Another Tech Bubble? History Says No

A few months ago, Fred Wilson blogged about fears of a coming downturn in technology. Then last month the hilarious tech bubble video began circulating throughout the Web. That tech stocks have plummeted early this year suggests we are heading for some stormy weather in techland. What’s going on?

Like a lot of folks, I’ve been wondering the same thing myself. But if you look at history, we’re probably not headed for a sustained downturn in technology. One of the things that struck while me researching my book was that there’s been a strong and clear technology cycle at work over the last 40 years or so. Typically, a disruptive technology is invented and commercialized, helping to drive a 6-8 year cycle of sustained growth.

The first high-tech boom happened in the 1960s, with the craze over “new issues” and “electronics”. The market went on a six-year run before it stalled. Then the commercialization of the integrated circuit and the dawn of the computer revolution sparked another boom from late 1966 to 1972. The blockbuster IPO of Digital Equipment Corporation in August 1966 was a seminal event. DEC came out at $22. By March of 1967 DEC shares topped $50, over the summer, they hit $80, and in September they crossed $100.

In 1973, the bottom fell out of the venture capital market and the economy at large. The twin economic evils of inflation and recession joined hands to create a new type of monetary demon dubbed “stagflation.” Then OPEC’s oil embargo in October of 1973 sent the booming economy over a cliff. Between 1973 and 1975, the Dow Jones index was nearly sliced in half.

All the while, entrepreneurs and technologists were working on a whole new range of innovations that would spark another boom starting around 1979 and lasting until the 1987 crash. In the late 1970s and early 1980s, venture capital helped finance the creation of four new industries that boosted the economy: microprocessors, video games, personal computers, and biotechnology.

Then we had a recession in the early 1990s, which didn’t end until 1994/1995–the same time that the Internet and Web browser were unleashed on the world. We know that story pretty well.

So where does that leave us now? Well, if you assume that today’s boom started in 2003/2004, we’re probably in the middle to late stages of the current cycle. Of course, history isn’t always a useful guide. But it feels right to me. The rebirth of the Web has driven the current boom. But there are still several groundbreaking technologies that haven’t reached escape velocity yet–I’m thinking of wireless computing, and green technology in particular. If those two areas fulfill their promise, it could help extend the current cycle for a few more years.

Now, don’t get me wrong. Even though I think there is no widespread tech bubble like there was back in 2000, I think there are mini-bubbles. The most obvious one is in social networking. Valueing Facebook at $15 billion–with a 500+ price-to-earnings ratio–is insane! That p/e surpasses even some of the ratios we saw with telecom companies in 2000. (I think JDSU boasted a 400+ p/e at one point.) So while we will probably see a pullback in certain areas, with some inevitable consolidation, I think the trendline for tech will be upwards for a few more years. Unless of course some new black swan (i.e. another major terrorist attack or financial crisis) appears out of nowhere and throws everyone for a loop.

What do you think?

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One Response to “Another Tech Bubble? History Says No”

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