Recently, chatter has focused on whether the technology industry is in a bubble. Is it?
Individuals following say, home prices in San Francisco, one might get the impression that it is. Since bottoming in January 2012 at about $621K, the median home price in the Bay Area is now approaching $1.1 million, a growth of about 75% in just 3 years.
Valuations
Others point to the enormous valuations some of the “rockstars” of the tech industry are getting for their companies as a signal that things are getting a little frothy.
As examples of frothiness, just look at what the valuations of some tech industry companies are getting. Uber, the ride sharing service, recently raised $1 billion on an enormous $40 billion valuation. Snapchat, the more private way to share pictures and texts, is purportedly raising money on a $19 billion valuation. And Pintrest, the site where mostly women comment and post about the niceties in their lives, is raising funds at an incredible $11 billion valuation.
How could there not be a bubble with such unproven valuations?
The One Chart That Answers the Question
But, are these indicators really reliable signals that the technology industry is in another bubble phase – 15 years after the internet stock bubble exploded in 20o1? Here’s the one chart that should answer this question.
On the left axis and in blue is the amount invested in IT industry startups, as measured by Price Waterhouse Coopers’ MoneyTree survey. On the right axis and in orange is the number of deals in IT industry startups, again, as measured by Price Waterhouse Coopers’ MoneyTree survey. It’s impossible to miss the “bubble” that occurred in 1999 and 2000.
The dollar volume of deals exploded from $9 billion in the first quarter of 1999 to a peak of $41 billion in the second quarter of 2000. Simultaneously, the number of deals expanded from 1,306 in the first quarter of 1999 to 3,087 at the peak in the second quarter of 2000.
How does this “bubble” experience compare to today? Simply put, today’s strong technology industry startup scene is simply experiencing a “boom.”
It’s easy to see the booms and busts since 1995, but one thing is fairly clear – bubbles are much less common and current conditions in the IT industry startup world are, right now, nowhere near bubbly territory.
Conclusion
Overall, the chatter that the startup scene in the IT industry is probably overblown. When looking at the history of the number of deals and the amount invested, there’s a clear distinction between “bubble” territory and simply strong growth that’s likely to experience some bust in the next year or so.
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