Do you remember when $ 100 billion was a lot of money? Twenty years ago, at the height of the dot-com bubble, that was the amount that was invested in venture capital in a single year. It was five times the sum that had been recorded two years earlier and five times higher than two years later.
It turned out that not much money could be invested in creating startups without a business model, and most of the money was lost. Another $ 42 billion went to initial public offerings (IPOs) of tech companies with no revenue that public markets would have ignored in normal times.
Compare that to what has now become a series of bubbles in and around the tech industry, including IPOs, initial coin offerings (ICOs), Bitcoin, and Tesla. But common denominators are not hard to find: The search for growth in an investment world awash in liquidity and the kind of « fear of missing something » that sets in at such times.
A clear similarity to the dot-com bubble comes from the rise of Special Purpose Purchasing companies or SPACs. for its acronym in English. These companies raise funds and then go hunting for acquisitions. As in the dot-com era, much of the money from SPACs is getting into companies in their early stages, so this is the first time since the beginning of the century that a channel has been opened to bring a greater number of companies with no income to the public markets.
Nikola, who came to market after an acquisition by a SPAC, is the clearest example. The hydrogen trucking company had losses of $ 117 million in the last quarter and had no revenue. However, it rose to a market value of $ 25 billion in the middle of last year. And despite the resignation of its CEO, and General Motors’ decision not to go ahead with a $ 2 billion partnership it planned to run with the company, it is still valued at more than $ 6 billion.
The race to raise capital last year left SPACs with $ 70 billion of firepower, according to Goldman Sachs. Given the way they structure their operations, that equates to future acquisitions worth $ 300 billion. If the deals don’t close within the next two years, that money must be returned to investors, creating classic incentives for a bubble.
There are other similarities to the dot-com period. In promising new technology markets, a winner-takes-all mentality is common. Investors cannot imagine how the competition will develop. For example, the cloud software industry – where companies like Zoom have thrived – is teeming with companies with specialized service that could end up dominating a global niche.
Behind all this is the simple weight of money that seeks a good return. Public markets offer few opportunities for growth. The traditional venture capital industry cannot handle the weight of money (WOM), which has sparked a wave of experimentation in recent years, such as digital token sales, or ICOs.
Investors from OPI also joined the party. Going public went out of fashion for a generation of tech startups. But Initial jumps in DoorDash and Airbnb stock prices last month show IPO speculators are back in force.
The market value of all bitcoins in circulation has risen about $ 580 billion since the beginning of last year, reaching a new record this week of more than $ 700 billion. That closely matches Tesla’s track record: The electric carmaker has added $ 670 billion to its market capitalization in the same period, and is now valued at $ 750 billion.
Tesla could one day dominate the global electric car market, and bitcoins could become a permanent fixture in the world of digital money. But as they both soar toward $ 1 trillion, they appear to be the clearest examples of the growing financial bubbles that are emerging in the era of the pandemic.