Ideally, when people want to invest, they would seek consultation to forecast the return per share their investment will generate. They will examine the business model to make sure that the products or services have real value. Most importantly, they will make sure that the human resources behind the business they want to invest in are people with creative minds who are able to adapt to market trends, technology disruptions and other hurdles in the business cycle.
asasa-59131acdca23bdf8606267f2.png
However, in the face of the technology boom, those thoughts are forgotten. Companies that have not made a profit go public. The irrationality of investors arises from two major things, instant gratification and the fear of missing out. A lot of star-ups that started small but able surpassed those who are incumbent and it only takes 9 years –from the previous average of 20 years-- for a company to reach “the unicorn status” or the $1 billion market. Stories of successful start-ups create a notion that investing in star-ups will have instant gratification. The “FOMO” or the fear of missing out theory explains how investors go as far as ignoring the fundamentals in their search for the next big thing. As consumers flocked to the internet, investors were afraid that not becoming involved would be a huge missed opportunity.These irrationalities are more threatening than what it appears to be. As John Maynard Keynes is said to have observed, the market can stay irrational longer than you can stay solvent. Each week, one start-up company dies due to its lack of capability in creating a sustainable business model or simply due to the saturated market in which it is not able to keep up with other competitors. Even though there is a tangible loss experienced by the market, investors are still clinging on to the hope that at the end of the day, there will still be profit for them. Unsustainable investor enthusiasm that drives asset price expensively up to levels that are not supported by fundamentals leads to a bubble. Tragically, the exact same explanation was used in the past by Alan Greenspan to describe a very similar phenomenon which happened in 1996-2001, The Dot-com Bubble.
The Dot-com Bubbles started when there was a rise in the commercial growth of the internet. Back in early 1990s, lack of infrastructure and understanding on how to use the internet aggravated the idea that having an internet business was ludicrous. However, society's demand to use internet pushed government to make the internet more accessible. As a result, internet caused such a rapid revolution where companies change their business model into an internet based company such as amazon.com, an online bookstore which gain millions within a year or an online auction like eBay. The business strategy that they used was to expand their market as far as using predatory pricing and experiencing loss with the hope of future profit that could cover their loss.
Venture capitalist and investor believe they were the pioneers of a new economy by investing in dot-com companies hence they think it is justified to pump billions of dollars into half-baked dotcom companies that went public. The rush to invest in anything that ended with .com ended in 2001, when most of the publicly traded dot-com companies went bankrupt and trillions of dollars of investment capital evaporated. The NASDAQ peaked at 5,048.62 and fell as much as 78% in the same year.
Venture capitalists and entrepreneurs insist that the Silicon Valley tech economy is not in bubble territory. However, the resemblance between the symptoms in 2000s dot-com bubble and the situation we are in is startling. The catalyst of mobile app industries driven by its plummeting cost, increased access to funds and a rising entrepreneurial culture through crowd funding.
Incubators are seen as an approval that says these companies are the ones who will be profitable in the future, neglecting the fact that at the end of the day, the market is the one who controls the livelihood of the company. This could be seen in Uber which at the moment is operating with a $1 billion net loss in 2016 because they focus on gaining as much consumers as they can in the hope that they are able to recover their net loss in the long run. However, seeing how tech market become is becoming more saturated than ever, like how Uber has a new rival called Lyft or how even amazon forced to accept huge losses on their online physical book store because of their own product, kindle book reader, this strategy does not guarantee a sustainable business model.
Investors need to be more vigilant in choosing which start-ups they want to invest. The same goes for venture capitalist, because they also need to remember that most of the people who created start-ups are usually millennials who are still lacking in terms of experience in the business. Even if they have brilliant ideas, they still need guidance to make sure their start-ups can sustain in the long run.
Unless investors and start-ups become more careful in creating their business model and not blinded by the hype of technology boom, the dot-com bubble could repeat by itself. We are living in facing a new dot-com bubble and this bubble is on its way to burst with a loud pop.
by Safira Majory | Staf Kajian Kanopi 2017
References: