Is the tech sector in a (*gasp*) bubble?

With a rise of angels investing in dreams of finding the next great unicorn, Jessica-Belle Greer asks: Is the current tech market
too fantastical to be true?

Valencia, Amaro and Willow are filters that add a sense of artistry and nostalgia to the images of 500 million active, monthly Instagram operators. They are also trending baby names, according to the Baby Centre’s latest report. Lux, meaning transforming brightness, from the Instagram culture, had the biggest surge in popularity – 75 percent. In a world inundated by new technologies and smartphone apps, is it so surprising that we are seeing the future with Insta-tinted glasses? 

Private entities in particular are eyeing up the future by investing in small tech companies with apps aplenty. According to Inc. Magazine, the number of tech startups that have attracted US$1 billion in investments, a.k.a. unicorns, more than doubled between mid 2014-2015. And 75 percent of the largest private tech company financings ever were made in the past five years. This surge in private, not public, investment is what sets the current bubble debate apart. But are these unicorns the new Dutch tulips?

New Zealand Angel Association chair Marcel van den Assum says angel investors in the tech sector are rising in New Zealand. “We estimate the number of angel investors involved in networks has grown from around 370 to 730 in the past two years,” he says. “Angels are riding – and also part of creating – the investment wave.” 

The NZ Angel Association and New Zealand Venture Investment Fund’s recent Angel Report shows that 80 percent of the $53.2 million invested in the sector in 2013 was follow-on investment, with the average deal size almost doubling as angels gain confidence.

Former New Zealand Venture Investment Fund’s CEO Franceska Banga told Idealog last year: “In the New Zealand context, we are not seeing a bubble, nor unrealistic valuations … In the international context, a big differing factor between the late 1990s and now is the huge growth in access to the internet. 

“In the 1990s, it was a few hundred million people browsing the web. Now, billions are using the internet on computers, tablets and phones in a much more commercially sophisticated way. Technology and innovation do go through economic cycles, like other parts of the economy, and we are in a positive part of the cycle, but it is not a bubble and it reflects this massive shift in the way the internet and related technology has enabled changes across many sectors, in the way we do business.”

With the help of cloud-based services, the capital needed by startups is significantly lower than it was the '90s, giving current businesses a leg up to that billion-dollar pedestal. According to CB Insights, there are now 169 unicorns collectively valued at US$611 billion in the previously exclusive unicorn club. 

Websites such as Crowdfunder are adding to the hype. Anyone with internet access can invest in the latest technology they think people need. Anti-Photoshop, a Photoshop verification algorithm, has raised half its needed US$800k funds. Promising to “go viral right from launch” – because you can predict what will go viral, right? – the feature will be connected to social media so users can catch their friends out and a celebrity hall of shame promises to keep those pesky photoshopping celebrities in check. Is this really going to make the world a better place? 

As Lance Wiggs of the Punakaiki Fund told us: “Overall, there are good businesses and bad businesses, and high valuations and low valuations. The key to high-growth investing is to invest in good businesses, ones that have recurring revenues that are very unlikely to go away in a recession, ones where the growth rates for those revenues are high, and where the company can manage the profitability and growth by varying the rate of investment”.

When National Business Reviewreported on a tech bubble in 2013, the focal point of suspicion was Xero’s “stunning rise”, which “(justified or not) … has created a panic from investors who think they’ve missed the boat”. The NBR saw casual investors, more familiar with firms like Telecom, warming to high-risk tech companies, increasing investment in New Zealand’s early-stage technology companies. 

But Rod Drury, Xero founder and CEO, says the strong investment in the tech space is not a sign of a bubble. “You’re seeing disruption absolutely happening. We’re seeing globalisation. Uber did it for taxis. Netflix globalised TV. Xero globalised accounting. You’re seeing these companies getting scale, becoming platforms and doing a good job in markets that are massive. That’s not a bubble.”

Instead of being like The Big Short and turning to Margot Robbie in a bubble bath for explanation, we turn to Peter Cohan, a columnist for Forbes who was an early predictor of the latest tech bubble. He says both the bubble of 2000 and the pending pop come from the dichotomy of the ‘fear of missing out’ (FOMO), and the ‘fear of losing everything’ (FOLE). At first investors want the next Facebook about to skyrocket, but as these startups start to fail en masse, investors will quickly lose their appetite. 

The business world’s bid to outboom the Second Industrial Revolution is doomed, according to Robert Gordon, a professor of the social sciences at Northwestern University. As the “just a regular economist who has a fancy title” pointed out on a Freakonomics podcast, although we strive to reach an 18th century level of productivity, the timeframe of the latest tech boom is too short. Plus, our recent economic progress has gone into the pockets of the top one percent. “It’s the fact that not everybody is sharing in the fruits of that innovation,” he says.

Technology entrepreneur, executive and investor Keith Rabois told the Wall Street Journal: “One of the reasons people are raising all these funds isn’t because they want the money, but because they believe their own metrics are inflated at the moment, and they want to get that money before companies in their portfolios start crashing and burning.” And there is speculation that unicorn founders are accepting challenging terms to push valuations over the “magical $1 billion mark”.

Unicorns can be driven to overspend on marketing to grow to the point they can enrich venture capital. According to the Wall Street Journal, the biggest unicorn in the room is Uber, currently valued at US$62.5 billion. “The company claims it is profitable by some measures in North America, but it is spending huge amounts of money to capture markets in China and elsewhere,” it says

Is Uber one of many “imaginary pots of gold”, as The New Zealand Herald’s Liam Dann coined late last year? Uber board member and a partner at Benchmark Capital Bill Gurley even cautioned in a blog post last year that late-stage investors have “essentially abandoned traditional risk analysis”. 

Like the trending baby names, tech startups don't pride themselves on being traditional. And as natural early adopters, private investors in this field are quick to invest in the next solution – even if it’s slippery and makes bubbles.