The new tech bubble

Some time after the dotcom boom turned into a spectacular bust in 2000, bumper stickers began appearing in Silicon Valley imploring: “Please God, just one more bubble.” That wish has now been granted.

Compared with the rest of America, Silicon Valley feels like a boomtown. Corporate chefs are in demand again, office rents are soaring and the pay being offered to talented folk in fashionable fields like data science is reaching Hollywood levels. And no wonder, given the prices now being put on web companies. So is history indeed about to repeat itself? Those who think not point out that the tech landscape has changed dramatically since the late 1990s. Back then few people were plugged into the Internet; today there are 2 billion netizens, many of them in huge new wired markets such as China. A dozen years ago ultra-fast broadband connections were rare; today they are ubiquitous. And last time many start-ups (remember Webvan and Pets.com) had massive ambitions but puny revenues; today web stars such as Groupon, which offers its users online coupons, and Zynga, a social-gaming company, have phenomenal sales and already make respectable profits. The this-time-it’s-different brigade also points out that the 1990s bubble expanded only after numerous web firms were floated on stockmarkets and naive investors pumped up the price of their shares to insane levels. This time, there have been relatively few big Internet IPOs (though that is likely to change). And there is no sign of the widespread mania in the high-tech world that occurred last time around: the NASDAQ stockmarket index, a bellwether for the tech industry, has been rising but is still far below its peak of March 2000.

In one respect the optimists are right. This time is indeed different, though not because the boom-and-bust cycle has miraculously disappeared. It is different because the tech bubble-in-the-making is forming largely out of sight in private markets and has a global dimension that its predecessor lacked.

With luck the latest web bubble will do less damage than its predecessor. In the 1990s Internet euphoria caused a dramatic inflation in the price of telecoms firms, which were creating the infrastructure for the web. When Internet firms’ share prices plummeted, telecoms investors suffered too. So far, there has been no sign of such a spillover effect this time around. But the globalization of the Internet industry means that many more people could be tempted to dabble in web stocks in the current boom, adding to the pain of the bust.

When will that be? This paper warned about both the last Internet bubble and the American property bubble long before they burst. Irrational exuberance rarely gives way to rational skepticism quickly. So some bets on start-ups now will pay off. But investors should take a great deal of care when it comes to picking firms to back: they cannot just rely on somebody else paying even more later. And they might want to put another bumper sticker on their cars: “Thanks, God. Now give me the wisdom to sell before it’s too late.”