To keep you up to date with latest talks and kind of news in the tech community, we decided to give you a short explanation of what the tech startup bubble is since more and more media sources mention this term in their reports. To understand what all those people are talking about, it is first essential to figure out what “bubble” in general is about.
To put it simply, a “bubble” is a situation, where assets’ prices rise higher than their true value without any supply and demand forces justification. And these usually extra-high prices will remain completely different from the rest of the market until the ‘bubble bursts’ and prices go into freefall.
Let’s have a look at the typical bubble life cycle from the startup point of view, or to be the correct tech startup view. In 2015, we have seen several major changes in tech startup industry, featured by several cases of overvaluations and significant devaluations, ranging between 20% and 60%.
There have been recognized five key points in the bubble cycle:
Investors get impressed by some revolutionary new product or innovative technology, which can be considered as major market changes.
In 2015, it is possible to highlight two most significant changes in the tech market, though there have been much more. The first one is about cloud and its impressive breakthrough in creating affordable storage solutions. With the Internet, power it became much cheaper to set and run numerous complicated operations.
The other market change deals, particularly with the private market concept. Since Fidelity fund invested in Facebook in 2011, other investors realized that it can be very profitable to start making investments in certain private tech projects instead of traditional profit search in real estate markets or stock exchanges. What are more, even large financial institutions faced a kind of mentality displacement and directed their strategies to the private sector
At the next bubble stage prices are gradually rising, while doubtful assets attract more and more investors to the market, who join in fear of missing out potential ‘prey’.
Since 2011, more than 100 tech companies have acquired the ‘unicorn’ status. That unicorn race is widely criticized, since a lot of tech projects are really overvalued for no reason, just because of too much attention from investors’ and media side. Still, we cannot stop this unicorn boom.
This bubble stage is critical since here the assets in question have reached extremely high valuations and some people start noticing that those prices are not justified.
In 2000, there was a so-called dot-com bubble, dealing with the fast Internet market development. At that time, NASDAQ companies’ composite index exceeded GDP of some countries, which is totally crazy! In April 2015, NASDAQ announced an even higher peak!
At this point, the smartest have already recognized the sign of possible bubble burst and sold their assets to get the profits. Still, the burst may not appear for months, or even years after that.
Two major tech investment funds in the US – Blackstone and Fidelity – published their reports this year, where they devalued some tech companies by 20-60%, among which are Dropbox and Snapchat. Public devaluation of tech companies is done for the first time! Some investors also start selling a part of their shares in tech companies.
This bubble stage is characterized by extremely fast price falls. Now speculators are ready to cash at any price, just to get rid of ‘bad’ assets.
Experts say that we are quite far from panic yet, but we should be on alert. There is no exact moment predicted. Anyway, remember that even some quarterly report may trigger his hysteria.
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