The tech bubble that never burst

By Erin Griffith and Taylor Johnston,

The venture capitalists are sounding the alarm.

At conferences, they buzz about falling valuations for startups. On CNBC, they bemoan the sudden lack of initial public offerings. On Twitter, they warn of a coming downturn.

It is a familiar refrain. For the past decade, such warnings have cropped up repeatedly in startup land. The industry is in another bubble, investors and commentators caution, conjuring the 1999 dot-com era and the dramatic collapse and recession that followed. Jobs disappeared, fortunes vaporized, and reputations were tarnished.

The message since has carried those scars: The boom times are ending. Buckle in for a rough ride.

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Yet every time, more money has flooded into startups. Instead of a collapse, things got bubblier.

It started in 2011, when a tiny, elite group of startups attained “unicorn” status, with valuations of $1 billion or more.

Investors poured billions into startups each month, and hyped-up initial public offerings from LinkedIn, Pandora, Zynga and Groupon fueled fears of a bubble.

Facebook went public in May 2012 with the largest-ever tech IPO in the United States. Many viewed its valuation — more than $100 billion for a startup with less than $4 billion in revenue — as a sign that tech valuations had ballooned out of control.

The bubble they had warned of never burst.

Things sure felt bubbly. Engineers were demanding Tesla sports cars just for showing up to work, Business Insider presented as evidence.

By 2014, the number of unicorns around the world topped 90.

Startup investing rewards risk-taking. Many of the most audacious, irrational investors have won by doubling down in a market frenzy. The cautious ones, trifling over such small-minded concerns as high prices or cash burn? Less so.

Suddenly Uber — a little taxi app — was worth $51 billion. More than American Airlines or FedEx, which actually turned profits. Investors blasted the alarm even louder.

The warnings were not all wrong — a few unicorns did perish. (Remember Fab.com and Jawbone?)

But for every flameout, there were many more new ideas to back. New sources of capital — including private equity, mutual funds and sovereign wealth funds — began chasing unicorn investments. In May 2016, they poured $14.2 billion into more than 800 deals, the highest amount of the decade so far.

Just in case the warnings were right, some investors lowered the valuations of their biggest investments, briefly cooling the unicorn frenzy. There was talk of onerous funding terms and startup layoffs.

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Then Masayoshi Son, SoftBank CEO, arrived. The brazen investor dumped $100 billion into Silicon Valley startups — dwarfing the rest of the venture capital market — at a pace that averaged $100 million a day. Reuters called him a “one-man bubble maker.” Executives joked nervously about Son’s “capital cannon.” Venture capital firms raised bigger funds to keep up.

High valuations and obscene spending became the norm. Startups prized growth over profits. Investors gave up on their bubble talk. Fear went out the window. Everyone decided to enjoy the party.

Venture funding soared, topping $26.9 billion in December and hitting a new yearly high of $143 billion. The unicorn count jumped to 348, according to PitchBook, which tracks the venture industry.

In the lead-up to its IPO, WeWork imploded. It was the kind of spectacular, embarrassing, humbling disaster that many thought would have ripple effects for years to come.

In boardrooms, investors murmured that this was really, truly, finally the end. On conference stages, startup founders promised to “pivot to profits.”

Then the pandemic hit. Prepare for tough times ahead, venture firms declared. For real this time.

That lasted barely a few weeks. Startups flourished in the pandemic and funding soared to new heights. IPOs roared back. So, naturally, did the bubble talk.

More than 500 startups around the world topped $1 billion valuations. Those in the US raised $164 billion in 2020, setting yet another record.

Meme stocks! Crypto! NFTs! SPACs! The Federal Reserve was printing money, interest rates were low, vaccines were available, and the world was set to reopen. By 2021, economists began predicting a new Roaring '20s led by tech prosperity.

Yeah, it’s probably a bubble, investors shrugged. But YOLO, amirite?

This year, fear crept in again, as interest rates were set to rise, inflation surged, and war broke out. Soon, tech stocks tanked. Initial public offerings screeched to a halt. Startup investments fell.

A sense of caution returned. Was the bubble finally, really, truly bursting?

Today’s warnings are different from those of the last decade. Investors tiptoe around the word “bubble,” referring instead to a “recalibration,” a “pullback” or even a gentle “softening.” The people who once called for caution grew tired of being wrong, and their audiences became numb to the warnings. Every time the alarm bells rang, more money poured into startups.

“This time is different” used to be a morbid joke among investors; now people believe it. Tech is too enmeshed in our lives, the thinking goes, and the dot-com bubble is too far in the rearview. This decadelong startup boom has surged in the face of so many scares, each time amassing even more money and power. Maybe it really is different this time.

Some investors believe market euphorias are good — even necessary — things for progress. Without all that attention and excitement, how can a startup founder convince workers and investors to help turn their crazy moonshot ideas into reality? Sure, most of the people who flock to a bubble are in it for the money. And yes, things can get messy. But underneath, it’s all moving forward. Out of the dot-com ashes, techies like to remind us, grew Amazon, PayPal and eBay.

Even as the biggest factor driving investors to high-growth startups over the last decade — low-interest rates — begin to change, even as economists worry about an impending recession and even as startups lower their valuations or suddenly run out of cash, few today are predicting a total collapse.

A decade of talking about a bubble that never bursts will do that.

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