings can change the way they do things. There are tons of companies starting up.

There’s so many people talking about an oncoming tech bubble that people are already writing how-to survive the tech bubble for companies like this one on Entrepreneur. It’s Silicon Valley’s version of doomsday prepping.

One entrepreneur that sees a bubble burst on the horizon is Mark Cuban. Mark’s reason for thinking we are in tumultuous times is because many venture capitalists have no liquidity. There’s not way they can get out. Like the captain of a sinking ship, many VC’s will have no choice to go down with the company their supporting, because there’s nobody else who will take over.

What Do the Numbers Say?

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It’s great to look at people in the industry stating they believe a bubble popping is sure to come, but what are they basing these claims on.

Enter the National Venture Capitalist Association.

In a recent article (which you can find here) Internet-specific companies captured $11.9 Billion in 2014, which just so happens to be the highest level of Internet-specific investments since 2000, the heart of the dot-com bubble. The increase in dollars entering Internet-specific companies from the year before was a whopping 68%! Such a flooding of capital is sure to lead to some sort of fallout.

NVCA also reported that 27 venture-backed IPOs raised $4.4 billion in the last quarter of 2014, the period was the seventh consecutive quarter with 20 or more venture-backed IPOs, another statistic that hasn’t been seen since 2000.

There are simply too high of valuations for too low of revenues. Snapchat, a messaging application has a valuation of soon to be $19 billion, and revenues of who knows what because they have yet to figure out a way to make money.

There’s seemingly 100’s of companies, which much fewer users that are being over inflated without any plan for generating cash flow. Sure, some have done it in the past, but there’s only so many Zuckerbergs out there.

And this is another piece of advice to high-schoolers dropping out of school and moving to Silicon Valley chasing a dream: if you can’t do it where you are, you probably can’t in the valley where there’s 5,000 people seeking the same money, having the same idea as you. Stay in school.

How Can the Average Investor Combat the Bubble?

With all of this hoopla going on about a potential startup bubble, I’d like to clarify that I don’t see the bursting of the bubble affecting the majority of the population. I mainly believe this because the majority of people aren’t investing in startups, but rather index funds. That being said, there’s still some things you can do to protect yourself:

  1. Diversify: This is as basic an investing concept as buy low, sell high. Spread out your dollars over many industries to avoid unsystematic risks. Sure, a portion of your portfolio may see a dip if the tech bubble pops, but you’ll be invested in other areas to spread that risk.
  2. Invest in what you know: If you don’t really understand how coding works, or much less how to operate a computer, stick to other industries. Technology is not, and won’t ever be the only industry growing. You surely have an interest in something that is much greater than the general public– use that to your advantage. Invest in things you know.
  3. Follow the news: Not being aware of something is not an excuse for being affected by it. Be proactive and prepare.
  4. Look for safe investments: If you have no tolerance for risk, then look for investments that offer very little. You don’t have to ride the waves if you don’t want.
  5. Hire a professional: I may be biased, but a financial advisor can help you diversify, and prepare for what’s to come. Not only that, but a knowledgeable advisor will be able to answer your questions and help you put a plan in place that can weather the storms.

If you’ve found this helpful, not helpful, or just have something to say feel free to leave a comment or get in touch with me on my contact page.

– Cooper Mitchell

 

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