“Everyone enjoys a party. But, inevitably, following a great party, there is a hangover.” Billionaire investor, Stanley Druckenmiller.
Global tech giants saw their value fall by over $1 trillion in three trading sessions. Also, over 15,000 workers have been laid off by startup companies worldwide. Are the flops in the technological marketplace signs of bust? Is that a “bubble burst”?
There is a phenomenon of economic growth characterized by a rapid rise in market value. But this rapid inflation is followed by a rapid decrease in value or contraction. It is sometimes called a “bubble burst.”
The roar of bubbles can be heard anywhere right at this time. Tech stocks, early public offerings (IPOs), valuations and even cryptocurrencies—all the assets that have reached skyrocketing heights in recent years—now come down. Has the party been done here?
Is Tech’s Bubble about to Burst?
It feels like a technological bubble is going to burst. If it is a technological bubble, it is made of things stronger than the one that broke out around the turn of the millennium. This bubble was embodied by start-up companies that closed their doors just nine months after their stock sale, which was widely publicized.
However, What Is a Bubble?
In the context of economics, The term “bubble” typically designates a situation where the price of something—whether it’s an individual stock, a financial asset, or even a whole sector—greatly exceeds its basic value. Because speculative demand fuels inflated prices, the bubble eventually pops. According to Investopedia, as speculative demand drives price inflation, the bubble ends up bursting.
Generally, bubbles are created by an increase in asset prices triggered by enthusiastic market behavior. During a bubble, assets generally trade at a price, or in a price range, that greatly exceeds the intrinsic value of the asset (the price does not correspond to the underlying asset.
What Triggers The Asset Bubble?
Bubbles encourage borrowing & margin investing. It causes pain as rates increase. In addition, fast-growing companies, whose valuations incorporate overly optimistic assumptions as to the future, are seriously affected by rising interest rates.
Three main factors contribute to the irrational vibrancy and subsequent asset inflation, as explained in The Balance, “Asset Bubbles: Causes and Trends”:
Low levels of interest
Low-interest rates make it easier to borrow at lower costs, thus stimulating capital expenditure. However, at those rates, investors may not get a good return on their investments. They transfer their money into higher-yielding, higher-risk asset classes, which pushes up asset prices.
Demand-pull inflation
It occurs when a commodity’s demand exceeds the available supply. The sellers of the goods then increase the prices.
Asset shortage
It happens when investors think that a particular asset is not enough. Due to the imbalance between supply and demand, prices increase above the asset’s value, making asset bubbles more likely.
How does a bubble burst and affect the business? The damage from bursting a bubble depends on the economic sectors involved. For instance, the bursting of stock and housing bubbles in Japan from 1989 to 1992. In the United States, the dot-com bubble burst in 2000, and the residential housing bubble in 2008 caused severe recessions. In short, Historically, the most common enabler of a bubble-bursting is higher inflation and interest rates.
Learn From a Dot Com Bubble Burst: Would It Be a 2.0?
When did the dot com bubble burst happen? “The technology bubble in Silicon Valley is bigger than it was in 2000, and the end is coming,” CNBC said about the present situation. The tech unicorn bubble is already reached. Everything will fall apart now. Massive losses occur in early-stage venture capital-funded startups that are overvalued, up to 50%. Will there be another dot-com bubble? The market situation at what took place 20 years ago?
Let’s see what the dot-com bubble of the early 2000s has in common with the current explosive growth of startups. The dot-com bubble was the unprecedented increase in market valuations of online technology firms. It was Also known as the internet bubble or the information technology bubble. “Dot-com” is an industry-specific term for any online business. As the market value of these businesses grew exponentially, it peaked in popularity at the turn of the century.
This is an economic situation where stock prices are highly overrated by their intrinsic value. Investors were not just unaware of the state of affairs in IT companies, but also ignored their true value in pursuing their illusions. But as soon as that happened, people started to wonder if history could be repeated—to be the dot-com bubble 2.0.
In 2021, startups were expanding at a giant pace. The coronavirus, the global shift to telecommuting, and the digital transformation of offline companies have stimulated start-ups to offer innovative technical solutions. Any experts, investors, and start-up enthusiasts are worried that the bubble may reappear.
