The next big financial crisis (is already happening)
Credit to Author: Ben Kritz| Date: Wed, 19 Feb 2020 17:17:27 +0000
THERE is a popular rule of thumb, for which there is no scientific basis but seems to be accurate more often than not, that nostalgia has a 20-year life cycle. In other words, what was popular 20 years ago should be enjoying a resurgence in popularity right about now.
Unfortunately, this is not always a good thing, and once we realize that whatever it is we’ve given a second life should have remained in the past, it quickly falls out of favor and any business developed around it crashes.
Twenty years ago, utterly worthless, unsustainable internet-based companies were all the rage. Thousands of startups based on interesting but not necessarily profitable ideas enjoyed an investment boom. The world was awash in liquid capital, and anyone who could even vaguely express a business model could have all the money he wanted. A company that could barely generate revenue, let alone actually turn a profit (my personal favorite example was one that delivered pet food that customers ordered online) might be worth billions of dollars, thanks to being propped up by vast amounts of venture capital.
Those were good times. I was right in the middle of it, working at a German luxury car dealer in downtown San Francisco, Ground Zero for the dot-com boom. Easily seven or eight out of every 10 customers was of the nouveau riche “startup” class, and they were easy prey for us. Not that they seemed to mind; when our manufacturer introduced a new roadster, which was necessarily in short supply due to the length of time it took to build them, our eager customers routinely offered tens of thousands of dollars over the car’s already hefty $128,000 sticker price to ensure they could take delivery faster.
For two solid years, 1999 and 2000, I did not take a salary or expenses, but simply a small, 1.5-percent commission from the department I was responsible for. In one year, I earned a little north of $180,000. The next, I topped $200,000. In one memorable month, I made nearly $40,000.
Of course, that couldn’t last, and we all know what happened next. The well eventually dried up, and virtually in unison, the investors that had poured so much money into startups called in their markers. The dot-com boom turned into a dot-com crash almost overnight, wiping out all but a handful of the internet startups (Amazon was one notable survivor), and crushing the businesses — like ours — that had relied on their more-money-than-sense spending.
I can’t say I saw it coming when it actually did, but when an opportunity to transfer to a different part of my company — at the other end of the country, serving a thoroughly recession-proof market — I took it, and escaped the disaster by a matter of weeks.
Fast-forward 20 years, and I am in a completely different business, in a completely different part of the world, but feeling the same weird atmosphere as there was back then, smelling it like ozone in an approaching storm.
Last week, The Bloomberg Startups Barometer, a weekly indicator that measures the overall health of the business environment for technology companies in the United States, dropped to 833.74. It hit its peak at 1545.32 during the third week of June last year, and so has slid 46 percent in a little under eight months.
The barometer, according to the explanation provided by Bloomberg, measures the amount of money flowing into venture capital-backed startups plus the money from company exits – acquisitions by other firms, mainly – that result in returns for their investors, averaged out over a 12-week period to smooth out the volatility of the market. For the barometer to drop precipitously, either: money has all but stopped flowing into startups; many startups are “exiting” at a loss to their investors; or both.
It is easy to see what is happening, but amazing that the world has apparently learned nothing from the first time it happened. For years, central banks have flooded the world with cheap money through “fiscal stimulus” and bargain-level (sometimes even negative) interest rates in an effort to recover from the 2007-2008 financial crisis. That money isn’t worth much if it doesn’t go somewhere, and so – largely thanks to the growth in social networking – we have witnessed dot-com 2.0. Consider the valuation, revenues and losses of some of the startups that are considered the most “successful” of the current period (2018 figures): Uber, $64.4 billion value, $11.3 billion in revenue, and $3 billion in losses; Pinterest, $15.1 billion value, $756 million in revenue, and $63 million in losses; Beyond Meat, $4.6 billion value, $88 million in revenue, and $30 million in losses; and Survey Monkey, $2.1 billion value, $254 million in revenue, and $155 million in losses.
If history doesn’t repeat itself, it at least rhymes. For economies that are heavily reliant on the “tech sector,” retail, and other forms of discretionary spending (like the economy we’re sitting in), things could get ugly very quickly.
ben.kritz@manilatimes.net