It is partially. There's some basis in reality since it's actually very profitable overall, but the investment goes beyond reality.
I'm not saying you shouldn't invest in tech. It's possible this bubble never goes away.
Most of these unicorns simply can't turn a profit with their current cost structures. And even if they do, the profits will be so small that the valuations will simply not be justifiable.
I'm not sure dependency implies a bubble, rather a risk. For companies like Amazon(AWS), there certainly is an element of being too big to fail because AWS and similar cloud operations provide so much of the infrastructure for other applications.
The bubble can clearly be seen by the disassociation of valuations from the underlying value, which for many new companies is nothing.
Scratch that (true, but the whole economy I counter needs cheap enough money to grow); the U.S. government is the biggest borrower I counter-claim. So taxes got to go up while the economy somehow keeps growing for this to be sustainable. Ergo, it is not in a matter of years, and I would say that is the common "secret."
The hope is that everyone is going to march in line and not go out asking for raises due to inflation; so that we end up with "hyper-inflation" before the supply chain system stabilizes, maybe the Russo-Ukraine conflict sees some light, and the U.S. Treasury can decide they can't sustain this any longer.
Thus, we are praying for all these pieces to kinda fall into place, so we don't end up with hyper-inflation, recession and interest rates going down all at the same time.
Click All to see the difference in scale we are talking about to the past. 2 Trillions are parked to the Fed by banks, accumulating the new high interest, waiting for a signal to be re-enter.
What were interest rates in the late 90s? hmm...even higher than today, yet that was the biggest tech bubble ever. If VCs and other investors expect to make >100% in a year , what does it matter if the interest rate is 3% or 1%?
Startups generally have only very limited (if any) access to money anyway, so making money more expensive for established companies is probably a net positive for folks who are legitimately trying to start real software businesses.
Not really. The money a startup is going to make is farther in the future than an established company.
If you look at discounted future cashflow, a startup as an investment opportunity is much more influenced by the interest rate than an established company because a larger % of the value is coming from money farther in the future.
Basically 20% of net present value of Microsoft comes from the money it'll make next year and 5% from the money it'll generate 5 yrs from now.
But a startup is the opposite where 0% of the value of the startup comes from the profit it'll make next year, and 20% from the profit it'll make in 5.
And when interest rates change it reduces the present value of the profits in 5 years by far more than it reduces the profits next year. Reducing the value of the startup relative to Microsoft, reducing the startups ability to get funded more than Microsofts.
> reducing the startups ability to get funded more than Microsofts.
So for 99% of startups (who don't raise venture capital anyway) there is no difference. But for Microsoft there is a huge difference, which is why the big tech companies are doing layoffs. Whereas we're not seeing many Indiehackers posts about people working out of their parents' basements who are laying themselves off.
The argument is that easy "free money" causes money to flow into equities, and that money goes in search of better returns which includes venture funding.
The moment the economy tightens up, suddenly the venture funds have less money.
I'm not sure what's causal in it all, but from the outside it certainly looks like that's what happens.
It's not that they have less money, it's just that when 1yr treasuries are paying over 4%, the returns in risk-adjusted investments need to either return a lot more or die.
Probably both matter: suppose your grandma is your angel investor. If suddenly equities plummet, grandma sees less in her portfolio, so the funds available for angel investing are no longer there.
This is happening to me right now with my parents not being able to help as much with my kids' college tuition.