by Ken Mingis

The Takeaway: Tech bubble redux?

Jul 27, 2015
Technology Industry

The NASDAQ's been on a tear, leading some to wonder if it's 1999 all over again

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The last time a tech bubble burst, markets fell, start-ups failed, IT unemployment shot up and undergraduate enrollments in computer science fell off a cliff.

Well, don’t look now, but 2015 is starting to look something like 1999, or maybe early 2000.

Earlier this month, on July 17, the NASDAQ composite index hit its highest point in 15 years, reaching 5,210. Helping to fuel that rise: Big valuations for the latest sweethearts of the sharing economy. Uber is valued at $50 billion, similar to FedEx, Salesforce, Caterpillar and Target; Airbnb is at $25 billion, similar to utility Pacific Gas & Electric and Netflix; and Snapchat’s worth something like $15 billion, roughly equal to Whirlpool and Tyson Foods.

At the same time, computer science undergrad enrollments — which tracked the tech boom and bust very closely in the 1990s and early 2000s — are up. They totalled 24,000 last year, almost where they were when they peaked in 2000.

“It’s often difficult to recognize a bubble while you’re in it, as unreasonable optimism and speculative greed lead to the belief that a ‘new paradigm’ will validate wildly aggressive projections,” said Bruce Bachenheimer, clinical professor of management at Pace University and executive director of its Entrepreneurship Lab. “It certainly appears that certain sectors of the market are due for a major correction.”

So are we looking at a repeat of the 2000 tech meltdown? Experts have some theories:

  • The investment landscape today “is still well short of the dot-com bubble days of 2000,” said Tim Herbert, the senior vice president for research at CompTIA. The number of IPOs is nearly 70% lower than they were in 2000, and for companies now going public, “the trend appears to be towards firms that have a longer track record, solid business fundamentals and earnings.”
  • Risks aren’t as great as they used to be because launching a start-up requires less money. Open source software and cloud computing “have dramatically” reduced start-up costs, said Patrick Gallagher, general partner of VC firm CrunchFund. A start-up that might have required $5 million or $10 million in 2000 can get going now with $1 million or $2 million today, he said.
  • During the dot-com bubble, many companies with no visible means of financial support were valued based on metrics with little substance. Today, the companies that are getting high valuations are earning real revenue and aren’t going away anytime soon, said Glen Rieger, general partner at NewSpring Capital.
  • The current surge in computer science enrollments at the undergrad level “feels different than the previous peaks,” said Peter Harsha, the director of government affairs at the Computing Research Association. “Students are engaging in computing because they recognize that it’s becoming increasingly required for success in other disciplines as well.”

Despite the differences between now and 2000, CompTIA’s Herbert still sees reason for caution. The growth in VC funding over the past two years “may suggest there are more dollars chasing fewer quality deals.” Funding for software firms may soon match the 2000 peak, with some valuations “…pushed to levels hard to justify,” he said.

With reports by Patrick Thibodeau at Computerworld.