At a recent Future of Finance conference, experts warned that a crash in technology valuations or some kind of wider economic shock could be in the offing. If this is right what can entrepreneurs do to prepare?
“Memories are short” warned Stephen Welton, CEO, Business Growth Fund, a speaker at the recent Future of Finance gathering organised by The Supper Club.
It may be worth pausing for a moment and recall. In 1987 stock markets crashed, there was apparently no rational explanation, but in the immediate aftermath, raising money from issuing shares was nigh on impossible - fortunately, the markets recovered quite quickly.
In the year 2000, stocks crashed and this time there was a good reason. The stock market crash followed the dotcom boom, stocks had shot up in value - crazy valuations were put out on companies and investors were sucked in by greed and fear of losing out. Does that sound familiar (think bitcoin)?
Alas, in the aftermath, it once again became nigh on impossible for techs to raise money and - this is a warning - even companies with apparently solid revenue models failed because customers either went bust or restructured.
It took around seven years for stocks to recover.
In 2008, it happened again, this time it was mortgage securitisation and a debt bubble, the very foundations of capitalism tottered and nearly collapsed.
In short, history tells us that crashes, often born of irrational exuberance, are inevitable - the only tricky bit is working out when.
But as Mr Welton pointed out, since 2008, record low interest rates have created incredibly good lending conditions. This has helped good companies grow or even start and then grow, but “a rising tide lifts all boats” not all the businesses that have benefited are built on solid business models.
Interest rates are set to rise - the US Federal Reserve increased interest rates earlier in March and is expected to increase them five more times by the end of 2019. At the same time, many economists warn that the Trump’s unfunded tax cuts and a possible trade war could create inflation pressures leading to even more rapid increases in rates.
All this, at a time when hype associated with tech seems to be at extraordinary levels.
Some justification
Yet there is some justification behind the hype - we live in an era of accelerating technology. The fourth industrial revolution has begun - there are good reasons for much of the recent excitement in tech.
Too fast
It is just that sometimes the hype can outgrow the reality - and while the rise of crowd-sourced funding, ICOs and of accelerators and incubators are good - there is a serious danger of over-exuberance. If a crash occurs, sentiment will probably swing too far the other way, and we will enter a phase of tech cynicism, just as happened post-2000.
Good bubbles
Not all bubbles are bad - long-term. The dotcom bubble probably accelerated the rise of the internet. In the US in the 19th century, bubbles in the laying of telegraph wires and then railroads burst, but still left a legacy that helped make the US the force it is today.
Anyone who had bought shares in Amazon or Apple after both the previous crashes would have made a handsome profit.
Post-2000, Google was able to expand in part by buying cheap severs - an after-effect of the crash.
The technology boom is a good thing, but only companies that recognise a crash may follow, and what that means, are likely to survive beyond such a crash - deep pockets may be essential.
