Assessing the tech bubble: How to prepare for the impending tech storm

Take a moment to think back to 1999. The internet was still a relatively new concept, and people were excited about it — a little too excited. The dot-com bubble burst was a wake-up call to many entrepreneurs and investors, but people tend to forget things after a couple decades. This is familiar territory once again. 

In the late 1990s and early 2000s, the internet boom gave the world tech giants like Amazon, Google, and Facebook. And the more recent smartphone boom brought Uber, Airbnb, and Snapchat. And now the tech world is focused on the latest and greatest technologies, such as AI, cryptocurrency, and the Internet of Things. 

While the startup world has always been a crazy and hectic place, there’s more hype around these new businesses than ever before.

Celebrities are now getting involved in the tech investment space, and venture capitalist firms are fighting for the chance to invest in up-and-coming technologies in hopes that they’re the ones to discover the next Uber or Airbnb. And there’s a lot more “FOMO investing” — or people who are investing just because everybody else is doing it. 

All these signs point to the idea that people are following the money in startups. But is there really enough money to go around? There are plenty of examples of excessive spending cultures in startups that are not profitable, and too many startup founders spend more time networking with other founders than, you know, actually working on growing their companies. 

And startups often play by their own rules, relying on unusual KPIs such as burn rate and user growth rate that, while important to track, don’t paint the whole picture when determining whether a business is sound and profitable.

So does this mean we’re in the middle of a tech bubble? 

The anatomy of a bubble 

Before answering that, it's important to define the term “tech bubble.” A bubble in the tech world is caused either by inflated expectations of new technologies — the sort of zealous anticipation of the future that’s been well documented in macroeconomic research — or by inflated expectations of the success of tech startups. 

Today’s tech market contains a bit of both, which isn’t surprising because inflated technology expectations often lead to inflated financial expectations. 

Furthermore, a bubble in any market is often accompanied by several clear warning signs. For starters, media coverage of any bubble market is often unwaveringly positive (until it’s not). Incessantly favorable coverage does little to encourage critical thinking among investors. And when this happens, there’s usually no shortage of financial advice from self-proclaimed "experts," eager to take advantage of a surging market and waves of new investors who are looking to make easy money. 

There’s also a surge of interest in these new technologies (for example, does anyone remember all those nanotech business conferences in the early 2000s?), and everyone wants to be a part of it. People flock to these startups, eager to leave their old (well-paid) jobs in hopes that they'll earn more money (or easier money) in the tech startup world.  

Despite the fact that many startups are simply using existing technology in new ways, the amount of money being thrown at these companies is astounding. 

The rise of the 'decacorns' 

Today, there are seemingly countless examples of companies that show signs of valuations based on hopes and dreams rather than sound business models. A lot of these companies are finding early success simply because traditional, established companies have failed to wake up and realize the world is changing. 

While incumbents typically have the resources and customers that any startup founder would kill for, venerable companies in the automotive, financial services, and healthcare industries (just to name a few) have been displaced by businesses that focus solely on their technology and aim for massive growth. 

Investors have also been willing to place big bets on business model experimentation. For example, Uber, arguably one of the most iconic startups ever, was valued at a whopping $69 billion in its latest round. Although it's been a bumpy ride lately for the company — and it will probably see a lower valuation in the next round — it’s still clear evidence of investor confidence in the sustainability of new business models for transportation. 

Similarly, the growing subscription economy has been a popular target for investors eager to take advantage of the shift in consumer behavior that has built companies like Netflix and Spotify into behemoths over the past 10 years. 

But in a world where “unicorns” can become “decacorns” — startups like Airbnb and Uber are valued in the tens of billions of dollars — there must be an end in sight. The signs of a bubble certainly seem present, but no one knows when (not if) it will burst — or at least deflate. For investors and tech leaders alike, it’s important to know the risks endemic to this type of market, as well as how to plan for a future that isn’t so bubbly. 

Weathering the storm 

While the ride up is exciting, as you watch valuations continue to rise (and your earnings along with them), try not to overreact. Stay sober when looking at valuations, and try to understand the technology you’re investing in. The more informed you are, the easier it will be to see through the hype. 

At the same time, you don't want to overreact on the way down, either. Instead, see through the gloomy outlook and find the hidden gems. There are always plenty of interesting investment opportunities in a down market if you have the intelligence and resources. 

One of the biggest mistakes business leaders often make at the first sign of a bursting bubble is to panic. They’ll cut funding to R&D, innovation, and business development, which can ultimately be fatal to a business. This happened in 2000 when the dot-com bubble burst, and many companies left this new thing called the internet to go back to brick-and-mortar stores. 

What would have happened after 2000 if book chains, publishers, and other companies instead would have continued to embrace and invest in digitization? No one will never know. The reality is that most of them didn't. As a result, some of them went bankrupt, and the rest have been trying to catch up. 

For you, the key is to simply be aware of the market and your goals in it. Don’t pay too much attention to the sensational news. Positive or negative, these news stories should never be the primary driver behind your investing or business decisions. 

Also, stay curious and continually educate yourself on the technology that interests you, as well as the expectations others have for it. And remain diligent about understanding your industry, changes in the value chain, and threats to your business model. 

In order to succeed in this type of market, you’ll inevitably have to leave your comfort zone. Embrace that fact, because as this bubble continues to grow, the last thing you want to do is get comfortable, fat, and (temporarily) happy.

Nicklas Bergman, Serial Entrepreneur, Deep Tech Investor and Futurist

Image Credit: MaximP / Shutterstock