The understanding of the word ‘bubble’ in business is not so far from the actual knowledge of what is known as a bubble. In tech specifically, a tech bubble is a situation in which prices rise rapidly, going far higher than the true worth of a specific asset, product, or entire industry.
Experiencing blowing bubbles as a child can give a clearer understanding of the concept. Remember how fragile a bubble is, made from a thin layer of soapy water filled with nothing but air.
Like this, a market bubble is made from an accumulation of many different elements. A single change in almost anything can cause the bubble to pop easily. When everything gets more condensed, there will be that change in which the bubble pops.
When the bubble pops, things do get messy. In business terms, a bubble popping can create a ripple effect of a market crash on a global scale.
What Causes a Market Bubble?
Out of many schools of thought that cover why a market bubble forms, here are some notable ones:
- Keynesian economics, coined by the 20th-century theories of John Maynard Keynes, pulls a string to speculation. When people rely on their instincts to make decisions, the ability to look clearly and act rationally becomes clouded. When multiplied by several variables, this act of an individual or retail investor can produce a worldwide phenomenon in the markets.
- Another reason is said to be the intervention of The Fed or the Federal Reserve, which has the power to print currencies and rising interest rates which is believed to hurt the natural cycle of a market movement.
- The basic economic principle of supply and demand is an easy and well-accepted reason. This works in the times when technology comes in and, over time, kills old methods of businesses where adaptation is the norm. This creates a surplus in demand, raising the price of a particular technology or product.
Is the Tech Bubble the New Dot-Com Bubble?
Disruption in the Tech Industry
The tech industry, especially many start-up companies, has enjoyed uninterrupted growth for the past decade, with investors having complete faith in its rise to peak performance.
However, just like anything that goes up, a market correction or a burst in the tech bubble is on its way to disrupting the explosion of demand. The projection of the tech bubble is also fueled by the pandemic and its effects, making everyone stay home for the last couple of years. Now people are rushing out of their homes to purchase products physically and even planning travel arrangements just because.
Navigating through uncertainty in the market was not planned significantly since the tech industry was growing at an incredibly desirable rate. This uncertainty is, however, happening as we speak.
The Nasdaq 100 Index has seen a 25% drop since November 2021. The so-called FAANG stocks of well-known consumer brands, Facebook, Apple, Amazon, Netflix, and Google, have lost close to USD 2 trillion in their valuation since early January 2022.
Investors are now experiencing a mood shift on their tech dealings that all made their money at one point. Companies like Facebook are, for the first time, pausing their hiring process.
Considering the social media platform’s psychological harm to its users, Mark Zuckerberg is finding it hard to find engineers that he desperately needs to realize his metaverse dreams.
This tech bubble has also shown many layoffs across the industry, especially in start-up companies. Significant companies like Cameo, Robinhood, TikTok, and Coinbase have all made statements regarding laying off employees to survive this turmoil.
How the Tech Bubble Raises the Recession Alarm
Déjà vu is the word going through people’s minds when experiencing the past year’s tech downfall. Seasoned Wall Street investors claim the dot-com crash will likely repeat itself, seeing this year’s market downfall.
So-called safe investment instruments like the tech-filled index of Nasdaq have seen a wild plummet of about 25%, and the S&P 500, filled with 500 of the biggest US companies, is down 20% since the start of the year.
Considering that we are only halfway through the year, historical trends show that this decline is just the beginning of a possible recession.
The dot-com bubble burst in the early 2000s washed out several tech darlings that were well ruling the 90s. A pattern like that can be seen today with a market that didn’t exist many decades ago.
Cryptocurrencies, among others found, lost a massive chunk of their value in the past six months. This sell-off is one of the worst in the market’s history. This dramatic drop in markets has made some of the world’s significant investors state that we are reliving the dot-com tech bubble market crash and could be on track to a recession.
According to these investors, the speculative nature of retail investors shows that not much has changed since the 2000s. Considering the market crash of the 2000s, investors were expected to learn from their mistakes.
But seeing the market today and the sell-off going on, it is safe to say that the speculative nature of investors still has not changed much.
Surviving the Tech Bubble
When talking about surviving the tech bubble, the climate of the start-up industry needs to take as many measures as possible, seeing that many investors and professionals are predicting the bubble to burst soon.
High-growth companies should work towards not only surviving but also trying to flourish as they later walk out of this turbulence. Here are some steps for companies to survive the tech bubble:
1. Get Profitable
When focusing too much on growth, some companies lose track of their business’s primary focus: profit-making. As much as investors like to see a database of customers and users of the app, they would be much more likely to enjoy looking at reaping more money from the business. Besides a surefire way to get more investment, being profitable allows employees to feel a sense of safety and security, knowing that their company is set for the next few years.
2. Cash is King
Especially during inflation, keeping cash within the company can ensure operations can stay afloat. This allows companies to keep inventory before banks turn off loans and investors run out of money to provide. If cash is available to sustain the company for 12 months, try extending it for a few extra months just in case.
3. Reach Cash Flow Break Even Faster
Ensure that capital expenditures are kept at a minimum and try to lower marketing expenses to reach another level of funding or a break-even point earlier.
4. Redefine the Word ‘Success’
Similar to becoming profitable, businesses must be able to tighten business models and adjust their mentality from being a ‘hyper growth’ company to a ‘profit first’ company.
The challenge faced by companies will be more difficult when in-house divisions are not as strong as others, especially in the accounting and finance departments. Looking to outsource accounting services can use the help of Cekindo, a market entry consulting firm in Indonesia.
Professional accounting help from a local market entry firm can be beneficial when looking for opportunities within the country, as Cekindo can navigate complicated regulations requiring extra care and attention.