Pop, Goes the Bubble

The Internet is a rather young invention; after all, the World Wide Web was created in 1989 and only released to the public in 1991. It has experienced extremely rapid growth since then, rising to its current prominence, but this growth has not had a smooth journey. At the beginning of the 21st century, investors had been wildly funding Internet-based companies, also known as “dot-coms,” but from 2000 to 2002, saturation in this market suddenly forced the dot-com bubble to burst. We have since recovered, entering into the Information Age with a new host of developments in technology, but questions remain: specifically, is another bubble forming, and if so, when will it burst?

Today’s technology has advanced far from the Internet-based businesses of the early 2000s. Companies have streamlined marketing with artificial intelligence bots, enhanced shopping with virtual reality, and modernized delivery through drones; it seems as if every day, a new startup pops up, offering a different way to “revolutionize” our lives. Yet this abundance of startups appears alarming. After all, very few will become sustainable, or even profitable, businesses in the long-term. Many startups often have a singular purpose, unable to actively expand beyond that role or differentiate themselves from numerous competitors. For instance, take Maple, the food delivery startup. When I was working in New York over the summer of 2016, the other interns and I often noticed our managers ordering lunches through Maple, which enticed several of us to try the service too. With a free sugar cookie and a freshly prepared gourmet meal, Maple seemed like another meal delivery startup, occasionally useful but not particularly unique; it could be compared to already cooked Blue Apron meals. Fast forward to the next summer: I received a text from a fellow intern that Maple had closed down operations. The business model of having a chef prepare meals solely for delivery purposes appeared to be too expensive of an investment and exemplified an overarching problem startups face: carrying a visage of consumer convenience under extraneous work and investments behind the screen.

Maple is simply one example for the plethora of smaller startups working to make an imprint on consumers nationwide. Larger “megacorn” startups, which refers to groups with significant investment and audience, tend to impact the economy on a greater scale. Their private status prevents investors from understanding whether these businesses are actually operating under or above costs. Uber and Airbnb, the two highest valued US startups, illustrate this phenomenon. Both are valued at more than 30 billion USD, yet Uber is still operating with losses, while Airbnb marked its first year of profitability only last month. When these companies go public, their shares may likely be worth much less than their expected valuation. Snap Inc., which went public a year ago, is still unsure of whether it will ever be profitable. Not to mention, these startups also herald several underlying issues in company culture, such as Uber’s sexual harassment allegations, which affect the overall success of these companies if they ever choose to go public. Inflated expectations with these startups are likely to be countered by low profitability and little long-term sustainability.

It does seem as if these startups have been at least slightly wary of a prospective bubble bursting since there has been a slowdown in IPOs. Spotify recently chose an alternative route to a traditional IPO by offering only a third of their company to the public. However, this trend has been contradicted by the explosive growth in venture capital, which leads itself into another root cause of a possible startup bubble. With the growth of the technology sector, all groups, even celebrities like Kobe Bryant and Ashton Kutcher, want in. These groups invest in venture capital firms, which then invest on the initial investors’ behalf. Startups which are acquired or go public are rarities; oftentimes, VC firms’ investments flop. Of course, failures are a natural part of the VC cycle. More concerning, however, is the expedited process of investing as the excess of novel startups provokes a race to invest in the next “Uber” or “Snap;” such habits ultimately result in decreased due diligence on the startup’s ability for long-term growth. The days of Series A to C funding are gone. Protracted rounds of investing concern a multitude of investors, who eventually receive diluted returns. These activities result in overvaluation of startups and inability of VCs to repay their initial investors.

The hype of tech startups must be mediated with the notion that they may be creating a bubble no different than the one experienced less than twenty years ago. Consider a company that once existed called Pets.com, which sold pet accessories online; 268 days after its IPO, it underwent liquidation. Today, there exist several pet related startups, but in a year or two, they might as easily be removed from the market, just like their predecessor. This trend promises to hold true for the vast majority of startups today, not just in the pet accessory industry. Though not every startup is unsustainable, it would be wise to consider how today’s startups, small or large, will fare in the long term.