More than 14 years have passed since Lastminute.com’s initial public offering valued the business at £571m and turned its 20-something founders, Brent Hoberman and Martha Lane Fox, into the poster children for dotcom success.
On its first day of trading, its share price soared from 380p to close at 492.5p. However, the success story turned sour in the weeks that followed, as the stock crashed to below 190p. Rattled investors cashed out of the technology sector. More than $1 trillion was wiped off the US markets in a single day.
Many of today’s technology entrepreneurs were still in school at the time, but they would do well to be aware how quickly the worm can turn. If investors are burned by one company’s failure to deliver on its promise, they will withdraw from the whole sector, and quickly.
The technology landscape is very different to the one Mr Hoberman and Mrs Lane Fox were operating in, of course. The advent of the smartphone and social networks has changed the way people go about their daily lives, in a way that people only talked about in 1999 and 2000.
But there are still worrying signs of a bubble forming. In the past 12 months, a glut of technology companies have gone public at valuations that seem to be totally out of kilter with their financial track records. Twitter has soared from $14bn to $24bn since it listed in November (briefly grazing $40bn), despite the fact it does not make a profit and is finding it increasingly hard to add new users. On the other hand, King, the company behind Candy Crush Saga, has profits aplenty, but has yet to demonstrate that it can produce more than one hit game. It went public for $7.6bn.
It is not only listed companies that are hitting billion-dollar valuations. In many ways, the venture-capital-funded private sector is the worst culprit, frequently valuing companies at more than 50 times their earnings. Airbnb, the website that allows people to let their home, or a bed in their home, on a short-term basis, is close to sealing a funding round that will value it at $10bn. That’s $2bn more than the Intercontinental hotel chain. Meanwhile, WhatsApp, the messaging service, sold to Facebook for $19bn, just 12 months it was valued at $1.5bn. Not a lot had changed about the business. It had just kept growing fast.
There is no doubt that these companies are valuable, and that they are radically reshaping their sectors. But they are being valued on their potential over decades and decades, assuming that almost nothing goes wrong.
In truth, very few tech companies will ever fulfill those expectations. Markets will change. Consumer habits will change. In many cases, newer, better players will overtake.
Unfortunately, if the tech crash comes, markets will not pay close attention to the differences between those businesses with a solid foundation, and those which are based on nothing more than glittering promise. A bursting bubble will engender panic, and the entire sector will get burned.