WBUR Radio Host Tom Ashbrook tackled that topic Wednesday morning on his On Point Radio show on National Public Radio. The conclusion was we’re already seeing the bubble deflate, but it’s not going to be as big of a bust as when the Dot Com bubble burst in 2000.
Today, 145 so called technology “Unicorns,” private companies valued at more than $1 billion, exist, Ashbrook said. That’s up from 40 two years ago, he said. They include well-known companies like Uber, Snapchat AirBnb and lesser-known ones like CreditKarma and Thumbtack, according to Ashbrook.
The program featured Austin’s Bob Metcalfe, professor of Innovation at the Cockrell School of Engineering at the University of Texas.
Venture Capitalist Bill Gurley, general partner with Benchmark, said we are heading to a bust and Venture Capitalist Marc Andreessen has said we’re already in a bust and everything is going to be great, Metcalfe said. And he said they are both right.
“The down round has begun. The Unicorn down round has already started,” Metcalfe said.
The “free money” economy with interest rates at zero is creating a bubble that is going to burst and that will take the Unicorns down, Metcalfe said.
Another guest on the show, Alexandra Suich, U.S. technology editor at The Economist, said the Federal Reserve’s low interest rates have driven private investors along with some pension funds and mutual funds looking for high returns into backing Unicorns in the technology market.
Metcalfe also said the promise of the Internet is far from over with 3.2 billion people connected to the Internet. There are bunch of industries that are ripe for innovation such as energy, education and healthcare, Metcalfe said.
“Well, if you are starting companies there can be too much money available,” Metcalfe said. “I think that’s what happened. The free money regime we’ve been under has created too much money. And for entrepreneurs that creates problems because it creates too many competitors in each field and they damage each other.”
Another guest, Josh Rauh, professor of finance at Stanford University’s Graduate School of Business, said the Unicorns need cash flow to justify these large valuations. And some investors are betting that they are worth it based on projected future earnings, he said.
In some cases, venture-backed companies are supporting other venture-backed companies with advertising and marketing revenues as their best customers and that could have a negative effect if some of the Unicorns experience trouble, Suich said. She said she didn’t expect it to have huge contagious effects on the overall market though.
Venture capitalists are investing too much in social, mobile and cloud and one of the aspects of the bubble bursting will be more diversification of investments into energy, healthcare and education, Metcalfe said.
Ultimately bubbles are a tool of innovation and the coming bust is a helpful adjustment that will move the U.S. on to other fields of investment away from social, mobile and the cloud, he said.