When the dotcom bubble burst in 2000 many investors slapped their foreheads at their collective stupidity and shouted: what were we thinking? How was it that Pets.com, a profitless start-up more famous for its floppy-eared sock puppet mascot than any coherent business plan, could float on the Nasdaq before going bust within the year?
Some investors may be squirming again today as they watch the 29 per cent fall in the Nasdaq this year and survey the wreckage of special purpose acquisition companies, which enabled several profitless companies without coherent business plans to come to market. These Spacs were, in the words of one veteran investor, the “last degenerate spasm of an over-extended bull run.”
However, as the tech entrepreneur Paul Graham wrote in a brilliant essay in the aftermath of the first dotcom crash, stock market investors were right about the direction of travel even if they were wrong about the speed of the journey. “Despite all the nonsense we heard during the bubble about the ‘new economy’ there was a core of truth,” he wrote in “What The Bubble Got Right”.
Written in 2004, Graham’s list of 10 things the bubble got right still stands the test of time. The internet has indeed revolutionised business. Casually dressed, California-based, 26-year-old nerds with good ideas have often out-innovated 50-year-old suits with powerful connections. Technology doesn’t add, it multiplies, he wrote.
What have investors got right in the latest bubble?
It would be fascinating to hear Graham’s updated thoughts. Sadly, he has not yet replied to my email. So, to trigger the debate, here are five things I think the latest bubble got right, drawing on interviews with investors and entrepreneurs. FT readers will doubtless have better, or contrary, ideas.
First, the stock market has been right to attach enormous value to data, even if accountants have a hard time recognising it on the balance sheet. Those companies that can gather, process and exploit meaningful data have a significant competitive edge in almost every market.
Second, while globalisation may be slowing, e-globalisation is accelerating. The International Telecommunication Union estimates that 4.9bn people — or 63 per cent of the world’s population — were connected to the internet by 2021. It is targeting 100 per cent by 2030. Not only are people increasingly accessing the internet but they are accessible on it, too. A teenage programmer in a bedroom in Tallinn or Lagos or Jakarta can reach a global audience overnight.
Third, the Covid pandemic has permanently changed the world of work. Stock market investors may have suffered a sugar rush in excessively bidding up lockdown favourites such as Netflix, Spotify, Peloton and Zoom. But many companies will never be able to force valuable employees back to the office. So-called liquid enterprises that successfully hire and manage employees around the world are going to thrive — as are the companies that service this decentralised workforce.
Fourth, the energy transition will translate into colossal stock market wealth. Tesla might have become the most overhyped, if not overvalued, company on the planet. But by spearheading the electric vehicle revolution, it nevertheless symbolises an important trend.
Fifth, the evangelists touting crypto and Web 3 may have so far failed to deliver many answers, but they are asking the right questions. How do we own and trade digital assets? “Blockchain is a game-changer. It is going to restructure the back office of the world,” says one bank chief executive.
This year’s cyclical downturn in public and private tech markets is crushing these secular trends. But in the past few weeks investors have been warming again to the attractions of fast-growing tech companies. One example is Figma, a collaborative software business that has just agreed an eye-popping $20bn takeover offer from Adobe.
Dylan Field, Figma’s 30-year-old co-founder, tells me his company has been built on the “mega-trends” reshaping the tech sector. About 81 per cent of Figma’s active users are now outside the US. It may have become a cliché to say that “software is eating the world” (to use the tech investor Marc Andreessen’s phrase) but it remains true. “People assume that it is over. But it is just starting,” Field says.
At times, the latest tech bubble has resembled the unintentional dotcom Ponzi scheme described by Graham at the beginning of the century. But that does not mean investors’ instincts were not sound, both then and now. The only question is: what price to attach to them?