“These corrections are always vicious and sudden, and it is amazing how quickly all of the experts and pundits and gurus change their tune,” Vasant Dhar, a professor at New York University’s Stern School of Business, told CNN. “The market always has amnesia.”
Dhar, who has worked in tech for decades, said he’s weathered several booms and busts during his career, including the Dot-Com Bubble in 2000 and financial crisis in 2008. But, he said, “it’s always the younger people coming in who, as Bob Marley says, don’t know their history and get ahead of themselves. And then things correct — and things correct very, very suddenly.”
‘A major sea change’
It’s been so long since the last prolonged downturn in the tech industry that some elder statesmen in Silicon Valley are using their platforms to try to remind the many tech workers who may never have worked in that environment what it was like.
“This is a major sea change,” said Matt Kennedy, the senior IPO market strategist at Renaissance Capital, a provider of pre-IPO research and IPO-focused ETFs. “For years, startups generally followed the same playbook, which was grow as fast as possible at whatever the burn rate. That’s what their investors wanted to see. Capital was cheap, so losses didn’t matter.”
“But that’s changed. Once again, profits matter,” he added. “I think that investors are looking a lot closer at the bottom line.”
A more difficult startup and fundraising environment is not necessarily detrimental for all companies, though it may be “worse for the frothy ones,” Dhar said. The riskier ventures and earliest stage startups tend to suffer in these difficult economic times, Dhar said, but late-stage VC-backed companies might find the sudden evaporation of “pesky competition” advantageous.
Kennedy added that many fast-growth tech startups “need funding to survive” and more pain could be in store for some. “They’ve operated only as high-loss businesses, and that’s a difficult pivot to make,” he said. “As a result, I think we’ll see layoffs and down rounds. Some of these businesses will fold, others will be acquired.”
More resilient than Dot-Com era
While many comparisons have been made to the anguish wrought by the burst of the Dot-Com bubble, the tech sector is far more developed now than it was in the past, according to Dan Wang, an associate professor at Columbia Business School.
“Large tech companies, even though they’re tightening their belts, are still in a financially advantageous position,” Wang said. “And furthermore, a lot of the services that tech platforms, especially, provide are ones that consumers regard as indispensable.”
This “makes it very difficult to compare the two eras, or to suggest that what happened 20 years ago might be predictive of what happens in the next several months,” Wang added.
Despite the fearful rhetoric and concerning daily headlines in the tech world, Dhar said he still sees the sector eventually bouncing back. “In the long run, tech is the future,” he said.
In the meantime, corrections can even be beneficial for the tech sector, both by ensuring more financially viable companies end up going public and by eliminating some of the froth and excess in the market.
“To be honest, some of the pitches I’ve heard over the last year have sounded like completely absurd,” Dhar quipped. “I have no idea why they would have valuations like that.”