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Demystifying the Tech Startup Bubble

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The editors at Biz Brain decided to research the topic of:

Demystifying the Tech Startup Bubble

With IPO flops and Billion dollar tech acquisitions, many experts are debating the existence of a tech startup bubble. Is it real?

What is a tech startup bubble?

- An investing phenomenon -- An obvious, but unsustainable, market rise from increased speculation in tech stocks
- Typically characterized by:
- investors predicting big ROI opportunities
- rapid share price growth from hype
- heightened tech company valuations and acquisitions
- Unproven tech companies going public, capitalizing on over-valued demand
- Demand not met, and bubble pops

Tech Bubble Example: DotCom *POP*

- *important disclaimer Total NASDAQ market value
- 1990-2000 marked 140% annual growth rates
- Zenith in 2000: IT companies represented 1/4th of all equity value in the world
- 2 years later: Technology value deflated 70%
- The number of [tech?] IPOs dwindled from 457 to 76 (1999-2001)
- DotCom bust was a result of "too much, too fast."
- Callout case study-esque:
- Delusional investment: [sock puppet mascot image]
- Raised $82.5 million in an IPO in February 2000
- Opening stock price: $11/share
- Delivering pet food and accessories online
- Due to high shipping costs and low demand, they lost money on most orders
- Collapsed nine months later
- Worth $0.19/share

DotCom Bubble 2.0? Why some people claim there is a tech startup bubble today

- A startup "success" - making more than enough money to pay back investors
- 3 out of 4 of venture-backed startups don't return investors' capital
- 95% of startups don't meet their projected return on investment (ROI) revenue growth
- "Successful" Tech startups are over valued
- The average "successful" startup:
- Raises $25.3 million
- Sells for $196.8 million


- $286 million in venture capital funding
- $1 billion bought by Facebook


- $125.25 million in venture capital funding
- $1.1 billion bought by Yahoo


- IPO for $1 billion for initial public offering (IPO)
- $7 billion company valuation
- Trading Debut at $10/share
- Today 55% decrease in valuation


- $16 billion for initial public offerings (IPO),
- 3rd largest IPO in history
- $104.2 billion company valuation
- trading debut at $38/share
- 3 weeks later Facebook stock was worth $28/share
- 1 year later Facebook had lost 31% of its initial value

The Tech bubble is all bull

- 1. The volatile industry has settled
- 2. Investing in substantial models
- building upon existing technology are safer investments than ideas just coming off the ground
- During a recession there's a stronger case that money's been too tight, instead of too loose in the market.
- Yet Tech startup total investments through the recession (07-12)

Why people say there is no bubble

- There is less investment money in the market
- People are investing money more responsibly, giving smaller amounts to more companies.
- Increases chances of making a profit
- The cost of launching a new startup has dropped from the millions to $50,000, making them easier to fund.
- People are investing based on substantial technology
- Products and services that build upon existing technology are safer investments than ideas just coming off the ground

Most startups don't succeed

- "Success" would be defined as making more than enough money to pay back investors
- More than 95% of startups don't see the projected return on investment
- They don't meet their goals to pay back investors or reach a specific revenue growth
- Even successful companies can flop
- Myspace was boasting over 75 million users in December 2008
- By May 2011, the number had dropped to 34.8 million
- As Facebook gained popularity, Myspace lost it
- After buying Myspace in 2005 for $580 million, NewsCorp sold it in 2011 for $35 million
- $545 million loss
- Facebook may be headed in the same direction
- "Look out Facebook! Hours spent participating per member dropping seriously. First really bad sign as seen by crappy Myspace years ago," NewsCorp's Rupert Murdoch tweeted May 16, 2012

Conclusion: Does it look like we're in a tech bubble?