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Just blowing bubbles

The word ‘bubble’ has popped up in headlines on news and tech websites with increased frequency lately. Sadly, most of these articles are less about analysing the startup investment market as it is now and more about making ominous predictions of another dot-com crash.

Rather than adding to all the cheap crystal ball wisdom  out there, I’m going to simply look at the context around bubbles and encourage you to make up your own mind.

Are we in a bubble or not?

The two most common arguments for the existence of a tech bubble are that valuations are high, and that many, if not most, investors are saying there’s no bubble.

Let’s discuss that second point first. In general, it’s true that investors in a particular market typically don’t acknowledge a bubble until it’s in the process of bursting. A quick search can turn up all kinds of comments from people swearing there was nothing to worry about even as the market tumbled.

So, the reasoning goes, since people are denying there’s a bubble, that must mean we’re in one. However, the fact that most people disagree with a claim is not good evidence that the claim is right.

Moreover, just as investors are quick to dismiss talk of bubbles, journalists are eager to play it up. After all, predicting the worst is easy and, since pundits rarely put any kind of time limit on forecasts of economic doom and gloom, the prophecy is sure to be fulfilled at some point, even in the case of a moderate downturn. It’s worth being just as skeptical of cheap cynicism as it is of blind optimism.

As for the observation that valuations are very high, there’s no question this is true. Uber, valued at US$51 billion, Airbnb (US$25.5 billion), and Snapchat (US$16 billion) are just a few of the examples people typically point to. The real issue is whether these valuations are so unjustifiably inflated that they can only come down in a dramatic fashion.

My personal view is that some of these valuations will come down in the near future, but I don’t see any reason to think they’ll suddenly tank altogether. Once again, the fact that an object is on a high shelf is not proof it’s about to fall to the ground.

Could whatever we are in still burst?

Even if valuations do come down dramatically – for excitement, let’s call that a crash – it won’t necessarily have the same effect that the dot-com crash did. There are many differences between then and now, but the one which stands out to me is the significant lack of IPOs.

As Benedict Evans and his colleagues at Andreesen Horowitz have pointed out, the vast majority of successful tech startups are being funded privately this time, as opposed to listing on the stock exchange. In fact, all three of the companies I listed earlier are backed by private investors and VC money, not public shareholders.

This shift away from a public listing being a necessary step on the road to global success has several implications. From the point of view of the likelihood of a crash, it’s important to note that private markets aren’t as volatile as public stock markets. Public shares can be bought and sold almost instantly at the whim of the investor. This means a wave of panic can appear seemingly out of nowhere, with sudden mass sales driving a company’s share value down drastically in an afternoon.

Shares in a privately-owned company can’t be offloaded so easily. Private investors are restricted in who they can sell their shares to and, in some cases, when they’re able to sell. For the successful startups mentioned above, for whom most investment comes from large VC firms, institutional investors are highly unlikely to want to suddenly liquidate their holdings unless they genuinely believe the company has no chance of bringing in a return on their investment.

VCs aim to be well informed about the companies they invest in, and their funds are set up for long haul investments. The sudden selling which causes a bubble to burst is simply less likely to occur in a private market. The popularity of private investment for tech startups also means public share markets are less exposed to the risk of valuations crashing.

Should we panic anyway?

For a by-the-numbers approach to the differences between the dot-com era and now, it’s worth stepping through Evans’s entire presentation. In the tech world, Evans is known for putting together graphs as provocative as any Cubist painting.

From an Australian point of view, all the talk of a bubble seems especially overblown. In a sense, our tech investment scene still hasn’t recovered from the dot-com crash. With the small number of local startups managing to secure VC funding and the even smaller number listing on the ASX, identifying our current situation as a bubble sounds premature to say the least.

To be fair, these articles are, for the most part, talking abut the U.S. But since Australia is still just finding its feet in the startup economy, we shouldn’t let talk of a bubble – justified or not – scare us off. After all, bubbles burst and markets rebound. If anything, a downturn in the U.S. tech sector could open the door for startups in other countries to make more of a global impact.

Kit Kriewaldt is an entrepreneur and strategic communications specialist. He loves to talk James Bond, cocktails, and psychology – focusing particularly on decision making and consumer behaviour. He is also Chief Marketing Officer of digital communications platform Liquid State. Image credit: Maciej Szlachta/tookapic

About Kit Kriewaldt

Kit Kriewaldt is an entrepreneur and strategic communications specialist. He loves to talk James Bond, cocktails, and psychology - particularly the topics of decision making and consumer behaviour. He is also former Chief Marketing Officer of digital communications platform Liquid State.