The signs of a dotcom crash
The Nasdaq just hit 5000. For 15 years, the tech world has been waiting for this moment.
The previous time the stock exchange was this high was Friday, March 10, 2000. The first generation of internet companies was soaring. By Monday morning, the markets had crashed and the tech world was burning. Five trillion dollars and thousands of companies were wiped out in the following months.
It’s hard to believe that the current tech boom and the last one have anything in common. Yesterday’s web was infantile; today’s seems eternal. But recently, tech veterans have been warning that the stock exchange is not the only indicator of an economy’s health. For many, early 2015 feels uncannily like early 2000.
The internet has a bricks and mortar, flesh and blood simulacrum. California’s Bay Area – encompassing the city of San Francisco, and the long flat sprawl of the Santa Clara “Silicon” Valley to its south – is home to the densest concentration of tech companies in the world.
To check the state of the internet, I have been told, all you have to do is spend enough time on the corner of San Francisco’s Market Street, the long straight artery that slices the city in half. By the end of the last crash, it was an empty, shuttered wasteland. Half the city was an abandoned building site. You couldn’t hire a U-Haul van in the entire Bay Area: they’d all been driven one way, out of town. Everyone was gone.
On a Monday afternoon, as the Nasdaq continued to climb, I went down to the corner of Market and 9th to test the air.
Cranes beeped and construction sites clanged. An ambulance went screaming past. A whiff of human faeces wafted up from the gutter, mixing with the smell of oysters and braised lamb drifting down from the employee diner in the new Twitter building.
San Francisco has always been a gold-rush town, and the first tech boom was a time of true speculation: a land grab, pure and simple. With the Cold War ended, in 1992 congress lifted the National Science Foundation’s restrictions on commercial transactions online. At the same time, in a moment of perfect capitalist poetry, a scientist at CERN in Switzerland was launching the “World Wide Web”, the layers of hyperlinked pages and browsers we use to navigate the vast cornucopia of human wisdom, kitten photos and pornography. The combination of the two events began a stampede to uncover new markets.
When Jeff Bezos began selling books online from his garage in 1994, there wasn’t even a question on the Australian census regarding home internet usage. Less than 0.5 per cent of the globe was connected, but the potential to make bank was obvious to those in the know.
Fast growth meant being first, capturing a space. In the absence of any real data, the speed at which a company ran through money – the “burn rate” – became a representation of how fast it could expand. Expansion equalled users. The user was the product; at some point, dotcoms hoped they would be able to monetise eyeballs, even if they weren’t sure how.
Venture capitalists threw money at any company that slapped “dotcom” on its name and claimed it was the future. On Wall Street, dodgy dealers backed up the companies, writing jargon-filled briefs to justify their existence. In San Francisco nerds straight out of college revved Porsches up and down Market. The air smelt like testosterone and crane fuel. Contractors ripped holes in every spare square foot of land across the peninsula, preparing to build dream apartments for the 20-year-old would-be billionaires who were arriving by the planeload.
Then, on March 11, 2000, it was over.
The numbers are astonishing. An example: an online pet supplier large enough to advertise during the Super Bowl. Pets.com went from Initial Public Offering (IPO) to liquidation in 268 days. In the company’s first fiscal year, with a revenue of just $619 000, it spent $11.8 million on advertising. Larvae die in warehouses and kitty litter is expensive to mail, but Pets.com still managed to raise $82.5 million at its IPO in 2000. When it collapsed, it took $300 million in investment capital with it.
In the world of start-ups, timing is the key to success. While many businesses of the first dotcom boom were duds, plenty of others were simply too early. As they sold their souls, servers and warehouses at fire sales across the United States in the early noughties, representatives from Amazon bought them up, laying the groundwork for the modern monopolies.
Things are different in 2015. The users are online, three billion of them globally. There are fewer companies on the Nasdaq – 2565 instead of 4715 – and those at the top, such as Apple, Google and Facebook, are established forces with actual revenues. They run large swaths of the Bay Area like predatory overlords, sucking satellite companies into their fiefdoms. The Googleplex’s nearly 300,000 square metres is crawling with 20,000 Googlers. Facebook’s HQ, at 1 Hacker Way, Menlo Park, was built to resemble a small suburb. The past few years have seen the rise of the “acqui-hire”: acquisitions made to absorb talented engineers or wipe out competing products. In 2014, Google alone devoured 34 smaller companies for undisclosed billions.
Behind the slim-line Nasdaq and the seeming stability of the behemoths, though, San Francisco is once again floating on a sea of venture capital. In 2014, $48.3 billion in venture funds was invested in the US. Of that, $11.9 billion went to internet-specific companies, the most capital invested since – you guessed it – 2000.
Private money is pushing valuations to giddy heights. Shady secondary markets are being set up before IPOs by investors hungry for locked-up employee stocks. And, once again, burn rate is being mistaken for actual growth.
“The CEOs who want to tell you this bubble is different were seven years old when the last crash happened, ” says tech veteran Matthew Work.
I’m having lunch with him in the SoMa district (South of Market). Only 30 per cent of tech workers currently in the Bay Area were around during the last crash. A week in San Francisco can age you like a decade elsewhere. It makes mentors hard to find. Tech “incubators” and “accelerators” pop up on every street corner, ranging from the glamorous to the downright scandalous, luring in founders with the promise of branded hoodies, beanbags and back doors to power.
Work was a director of strategy at EarthWeb, one of the roller-coaster stories of the first boom. He waves his chopsticks like talismans. “How do you know the tech world is in a bubble? When you have companies delivering two organic eggs to your door, for free, in San Francisco. There is no such thing as a free delivery.”
New venture capitalists are excited; old venture capitalists are wary. Marc Andreessen, co-founder of Netscape and one of the most influential venture capitalists in the tech world, describes himself as a market optimist when it comes to publicly traded companies. But at the end of 2014, he posted a warning on Twitter: “When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co’s will VAPORIZE.”
Twitter is an interesting case in point. An “infant” on the public market with only 17 months of trading under its belt, the company is about to turn 10 years old in the flesh. It hasn’t managed to turn a yearly profit; it’s still struggling to monetise its 288 million users. Last year, while its stock prices continued to soar, it posted another net loss of $578 million.
Boom and bust cycles are built into our economy. The anniversary of March 2000 has passed. But regardless of what happens on the Nasdaq, at some point, the tech boom will turn. And when it does, we will be faced with a problem. Behind all the flying wads of cash, we still haven’t worked out what we want the world wide web to be.
The visionaries of the first boom imagined an online world where we were all invisibly connected, where everything was free, information was horizontal, and money somehow appeared for the worthy.
Matthew Work is right: there is no such thing as free delivery, and it’s a truism that extends from eggs to email. For the giants of the modern internet, the main route to monetisation is through advertising, the erosion of privacy, and the use of underpaid, often unprotected, private labour.
Today’s visionaries are beginning to wonder about a world where we can be private once more, where correspondence disappears, where information is hierarchical, and we know who is paying and why. It ain’t all bad. But it could be so much better.
After lunch, I walked home down Market Street, past the construction sites, where high rises are soaring once more.
For dinner that night, I ordered soy mustard glazed salmon and Chinese broccoli from an online company called Munchery: “Chef-made meals. Delivered to your door. Ready when you are.”
It wasn’t very good, but it didn’t matter. It was part of a free promotion.
While I poked at my cold fish, I watched fuzzy YouTube videos of baby pandas in the snow.
This article was first published in the print edition of The Saturday Paper on May 9, 2015 as "Blowing bubbles". Subscribe here.