So friends, my belief is we’re approaching a giant economic bubble driven my tech. I’m not an economist, I’m really just throwing my own ideas out there. And I’m trying to grab up data to support it, knowing I basically don’t understand what I’m talking about.
The problems are summarized here:
Essentially since the dot com boom/bust, massive flows of venture capital have driven the growth of companies that have a problem: they don’t make money. Software trends have made it incredibly easy to enter a market, incredibly hard to make money in one. You’ve seen the news — Uber and Lyft losing billions. Having seen the failure of taking companies to IPO in the late 90’s, tons of startups just stay private, with their losses hidden from the public. The problem is this applies to almost the entire tech industry with the exception of a few established players (google, apple, amazon, facebook).
But it gets worse. Consider the effect on an industry of a new player who lacks the requirement of turning a profit. Everyone who’s already there, operating on an assumption that money must be made (i.e. like taxis) is at an a disadvantage. These old functioning business have often been replaced by ones that lose money hand over fist.
To me this has all the properties of something that could create a run on the banks — investor confidence drops, capital flow drops, the venture capitalists expecting to make money suddenly feel the need to recoup their losses, and they start cutting all the bad companies and selling the good ones. WeWork which you may have seen in the news may be the canary in the coal mine.
The question is how far it then goes. And this is where I’m out of my pay grade but trying to understand. Here’s some scary stuff:
Pension funds are investing a lot in private equity lately: https://www.institutionalinvestor.com/article/b1cy61jsl24097/Public-Pensions-Pour-More-Money-Into-Private-Equity
Many startups (as much as 28% — 40%) get some venture funding in the form of debt (as opposed to giving away part of the company) — in the form of short term loans with even higher risk: http://faculty.haas.berkeley.edu/morse/research/papers/VentureDebt.pdf
And here’s a larger trend of corporate bonds in general being a concern — companies are leveraged in the same way homebuyers and the wall street firms were in 2008: https://www.cnbc.com/2019/01/15/investors-have-a-new-biggest-worry-about-the-stock-market.html
Corporations like Uber that is: https://www.nytimes.com/2016/06/15/business/dealbook/uber-sets-sights-on-leveraged-loans-for-even-more-money.html
I dunno I don’t know if I know anything about what I’m talking about but I think our companies are starting to run on debt in the same way people have been trying to float themselves on debt the last several decades.