Finance chiefs see parallels between the dot-com bust and the current techlash

The last time the tech sector faced the kind of financial reckoning it’s undergoing now, the Backstreet Boys dominated MTV (and MTV still played music videos), a lot of people still used AOL dial-up to get on the internet, and Gmail had yet to launch. But interest rates were low-ish, venture capital was plentiful, and startups peddled their novel “dot-com” ideas to investors with dollar signs in their eyes.

But then the bottom dropped out, and the dot-com bubble burst, leading to thousands of layoffs and many companies going out of business altogether. And if this is starting to sound familiar, it’s not just you; many who lived through the dot-com boom and bust of the late 1990s and early 2000s are seeing eerie similarities to the most recent tech-sector downturn.

“Both these eras were characterized by irrational exuberance, I mean, on steroids, with three exclamation points,” Len Sherman, adjunct professor of business management at Columbia University, told CFO Brew. Both eras saw new technology supported by an extraordinary burst of capital; first for the fledgling dot-coms and, most recently—at even higher rates—for tech behemoths between 2017 and 2021.

Out with the old, in with the new: While the ’90s saw the rise of the internet, smartphones and wireless connectivity drove the latest tech sector surge, Sherman said, and in both eras, the new technology led to the belief that the old rules were out, and that one should jump on the next opportunity that emerged. In both eras, however, many investors threw due diligence out the window.

But not everyone is seeing clear parallels between the first dot-com bust and the current crisis. Craig Wert, CFO of service-scheduling software Jobber, told CFO Brew that right now is not comparable to the dot-com bust, adding that the 2008–2009 downturn era was worse.

“I believe the markets are functioning; they’re just getting a lot more selective, and it’s probably healthy,” Wert said.

Whether today’s tech CFOs and company leaders can take any lessons from the late 1990s is still to be determined, but Tom Fennimore, CFO of Luminar Technologies, told CFO Brew he has crafted much of his current planning with the lessons of the dot-com bust in mind.

Fennimore said that having a strong, solid, cash-rich balance sheet seemed to be the main difference between the companies that survived and those that went down in the early 2000s. Luminar raised enough to get the company to “profitability plus a cushion,” he added.

“I wanted to make sure that we could build a big enough balance sheet and we’re prepared for this inevitable downturn,” Fennimore said. “I see a lot of these similarities, having lived through the first dot-com boom when I was in my early 20s, and…what we’re going through now.”

Fennimore has taken a multi-pronged approach at Luminar, emphasizing that near-term revenue is crucial. “Having the best technology is great, but you have to be able to actually commercialize that technology,” he said. “We needed to make sure that we built that storm shelter for the current storm that we’re going through.”

Once Luminar went public, the company decided to pay people in restricted stock units— if there is a financial bubble about to burst, RSUs still have value versus stock options that could hypothetically pop overnight and could lead to top talent fleeing.

In the 1990s, Sherman told CFO Brew, companies were faster to enter the IPO market, where some launched, and then went public less than 18 months later. In the case of the current market, tech stocks outperformed the S&P 500 during the pandemic, leading to an overvaluation of their stocks as the less sexy, non-tech sectors were hit badly by supply-chain issues in the thick of a global catastrophe, Sherman said. Now, the market is restabilizing to reflect their actual valuation in relation to other sectors.

“It’s the nature of the capital markets, its pendulum swings, it goes from one end to the other, to crazy money for everything, to no money for almost anything,” Wert told CFO Brew. More bluntly, Sherman said, “Human beings are stupid. I mean, we go through one asset bubble after another and every time we say, ‘Oh, no, no, no, we’re not going to do that again.’” —KT