Business

Will The Tech Bubble Please Stand Up?

Though the recent tech boom has been a boon to many savvy entrepreneurs, is the rapid technological growth leading to a more prosperous future?  This is a question many historians ask themselves as they take a look back into history to find out what happened in past economic revolutions.

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I’m going to go ahead and say it – All the people utilizing the tech boom are partying like it’s the late 1920s.  They are innovating and pushing technology to its limits by creating new consumer products.  Many technology based companies are financially growing at a rapid pace.  For example, just last July, Uber became valued at $50 billion.  The company’s idea is very simple in that it took a commodity that almost everyone uses (a car) and added a new realm of income for users of that commodity via easily accessible technology.  Concepts like Uber pop up all the time and success rides this seemingly never ending train of innovation.  However, unlike all other trains, this one in particular doesn’t know if and when it will hit a dead end.  If the utilizers of the tech boom are partying like it’s the 1920s, 1929 is just around the corner.  Analysts and venture capitalists looking to find the next big company to invest in debate have always debated among themselves as to whether or not the tech boom is actually a tech bubble.  However, if history is to be believed, this overflow of technology as consumer products will inevitably cause a collapse of the technology industry.

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As more and more investors place their faith in companies that utilize more advanced technology, there is a great shift in dependency for technology based companies to succeed.  However, if these companies don’t succeed, millions of people lose their jobs, a huge chunk of the stock market collapses, investors go bankrupt, and banks lose all their because the companies can’t pay back the huge loans that they take when they are declining in sales and have a very little margin profit.  Such a collapse would be caused by companies failing potentially due to overcompetition, something that is happening right now in the status quo.  Overcompetition would increase product variation, which would spread consumer money across many companies.  An example of how this spread would happen is when Apple faced a decrease in control in the smartphone industry when Android phones flooded that industry.  A spread in consumer money due to product variation will decrease potential cash flow to all company participants and that decrease will lead to less revenue for all companies.  The decline in revenue would lead to an inevitable decline in profit and in some companies’ cases, the profit will be negative.  Those companies would need to take loans from banks to bring themselves back up and to appease the investors who are dependent on those companies to succeed so the investors don’t back out.  However, the damage has been done and those companies can’t recover.  They cannot repay the bank loans and the banks lose money.  The banks cannot function and they close, which hurts people who are both in and out of the technology sphere.  The result would be a more catastrophic event than the infamous 2008 recession as the companies that failed to compete with bigger companies, investors who placed their faith in those companies, banks who placed their faith in both those investors and those companies, and the common people who place their faith in banks would all fail.

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This type of collapse would almost be like a bubble bursting.  The industry keeps getting bigger only to pop due to a large size.  Thus, it is extremely important to everyone that we should find out whether or not a tech bubble is happening so that we can take preventive measures to make sure that no one gets hurt.  To explore this possibility, one must look at the current technology market to see if a bubble is in fact forming and growing.

It’s very apparent that technology startups are being created at an increasing pace over the years.  There are so many startups that in San Francisco, you can buy greeting cards that say “Congratulations on closing your first round.”  Since the recession, according to an article published in The Economist, technology firms have had an unparalleled influx of new workers.  In 2014, around 20% (as opposed to 10% from 2008) “of American business-school graduates went to work for a technology firm,” which shows the new workers’ increasing affinity for tech firms.  This is a sign that there is an increasing dependency on tech-based companies for a revenue stream, which is necessary for economic stimulation (explained above).

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The article also shows that United States technology fundraising has increased by about $100 billion since the recession of ‘08.  Those 100 billion dollars made undoubtedly significant contributions to Uncle Sam’s recovery from such a tragic recession.  That’s $100 billion coming straight out of venture capitalists’ pockets.  Cyberstates 2015 issued a statement saying that the US tech industry produced around $654 billion in 2014, which means that venture capitalists are practically eating up ⅙ of the industry.  This finding just shows that the success rates of investing in tech companies is seemingly high.  This realization by venture capitalists inevitably leads to more and more investments in the industry.  Investors are “scrambling to profit from the next new thing” and are effectively “pushing up the valuations of the most popular, fast-growing startups by billions of dollars.”  This is another step I mentioned above that is one step down the spiral and into an economic downfall.

The next thing that we have to establish in order to prove the existence of a tech bubble is overcompetition in the tech market.  According to the The Economist article, greed has taken entrepreneurs to a storm of competition.  Companies see that venture capitalists are salivating to find a company that is growing so the only way to do that is to beat all the other competition via vertical/horizontal integration or simply taking bank loans and VC money to pay for the next big product.  Nowadays, big companies like Facebook are known for horizontal/vertical integration.  The article remembers when Facebook made a $1 billion acquisition of Instagram in 2012 and a $22 billion acquisition of Whatsapp in 2014.  Both of these companies were Facebook’s competitors in the social media realm, but they now just make Facebook bigger.  However, only these needle-in-a-haystack tech companies like Facebook could focus on vertical/horizontal integration.  The other companies have to take risky bank loans and have to get venture capitalists to believe in their companies.

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The next step is to prove when these smaller tech-based companies will inevitably fail since they will not be able to keep up with bigger companies that are becoming stronger by buying all these huge assets.  While there is a bit of spontaneity involved since I can’t predict the exact futures of many companies that take bank loans and VC money to grow, overcompetition and such a rapid increase in capital investment has always led to widespread finacial despair.  For example, before the stock market crash of 1929, overproduction of crops led to less revenue for farmers because of the increase in variability and overall rise of stock speculation by investors.  Since that bubble just kept increasing, it popped and all the investors and banks lost their money.  The same seems to be inevitable for the tech industry.  While no one may know exactly when the tech bubble’s pop will happen, it will happen at some point in time.

Already, we established that inherently, tech companies are cropping up at a very fast pace (establishing the seeds for overcompetition), more people are joining tech companies since the recession of ‘08 (establishing the dependency on tech companies to succeed), and venture capitalists are becoming increasingly focused on tech companies in general because they have potential to succeed due to the level of innovation that is currently taking place in America.  Since all three of these factors are increasing, a bubble has been proved.  This means that there should be more concern regarding this bubble as it could lead to one of the biggest economic collapses in all of United States history.

Twitter: @MohitPuvvala

Bibliography:

No Author.  “To Fly, To Fall, To Fly Again.” The Economist.  July 15, 2015.  Accessed May 14, 2016.  http://www.economist.com/news/briefing/21659722-tech-boom-may-get-bumpy-it-will-not-end-repeat-dotcom-crash-fly

No Author.  “UNITED STATES TECH INDUSTRY EMPLOYS 6.5 MILLION IN 2014.”  CompTIA.  February 10, 2015.  Accessed May 14, 2016. https://www.comptia.org/about-us/newsroom/press-releases/2015/02/10/united-states-tech-industry-employs-6.5-million-in-2014

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