But Probably, The Blast Is on The Verge of Happening
Economists argue about the cause of the bubble. They even disagree that bubbles are forming. They are based on the assumption that asset prices often diverge from their intrinsic value. However, bubbles are usually only identified and studied after the fact that there is a huge drop in prices.
But highlighting Newsbeezer’s article, job separation (lay-offs) in startups would also have something to do with the bursting bubble phenomenon observed today in startups. Startups across the country have experienced it. They grow up so fast, but they’re not strong enough. Recently, many Start-ups have put thousands of workers out of work.
Previously, over 15,000 workers were laid off by start-ups around the world, including Indonesian start-ups, amidst global economic uncertainty. Some of them are Zenius, LinkAja, and Shopee.
An educational start-up, Zenius Education, has laid off 200 employees. Its management stated that the lay-offs had to be made because Zenius was affected by the current economic impact. In addition, Shopee, a start-up e-commerce company, is set to launch mass layoffs in Southeast Asian markets, including Indonesia.
Moreover, although it is reported that they have made a lay-off, the Indonesian application of fintech LinkAja has not specified how many people are affected. The head of the LinkAja corporate secretary group stated that the layoffs are made due to significant changes in the company’s business goals.
Whether It Bursts or Not, It’s Time to Get Real
“Growth at all costs” was the party in which many startups took part, and it worked at the time. Until the companies lost money to grow, but the valuations began to diminish. Private and public investors could not see the timing of the profits.
So far, the founders of startups have endorsed the idea of “growth at all costs.” They rely on an open source of venture capital. But now, the founders must beware: Growth at any cost may no longer be in favor.
The start of the COVID-19 pandemic continues to cause turmoil in global markets. The overflowing modal venture now looks to turn downwards and become more selective. Growth is a key driver. However, in a post-COVID context, this should not be the only goal of the founders.
Today, investors are looking for a clear path to profitability. The notion of “growth at all costs” is no longer relevant. Long-term sustainable growth and profitability are the only ways to enter the new economic situation.
Investors tend to pay more for capital efficiency, unit economy, contribution margin and cost-effectiveness. So, founders should be prepared for this by changing direction rather than sticking to “growth at all cost” and wishfully can escape any trap.
Course Correction: Startups Survival Kit during Funding Cuts
Massive lay-offs and funding cuts due to the collapse of the global market and tight liquidity have spread the ‘start-up winter’.
As we said, the funding euphoria was over, and the VCs assessed the deployment of their funds. The massive change in funding in 2021 will probably force founders to do something about it. Thus, founders, the course correction phase seems to have started.
Course correction is about adjusting to failure, overcoming unexpected obstacles, and charting a new course for the company. While it is integral to entrepreneurial success, it is essential to survival in this next era.
Course correction comes in many forms: it tests the viability of other hypotheses about a product, a business model, and the growth of the enterprise.
Below are the five “course corrections” that each start-up may consider:
Zoom-in
This approach makes a feature unique within a particular product become the entire product. It focuses on the product’s value and leads to a minimal viable product (MVP). It is looking at producing a product that is delivered quickly and efficiently.
Zoom-out
It reverses a zoom-in approach. Sometimes a single feature may not be enough to support a range of clients. What companies previously considered the total product is now a single unique feature.
Engine of Growth
Most startups will look at these significant growth drivers: the viral, paying, sticky growth drivers. A company should consider choosing an appropriate model because this can significantly affect profitability and growth speed.
Customer Segment
A company can create a compelling product that attracts real customers but does not attract customers in the initial vision. While a product may resolve a real problem, there is always a need for the proper positioning for a much more valued and optimized segment.
Channels and Pivoting
Changing direction to achieve the goal is unavoidable. Nearly all entrepreneurs face challenges in developing a product that will require deciding when to pivot or, instead, persevere.
The startups’ track should not be just about money but how many pivots it can still do. Channel pivots require special and reasonable adjustments to price, characteristics, and competitive positioning.
High-flying startups were quickly grounded in the new climate. While the market was hot and venture capitalists had taken back the power of the company’s founders, startups should be getting ready for the ‘party’ which is getting worse.
