The majority of people associate the 90’s dot com boom to the moment that Netscape had its initial public offering. The company saw its stock surge that day, seeing a valuation at more than $2 billion by the end of day one.
It was at this very moment that the IPO became almost like a coming of age party- for tech startups during this era. Today’s technology giants, companies like Amazon, Yahoo, and eBay all went for initial public offerings in the late 90’s. Not every story was a success story, however. Plenty of other companies held IPOs during this era and then failed when the market bottomed out.
Not unlike the 90’s, Silicon Valley is experiencing a massive growth pattern yet again today. However, there’s been a massive shift in the way that tech companies procure financing: today’s startups are leaning more towards approaching rich insiders instead of the stock markets to finance growth.
To be frank, there are dramatically fewer IPOs these days than there were in the early-on dot com bubble. Valuations are dramatically down along with tech IPOs from the previous tech boom. Over the past ten years, the number of IPOs is dramatically lower than the level that the industry saw in the early 80’s, but the amount these companies have raised is significantly higher.
Instead, tech companies are turning toward private funding. We aren’t seeing a decrease in IPOs because the general public isn’t investing in tech or lost interest. Instead, startups are increasingly turning towards private funding– VC firms and private equity firms are a big favorite. Private funding has always been an incredibly important part of Silicon Valley, but they’ve recently become a commanding presence in the industry as tech companies rely on these sources more and more.
So What Are Tech Companies Doing Instead?
Another trend that we’ve seen- tech companies are starting to only approach the general public for financing when they’re forced to by federal regulations. The SEC requires companies to go public once shareholders grow past 500- a driving factor behind Facebook’s IPO in 2012.
Later IPOs have some drawbacks- we don’t see the massive opportunities (or risks) for investors who don’t have millions to invest in rounds of fundraising. In the 80’s and 90s, giant post-IPO gains weren’t unusual, but that landscape has changed with the trends currently driving the market.
Things are different these days. Facebook was worth over $100 billion by the time it opened itself up to the market in 2012. Since its IPO, the shares have doubled (and then some)- a fairly decent return for investors. However, there’s a next-to-zero chance that those people who invested in Facebook during their IPO will see a return growth factor of 100 (what early Microsoft Investors saw in the last wave). To put this into perspective, Apple is the most valuable company, well, anywhere and it’s worth roughly $700 billion, which is less than seven times Facebook’s IPO.
This is a story that’s becoming quite familiar with Silicon Valley investors in the stock market. Other recent tech IPOs mirror this same sentiment- companies are waiting longer before they engage in an IPO which leaves public investors in the dust, without much of an upside. The SEC has ensured that non-wealthy people are essentially put into a stranglehold in this scenario as they are legally prohibited from investing privately in companies, creating less opportunity to make risky yet rewarding investments than there were even 20 years ago. Granted, this also means that investors can’t lose their life savings on unproven tech stocks, but I digress.
Is There A Current Technology Bubble?
There’s a lot of discussion around this and a lot of paranoia revolving around the current ecosystem in Silicon Valley. This is, perhaps, anxiety left over from the dot com bubble bursting in the late 90’s- the market crash left investors with a few scars and no one will soon forget. Now that we’re seeing technology stocks jump in growth again, people worry that we’re in the midst of repeating history.
However, when you compare stock with earnings, recent growth looks fairly mild by comparison. During the dot com bubble, the market saw tech stock soar without any correlation to a rise in company earnings. Once the market realized that these companies were unable to deliver on the high expectations that the growth in stock implied, the bubble burst and the market crashed. In comparison, the modern surge of growth in stock prices is largely driven by massive growth in tech company profits. Even more encouraging- when you look at the percentage of these companies earnings, technology stocks are priced quite a bit less than they were even 10 years ago.
Kristen Bowie is a marketing leader, forging the path with data-driven decisions. When she’s not writing for thought leadership and creating sponsorship proposals at Qwilr, she’s hanging out with her two urban dwarf goats, painting, or is out watching a local band.