It is the year 2000. Nina Brink, CEO of internet provider World Online, gives everyone a thumbs up after a successfull IPO of the company. It wouldn’t last. Despite a strikingly ‘active’ ABN Amro soon thereafter the stock plunged. The damage to the investors was estimated at 2.3 billion Euro.
Although 12.000 investors were compensated, following a 110 million euro claim settlement, this event marked the burst of the internet bubble. Many would argue that the bubble was to burst regardless of World Online. Nevertheless, it happened and it took much of us by surprise.
As former manager of The Internet Plaza, an ISP that was incorporated by World Online shortly before the IPO, I strongly advised an investor not to invest in WOL, preventing them from a major loss.
But it should not have been a surprise. Two years prior to the dot-com boom the number of tech-related IPOs had dropped dramatically. Bad IPOs scared off investors from showing interest in new dot-com IPOs and as a consequence blocked the way out for VCs, the majority of the investors in the technology sector. While the amount of risk capital had already dried up in Silicon Valley and Silicon Alley, World Online took advantage of European investors that were unaware of the events taking place in the US and swiftly took their last opportunity to hit a homerun. Nina’s thumbs up were also directed at the working class people that invested their pensions and savingsaccounts. And lost.
It is 2016. After the peak in 2014 the number of IPOs has dropped dramatically. Some of the tech IPOs weren’t as successfull as prospected. Closing the backdoors for VCs. Financing for startups fell 29% in the fourth quarter of 2015 from the third quarter, and it dropped another 8% for the first three months of this year. Startups began scrambling to get their finances in order. Layoffs mounted, perks vanished. For consumers,prices started to rise.
So the big question is: Is the current tech bubble about to burst once more?
If we look at the number of unicorns being created (“unicorn” is an industry slang for startup companies that are valuated at $1 billion or more), we can see it is almost coming to a standstill:
The fantasy is unraveling
This has left Bill Gurley, a top tech dealmaker, to state: the unicorn fantasy is unraveling. One year after Fortune Magazine had declared this fenomenal growth – of startups being valuated by venture capitalists at more than $1 billion – the Age of the Unicorns. Now they send out a warning: Silicon Valley’s $585 Billion Problem: Good Luck Getting Out.
Access to capital
Never in the history of venture capital have early stage startups had access to so much capital. If a startup in 1999 needed $30 million to stay ahead of the competition, today’s Unicorns require at least 10 times as much, some even 30 times.
2007 versus 2014
Yet, as you can see in the graph below, the pattern of 2007 and 2014 looks similar:
According to Anshu Sharma of Storm Ventures, the idea of unicorns becoming extinct is greatly exaggerated, in response to rising problems surrounding Theranos, a startup in the medical technology field. If Therano is to die, it will be the first and – according to some – could trigger a domino effect. Anshu believes the unicorns are not cold, but winter is upon us. Investors have incurred losses in energy stocks and combined with slowly rising Fed rates this has created the perfect winter storm for equities.
To burst or not to burst
Ofcourse, I agree with Anshu, the strong will prevail and the weak will fall. Just like the energy sector some unicorns wil be able to cut costs rapidly. But nobody knows what will happen if $585 billion of tech investments suddenly starts to vaporize. It can’t be good.
As Isaac Newton stated wisely: “What goes up must come down.”