Tech Leaders Deflate the Bubble Talk
Shutterstock / Aaron Amat
Surprise: Big names in tech don’t think we’re in a bubble.
The debate over the B-word has heated up recently amid the curious push-pull of climbing private market valuations and the prolonged public tech stock slump. But the general consensus among speakers and attendees at the Code Conference this week was that any talk of imminent doom for the sector is vastly overblown.
Kleiner Perkins partner Mary Meeker first sounded that note during her annual Internet trends slideshow on Wednesday, pointing out that things got far frothier during the peak of the dot-com boom.
Among other points, she noted that tech public offerings last year were 73 percent below 1999 levels while venture financings in the sector were 77 percent below the peak of 2000.
“We think there’s still … a lot of opportunity,” she said.
Similarly, SoftBank CEO Masayoshi Son batted away any bubbly talk related to Alibaba, in which his company holds a major stake. He argued it should be priced aggressively in its highly anticipated initial public offering because it’s “delivering cash profit.”
For that matter, the broader tech market is in much better shape than the last go-around, Son added.
“This time I wouldn’t call it a bubble,” he said.
But, of course, pointing out that things aren’t as overhyped as they were in 2000-2001 — the most painful tech bust in recent memory — doesn’t mean there isn’t some excessiveness on display. Cycles don’t reach the same dimensions on every spin.
And it’s easy to see why some observers are concerned. The price tags on fundings and acquisitions seem to be defying gravity. And the pileup of conspicuous consumption, techie tensions, herd mentalities and dubious business plans is triggering Spidey senses in observers who have been through a market turn or two.
To some degree, the way people respond to the bubble issue depends on how they hear the question.
For many, are we in a tech bubble translates as: Are we on the edge of dot-com bust 2.0, a collapse that dooms thousands of startups and forces flocks of young coders to move back in with their parents?
Heard that way, with its whiff of schadenfreude, the question tends to trigger defensive responses.
But let’s pose it a more neutral and specific way: Is Silicon Valley money flowing to startups at a level that will, sooner or later, prove unsustainable?
That’s a lot harder to dismiss out of hand.
In fact, venture capitalists are the first to complain about the lofty and often illogical price tags for getting into deals. And tech headlines are filled with head scratchers of business models.
Does the world need four startups competing to pick up your laundry? Do consumers want an app that finds adoptable approximations of dead pets? Should the fact that Justin Bieber is playing angel investor scare the bejeezus out of everyone?
(Answer key: No, No, Yes.)
It’s hard to see how that level of investment into this many silly ideas can keep going forever.
Most respondents did acknowledge that various startup valuations are moving into uncomfortable territory and that some level of correction will happen eventually. But ultimately most believe that the next market dip won’t be as deep as the dot-com bust — and that it’s still a long way down the road.
“There are higher valuations now than five years ago by quite a bit and I’m sure there will be some normalization of that at some level,” said Mike McCue, chief executive of Flipboard. “But in my opinion it’s not a bubble like in 1999, where the whole sector and economy crash. It’s mostly limited to private company valuations.”
“We’re in early innings still, we have only just begun to grow as an industry,” McCue said. “The best days are ahead of us.”
Economist Ken Rosen, contacted for a perspective outside the tech industry echo chamber, ended up reiterating that view — right down to the baseball metaphor. He noted that public tech stocks were looking more bubbly before the recent public market correction.
“The question is whether it keeps going,” said Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. “Right now, we’re at an inflection point.”
To date, the decline hasn’t dampened acquisitions, private market valuations, hiring or general enthusiasm. But if the market takes another big tumble that could change.
The stock price is the company piggy bank. When it falls too far, businesses lose their ability to strike big deals and lure recruits with generous options.
But that’s not what Rosen expects to happen — not yet, anyway. He has said there’s enough real cash being generated to likely drive several more years of expansion.
“Maybe we’re in the fifth inning,” he said.
Overvaluations notwithstanding, Homebrew partner Satya Patel stressed that many of today’s startups are going after real markets — and some of those markets may be bigger than they initially appear.
“We’re living in a world where markets can be many times larger than they were previously and where business models can have high upfront costs but enormous, long-term value,” he said in an email.
He noted that Uber is competing against taxis today, but that the company may represent a much larger play for all of local transportation — or perhaps even global logistics.
“I’d argue we’re seeing valuations that reflect the potential market sizes these companies are addressing,” Patel added. “Not all companies will live up to the potential of their markets, but the ones that do will easily justify their current valuations.”
Ultimately, Rosen said it’s not a question of whether the boom will end, just when it will and how much it hurts when it does. Sooner or later, the market will sort the winners from the losers — because it always does.
“Half the companies we’re creating today will go out of business,” Rosen said. “If you look at the Valley’s history, that’s what we’ve seen; that’s the nature of it.”
“Booms always end badly,” he said.