Is Tech Bubble 2.0 About to Burst?

Written by Kevin Chung, Digital Pros

Young entrepreneurs inspired to be the next Zuckerberg probably don’t recognize the current state of the tech industry. For anyone around for the dot-com boom and bust of the 90s, however, things probably feel strangely familiar. In the 90s, investors and venture capitalists caught on to the potential of the tech and dot-com sectors, throwing money at projects in hopes they would become the next Microsoft. The problem was, most companies wouldn’t build a fraction of Microsoft’s worth. There was too much money and not enough value. The market had to adjust.

It did, with a vengeance. The Nasdaq Composite lost 78 percent of its value from 2000 to 2002, according to Investopedia.com, in what became known as the dot-com crash. Maybe it’s based on the Facebook’s success or the recent surge of high-profile purchases (Tumblr, Instagram), but signs indicate the tech industry may once again be in over its head. With so many investor-backed projects, the U.S. could be heading toward tech crash 2.0.

Fed Interest Rates

Start-ups and small businesses have always played an important role in the U.S. economy. The Federal Reserve lowered interest rates after the housing market collapse in an effort to jump start the economy. Venture capitalists and investors are still benefiting from these low rates, but experts note that that the Fed can’t sustain these discounts forever. When the government decides to raise interest rates, investors will have to pull back, leaving aspiring entrepreneurs with great ideas but no money to enact them. Tech start-up owners would have to develop a more traditional plan for growth: Provide value, create a business model and find a way to monetize.

The Social Decline

If the 90s birthed the dot-com bubble, perhaps experts will look back on this time as the social bubble. A few high-profile social networks have made ridiculous amounts of money. Hoping to become the next Facebook, Myspace or Tumblr, countless unknown social media sites have received start-up cash. Unfortunately, we’re already seeing signs that the social media boom is fading. A recent Pew Research Center survey revealed that teens’ enthusiasm for Facebook is waning. Some teens cited the stress associated with Facebook reputation maintenance as the central deterrent. Don’t expect the social media market to fold overnight, but if investors keep pumping money into the next big social media platform, they may return empty handed.

An App for Everyone

It seems they’ve been around forever, but the mobile app advent is just beginning. As smartphone providers continue raising the bar, app developers have more potential to enhance users lives.  Easilydo, for example, is a personal assistant app that has raised $4.3 million from U.S. venture capitalists.  While Easilydo is a well-built program, it’s currently free in the App Store, and it has plenty of competition. In a market flooded with apps, who knows if VCs will see a return on their investment?  Whenever you read Apple or Android phone reviews, users comment the apps that make these devices great.  Simply put: If everyone can develop an app, consumers don’t need anyone in particular.  Apps could be the sharp point that bursts this bubble.

Kevin Chung

Kevin is an accountant and business consultant with a penchant for muscle cars.