Sixteen years ago when I got out of school as a newly minted electronic engineer, the market was just free falling fresh off the burst of the dot-com bubble. My generation of young engineers lived through that and carried a very negative feeling toward the phrase "tech bubble", especially given that quite a few of our friends got burnt seriously during the fall.
My view regarding tech bubbles has since evolved quite a bit, especially over the past two years when the entire world is crying foul about a new tech bubble as more than 170 unicorns were born.
In its defense, there's obviously the famous number-driven analysis by A16Z. On the other hand, the philosophical part of me sort of drove me to arrive at another angle toward this: maybe we need tech bubbles for really disruptive technologies to be born and for the world to move forward.
In other words, tech bubbles are actually good for human beings, at least for those among us that believe in technology progress.
Note that while sometimes interlinked – due to the loose monetary policy and general market sentiment – tech bubbles are quite different in both behavior and aftermaths compared to other bubbles such as real-estate markets, bond markets or general stock markets.
Real-estates, bonds and publicly traded stocks are in general pure financial investment vehicles and therefore characterized by perceived risks, expected returns, volatility, etc. One can almost take a cyclic view on bubbles in these markets as they might evolve in the formats, such as from underlying to derivatives, but fundamentally nothing new will be born out of them and nothing old will disappear due to them.
Tech bubbles, however, could be very different.
Despite its bad name, the dot-com bubble in the late 90's has left us lots of legacy, both directly and indirectly.
Infrastructure-wise, the over-investments in inter-continental, submarine fibers (optical cables) brought down once high-flying tech firms such as JDS Uniphase and Nortel. However, that over-supply paved ways for the rise of high-bandwidth multi-media internet startups such as Youtube (2005), when necessary pieces such as last-mile access (ADSL and Cable Modems) and Adobe Flash matured.
In terms of the startups born in that bubble, several have severely disrupted the pre-existing markets and industries and occupy an important part of our lives today:
- Amazon (1994) disrupted retail industry
- Google (1998) disrupted advertisement industry
- Paypal (1998) disrupted payment industry
just to name a few.
When people criticized tech bubbles, they're usually taking the financial view coupled with and an attack on greeds and scandals. They seldom took into account of these long-term benefits.
I guess the real question is: could these technologies and great companies be born without tech bubbles?
While I have not done any rigorous research – that's the job of young finance professors in NYU Stern School trying to earn their tenures – my 16 years of close observation as part of the tech industry tell me that the answer seems to be "no".
In fact, I'm more and more inclined to claim that one needs tech bubbles to encourage really disruptive technologies.
The key is "perceived" risks, as in when people choose where to deploy their human capital, most would factor risks into such choices heavily.
In the year of 1994, any normal human being would have chosen to join Barnes & Nobles and try to climb up the corporate ladder if he or she really loved books. In the year of 1998, any normal human being would have chosen to join a large advertisement agency if they love advertisements, and Visa or MasterCard if they love payments.
Sure, there will always be crazy kids in college dorm rooms or in their parents' garages creating something like Amazon, Google or PayPal just for fun. However, it takes much more than business ideas and prototypes to disrupt an existing system. Once initial traction is proven, it takes execution, strategy and capital (both financial and human) – lots of them – to completely change the status quo.
And among these elements, financial and human capital especially need to be compensated for the perceived risks.
Financial capital comes in the form of venture capital, which tries to deploy return-seeking cold capital into very young companies that have almost no revenues, let along historical stock price trend. Such deployment is almost a black art and without potentially extreme rewards, capital for sure will shun the startups.
And while startup founders could be crazy people like Peter Thiel and Elon Musk, they still need growing teams to have a chance to succeed. And without potentially extreme rewards, why would any coder with a house loan leave his or her comfortable $150k salary and 2-week vacations at Sun Microsystem and join these two weirdos?
Hence for all the good things in disruptive startups to have a chance to happen, potential extreme rewards are necessary. And when that potential becomes reality from time to time, such as when Netscape went IPO in 1995, there will be more financial and human capital attracted to the startups. When certain conditions hold, a tech bubble will be born.
In this sense, tech bubbles could almost be treated as quid pro quo for the birth of disruptive technologies and far from the scary finance derivative products so vividly depicted in The Big Short by Batman, the 40-Year-Old Virgin and Rusty Ryan.
Hence who cares if Uber and Airbnb are really worth $62B and $25B respectively? Both have severely disrupted their respective existent industries and brought more options to the consumers. Their services are here to stay and will continue to benefit lots of lots of people. Even if we stupid VCs made serious mistakes by valuing them at 1 extra digit, $6.2B and $2.5B are still remarkable values created by a 6-year old and a 7-year old.
So why don't we all relax, sit back and enjoy some bubble teas, courtesy of my hometown Taiwan?