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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: Pets.com [sock puppet mascot image]
- Amazon.com-backed
- 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

Instagram


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

Tumblr


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

Zynga


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

Facebook


- $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?

Sources


- http://www.crunchbase.com
- http://techcrunch.com/2012/01/03/crunchbaseexits/
- http://www.cnbc.com/id/100686505
- http://www.sfbg.com/2013/04/02/tech-bubble-20
- http://slashdot.org/topic/bi/does-yahoos-summly-buy-signal-a-tech-bubble/
- http://www.huffingtonpost.com/2013/05/20/yahoo-tumblr-valuation_n_3307198.html
- http://www.huffingtonpost.com/john-friedman/real-estate-bubble_b_2745173.html
- http://www.ft.com/intl/cms/s/0/d215a3b6-ec43-11e1-a91c-00144feab49a.html
- http://www.investopedia.com
- http://readwrite.com/2011/07/14/3-myths-of-the-startup-bubble
- http://www.honeytreeholdings.com/is-the-startup-bubble-bursting/
- http://venturebeat.com/2012/04/17/are-we-in-a-startup-bubble/
- http://venturebeat.com/2012/04/17/are-we-in-a-startup-bubble/#v2IulFyac0RiWo7T.99
- http://www.theatlanticwire.com/technology/2013/01/2012-year-tech-bubble-numbers/60517/
- http://www.latimes.com/entertainment/envelope/cotown/la-et-ct-rupert-murdoch-facebook-myspace-20130517,0,7386543.story
- http://www.businessinsider.com/why-there-is-no-tech-bubble-2012-5
- http://usatoday30.usatoday.com/money/perfi/stocks/story/2012-05-17/facebook-trading/55056312/1
- http://online.wsj.com/article/SB10000872396390443720204578004980476429190.html
- http://housingstory.net/2010/08/19/the-five-stages-of-america's-housing-bubble/
- http://www.brilliantforge.com/2012/03/08/tip-for-startup-founders-it-isnt-1999/#.UZ-FtKUkU6o
- http://www.cnet.com/1990-11136_1-6278387-1.html


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