With technology-company valuations continuing to climb despite rising risk aversion and market volatility, pundits are comparing today’s reality to the frothy dot-com boom that peaked in 2000. Those comparisons play on investor sentiment and make for intriguing headlines but the truth nowadays is more complex and the parallels with the past are limited.
Today, the overall quality of technology companies is vastly superior to the universe of companies that drove valuations to incredible levels 15+ years ago. While many Internet companies, including some recent IPOs, continue to bleed red ink, there are many others that are delivering compelling products and experiences, growing profits and gaining market share.
In the heady days of the market run-up in the late 1990’s, investors were just learning about the power of the Internet and placed bets on a variety of companies with untested business models, all based on expectations of internet ubiquity and high bandwidths.
Conversely, many of today’s newly public technology companies have established operating track records, leverage a global and mobile Internet infrastructure, and have benefited from years of private-equity support. Equally important, most IPO investors have much higher expectations in terms of the commercial and financial progress of their investments. As a result, IPO candidates are coming to market with more proven backbones, global customers, sounder strategies and promising innovations. But let’s keep in mind, a strong company with the aforementioned characteristics has the potential to thrive even in difficult market conditions. For example, some of the enterprises that were launched during the dot.com era are today’s biggest companies such as Amazon and eBay.
On a grander scale, we’re continuing to see the dramatic impact of technology and the Internet across virtually every industry from retail, media and banking to health care, automotive, agriculture and industrial products. Today’s successful technology-driven companies are more than likely to be disrupters, driven by solutions that better utilize data and that make consumer experiences and business processes more effective and efficient. The expansion of the Internet of Things (IoT) has fueled a whole new ecosystem driven by innovation. And, there are scores of established and emerging technology companies serving as enablers and embedders behind the scenes, as well as engagers and enhancers who are directly serving customers.
While dot-com era comparisons are intriguing, if we are to learn from the past, this is definitely not the age that brought U.S.-focused companies such as pets.com, Webvan or Worldcom. Rather, this is the age of globally dominant U.S. web-based companies like Google, LinkedIn and Facebook – and a wide range of smaller, fast growing technology enterprises with great promise. They’re harnessing the productivity of the cloud, the speed of mobile, the insights of data analytics, and the voice of the customer to drive change, foster competition and fuel revenue, but they are also facing new global challenges — especially from China.
This is not to say that some technology companies aren’t likely overvalued. We’ve seen exuberant investing in many “unicorns” (startups that quickly saw their valuations soar to $1 billion or more) with the brunt of indulgence occurring in venture-capital circles. Some companies will succeed while others fail, and the market will separate the winners from the losers. This is all part of the cycle of capital investment. And, as investor sentiment turns more cautious and market instability persists, the bar will be raised further, both for attracting private investment and for accessing public equity.
At the end of the day, those technology companies with real business models, compelling products and proven track records in generating revenue and consumer loyalty will likely adapt and attract capital and put it to work, while the others may fade.
The difference between 1999 and today is the sheer number of quality companies raising capital – and the dramatic impact they’re having on how we live and work across the globe.
Commentary by Pierre-Alain Sur, PricewaterhouseCooper’s US technology industry leader across all lines of service (advisory, assurance, and tax), and a partner in the assurance practice. He also serves as the firm’s US leader for the communications, entertainment, and media industries and previously led PwC’s global telecommunications practice. In these leadership positions, Pierre works with his teams to enable some of the largest Fortune 500 companies, as well as emerging innovative start-ups, to reach their financial and strategic business goals. Follow him on Twitter @PierreAlainSur.