March 22, 2014
Remember the tech bubble that took place in the late 90s and early 2000s? Hard to believe how dumb the sentiment was placing huge valuations on companies that owned a website but made no money. However, in some cases at least, the argument could be made that it was worth the gamble. After all, many of these bubble sites were based on the premise that online shopping would become the norm, and these companies were creating platforms to buy products online in specific industries. Online shopping did take off and continues to grow. The problem for many, such as pets.com looking to corner the pet food and supply market, was not having the foresight of a super mega online retailer where consumers could buy anything which is the case with amazon.com.
The bubble popped and investors were reminded that ultimately a company’s stock value is related to the earnings and eventual dividends it is able to pay. Of course future growth plays a role, but you can never forget that zero multiplied by the highest of numbers is still zero. Surely we learned are lesson and such a tech boom and bust will never happen again.
Just kidding! Welcome to 2014, where ideas are worth billions and profits are “so last century”. This time the bubble focuses on social media and companies who are making mobile apps that often provide a free or inexpensive service in order to attract users in hopes it will spread like a forest fire. Some of these ideas are solid, fun, and even beneficial. Surely you’ve seen some of these companies’ fancy websites with large, easy to read fonts that force the user to keep scrolling down to learn more about this new mysterious, but cool concept, probably in beta mode and not quite yet available to the public. However, as a business model they don’t stand up and are helping to set up the next great tech boom and bust scenario.
Many new public tech companies acquired many smaller businesses prior to filing their IPO in order to make themselves look more attractive. As the initial celebration of going public ended, creating the joy kill of having to create real profits, many executives in these companies eventually left or got pushed out. Looking for work, they have found it in start-ups attempting to deliver good ideas through the growing mobile app market and backed by venture capitalists. In the short run these employees have nice well paying jobs, but eventually profits need to be made for a business to survive. This is why the next tech bubble is around the corner; there just won’t be enough of these tech companies producing real profits.
Fifteen years ago hard working people lost money when a pet food and supply company creating an online shopping platform did not attract enough customers. This time, money will be lost on some mobile app that tells you which pet store in your city has the cheapest prices for a specific dog food. Will there be enough people who are willing to pay for an app that tells them where they can save a buck or two? My guess is no.