Tech crisis: is 2022 comparable to the bursting of the Internet bubble?

With every lightning bolt in global technology, everyone raises the specter of the bursting of the Internet bubble of 2000, which had destroyed the sector in a matter of months. Even if caution is called for – the current correction is recent – the parallel deserves to be seen in terms of similarities, specifics and trends that may emerge for the future.

The madness of 1995-2000, then the crash

In the late 1990s, for anyone who crossed Silicon Valley or frequented the fancy bars of San Francisco, the hype was palpable. On the sixty miles of the 101 Freeway that runs along the San Francisco Bay and serves hundreds of businesses in the Valley, the giant screens were bought at exorbitant prices by start-ups with no profits and sometimes no traffic, but promising a digital business. and radiant future.

These vain campaigns acted as self-fulfilling prophecies for entrepreneurs and their investors. They were also celebrated as rock stars in places where they had to be seen. It doesn’t matter if, to use the phrase of one venture capitalist, “back then, it was customary to say that in terms of software, these boxes mostly ran under PowerPoint.” The only thing that mattered was this collective drunkenness, which was actually quite entertaining to watch and embodied by brilliant, unrestrained young people.

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In 1999 alone, 457 companies went public. What is it called an IPO? Initial Public Offering, is considered the royal “exit” for investors who will then celebrate the realized capital gain. Coincidentally, stock option filled entrepreneurs become overnight millionaires – on paper. Everyone has reason to celebrate as of these 457 IPOs, 117 will see their value double on their first day of trading.

All this joyful debauchery will be captured by the laws of economic gravitation. Many of the promised multi-communications technologies will turn out to be insecure, the customers aren’t there, the Eden of the commercial Internet suddenly seems very far away, mobile barely exists, etc. The fall is brutal. It can be summed up in a few numbers. Between January 1995 and March 2000, the Nasdaq, which concentrates most of the technology stocks, was up almost 600%. But over the next two years, the same Nasdaq will lose 75% of its capitalization, while hundreds of startups will disappear, including among the glorious IPOs of the golden years.

The Great Correction of 2022

Again some numbers. In terms of equity value destruction, since its November 2021 high, the Nasdaq has lost 30% of its value. But it’s mostly the tech heavyweights that have melted away, sometimes two-thirds of their value, as in the case of Meta, Facebook’s parent company. If, on average, we are still far from the collapse of 2000-2002, there is a magnifying effect on the large values ​​which are scattered as shown in the table below:

The ten largest US technology companies have collectively lost almost $4 trillion in market value in the space of a year. And if we take all the values ​​of the Nasdaq, the value destruction is $7400 billion. Let’s compare it to the 2000 crash: The Nasdaq had lost $5 trillion at the time, or $8 trillion today.

Conclusion: both crises are of the same order in terms of capitalization loss. They are also comparable in the labor market with more than 130,000 jobs lost in US technology at 800 companies since the beginning of the year, according to the site Layoffs.fyi. A figure equal, in absolute value, to that of the “Dotcom Bust” of 20 years ago and which should increase. However, the scope of American technology has grown significantly in 20 years: a company like Google, for example, had 300 employees in 2001 compared to 140,000 today.

Big differences between the crises of 2000 and 2022

Compared to 20 years ago, the current crisis has several aggravating factors:

• Inflation already firmly established (which did not exist in 2000-2002). This means, therefore, an increase in interest rates, which will deprive the ecosystem of this free money manna of recent years.

• A persistent negative context with the conflict in Europe, which will not end, an energy crisis of still unknown proportions; Sino-American tensions, i.e. a desire to avoid Chinese dependence, which will be costly for companies. Even if this context improves, we will have to take into account the large investments related to the fight against climate change, which will absorb enormous capital and increase the price of all durable goods.

• Uncertainties about China, whose growth is running out of steam, which must manage colossal financial bubbles, with the resulting risks of instability. All major US technology exporters are watching the situation with concern.

On the positive side:

• As 20 years ago, the cathartic dimension of the crisis should not be denied. Businesses built on sand will not survive the winter, investors’ wallets will be cleaned out, while venture capitalists Americans, more than 200 billion “dry dust” – funds not yet invested – will be back on the hunt for projects in the first clearing.

• These investments can be directed towards technologies related to the fight against climate change, as well as towards biotechnological and disruptive technologies (artificial intelligence, space, quantum, cyber, robotics, etc.) This development can constitute a frightening breath. in terms of innovation with side effects in many sectors such as transport, housing or health.

• At the macroeconomic level, a deflation of technology will have the effect of rebalancing local economies. In cities like San Francisco or New York, a 30 m2 is rented for 4,000 or 5,000 dollars a month and a lettuce costs six dollars, which drives away whole segments of the population from these cities.

But the reality also requires caution because this crisis of 2022 is its unexpected characteristic. And no one can say whether we are currently in the eye of the storm – with the worst yet to come – or whether the storm will subside.


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