Why the tech bubble must burst

Business Leader Magazine hears the thoughts of Jamie Waller, the CEO of Firestarters – an investment campaign company that helps entrepreneurs and businesses through financial and personal investment.

So far, Jamie has invested over £4.8 million in helping businesses across the UK.

Jamie has dealt with many technology-based companies and shares his thoughts on why the tech bubble must burst.

A bubble is fine when it starts and the main investors are investors that have made millions from their own business bubbles and are taking another risk in the hope for massive returns.

A bubble becomes an issue however, when you see the companies that trade within it raising funds from institutional funds. Wow, now that’s a bubble no one wants to see burst.

Pension funds are becoming leading players in late-stage funding rounds of the hot tech industry like Uber, Airbnb and Lyft, linking retirement of hard working middle classes to unpredictable sexy startups.

The huge pension deficit that exists in the UK means that funds are looking for more and more attractive ways of getting increased returns and low interest rates direct them towards private equity returns.

The problem is, that these investment opportunities normally become available to the larger institutional funds when the cream has been taken by the cats at the top.

A number of bankrupt technology giants will equal a significant increase in the pension fund deficit. Pension fund deficit, leads to bankruptcies and bankruptcies lead to regulator bail outs. I wonder if the Government are tracking this potential exploding bomb and making provisions for it?

Many people will read this and say, ‘what does it matter, there is not a bubble anyway’ but let me tell you this…

An asset with a price that cannot be justified with any reasonable assumption is an overvalued asset in my mind. A bunch of overvalued assets in one sector = a bubble. We are in a bubble.

I am not saying that people won’t make money along the way – of course they will, that’s capitalism! The problem however is geared towards the last money in.

Are the last set of investors likely to make a sufficient return for the risk that has been taken? A good example of this is CB Insights’ last calculated Uber valuation which was 100 times its sales. How can an institutional investor honestly believe that this is a risk worth taking? To put this into perspective, Microsoft got about six times sales when it went public.

Now the problem is not just with the late stage investors and pension funds. The UK Government have made investing in personal pensions so unpalatable that early stage sexy businesses are also being plugged by pension funds. Not institutional ones, but personal ones.

A relatively small lifetime allowance on pension contributions means that everyday people look to invest their money in things with a potential greater return. SEIS and EIS investment schemes point those investors towards early stage startups.

So now we have early stage pension savers putting their money into the first round of sexy tech businesses and institutional investors putting their investment funds into late stage. The question is not ‘if’ but ‘when’ the bubble will burst.

It’s important to remember, the problem is nothing like what we saw in 2000, when it was easy to monitor and identify issues within public markets.

Today more and more private investors are backing these private companies that would never have achieved these valuations on the public market. The truth is, private money means we are not sure how big the problem really is. I think the crazy valuations are the best indicator we have of how bad the bubble might be, and I think it’s bad.

My advice is to stick your tax incentivised investments into a range of assets that include private companies – but please be sure to feature unsexy ones that demand a multiple of profits and will deliver a steady return. Unsexy businesses might be the link to your sexy retirement.