The possibility that we are in a “tech bubble” is a hot and much contended issue in both Europe and the US. So why all the concern? Many market analysts and experts, drawing on comparisons with the dot-com crash, are warning of a similar trend in the current tech industry, characterised by inflated company valuations and a saturation of marketplaces.
China’s recent stock crash has added to concerns about large tech business valuations and the effects on the economy should these companies fail. Other macro issues, such as schools implementing compulsory coding classes due to a lack of developer talent and a potential EU exit for Britain, are dragging concerns about the tech industry into the mainstream media. Working closely with angel investor networks provides a great deal of insight into both the investment and tech startup spheres and in turn provides strong evidence against the tech bubble argument. Why?
Joseph Schumpeter was a twentieth century Austrian economist. His main theory was around “innovation waves”, or long waves of economic activity working in 50 to 60-year-long cycles. According to Schumpeter, a healthy economy is not in equilibrium, but constantly being disrupted by technological innovation, the Industrial Revolution being a good example. It wasn’t a bubble, but a genuine economic shift brought about by technological change that also had far-flung ramifications for everyday life.
In recent history, we have witnessed two monumental shifts: the Industrial Revolution, which saw a transition to new manufacturing processes between 1760-1820 and 1840; and the Technological Revolution between the mid 1800s and the start of World War One. The introduction of Bessemer steel is considered to have been a catalyst of the Technological Revolution. It was the first inexpensive process for producing steel en masse, and arguably less conspicuous than the developments that led to the Industrial Revolution. However, it was a change that brought about early factory electrification, mass production and the production line, which all had huge ramifications for the availability and pricing of previously luxury goods.
The dot-com boom was not a technological shift akin to the sort of revolution that Schumpeter was talking about. But now, what we are seeing with the rise of the tech industry is more of the ilk of the Technological Revolution in terms of its influence on the economy and on modern-day lifestyles – a Digital Revolution, if you will.
Like Bessemer steel, the catalysts for the Digital Revolution are not always conspicuous: machine intelligence; the ubiquitous web; an influx of screened devices. But these advances are allowing consumers to be continually connected to the network through which they can now continually access information about their surroundings as well as goods and services. The ubiquity of mobile is forcing the way we interact with our environments to change. The rise of tech companies is merely a manifestation of this.
Previous revolutions have shifted societies from agrarian lifestyles to urban living, moved workers from pulling carts to the factory line, where they helped produce the cars that had replaced them. There are no signs that the Digital Revolution will be any different as it births disruptive businesses that challenge conventional markets.
Companies like Gousto, Yplan and Property Partners are having great success in cutting across sectors and challenging existing markets like the food industry, event companies and the property market. And all of this has been made possible by a shift in technology. One sector that is benefiting in particular is the sharing economy, as an increased access to a global network is translating into an ability to create platforms for worldwide sharing. The necessity of ownership is being reduced and sharing economy businesses are becoming global players in industries previously dominated by conventional service providers.
It is also worth drawing attention to a key difference between the dot-com boom and the tech boom today: monetisation. You only have to look at annual revenue numbers for the biggest tech companies – such as Google’s $66bn in 2014 – to see that they make their own money, with even younger tech companies such as LinkedIn reporting $2.2bn in revenue for 2014. This all points to a very healthy market in which tech companies produce huge amounts of money as well as taking substantial investments.
How different is your life now in terms of the way you use technology to interact with the world around you? At the time of the dot-com bubble, the ideas being funded were exciting and novel but not integral to our day-to-day lives. The key message here is that, with investors focusing on businesses’ ability to monetise and Schumpeter’s prediction of periodic revolutions, your own demand for accessibility to networks via ubiquitous mobile technology is proof enough that we are in the throes of a Digital Revolution. And as long as consumers want to remain connected and accessible, demand will continue, and thus the wave will push on.