Is it time to get nervous? On Sept. 20, a pair of Silicon Valley start-ups enjoyed spectacular “pops” on their initial public offerings. Shares in Rocket Fuel, an advertising technology firm, rose 94 percent, while shares in FireEye, an Internet security company, shot up 80 percent. Uh-oh! A headline in the San Jose Mercury News kicked off the hand-wringing: “Jaw-dropping stock debuts by FireEye, Rocket Fuel are already raising questions about a new tech bubble.”
There’s a good reason for jitters: If there’s one thing the San Francisco Bay Area fears more than a big earthquake, it’s the sound of a tech bubble bursting. Economic devastation is never fun.
The difference between earthquakes and tech bubbles is that the former arrives without warning while the latter comes accompanied by sirens and a motorcade that you can hear in the distance for years in advance. When it comes to tech bubbles, the Bay Area is always on typhoon alert. But the craziest thing about the current craziness is that the closer you look, the fewer reasons there seem to be to load up on survival gear and run for the hills.
The current freneticism is a very different animal from the original dot-com boom. For one thing, the companies racing to go public this September actually have revenues and what passes for real business models, something that was very often simply not the case in 1999 and early 2000. For another, 60 percent of the U.S. population is walking around with networked supercomputers in their pockets that they are constantly using for all kinds of commercial purposes. That’s not hype — that is the essence of 2013.
So, OK, we shouldn’t be nervous, at least not about the possibility of a sudden tech economy crash. But we should be scared. Because the solidity of the current tech boom goes a long way toward explains a pressing mystery: Why so many people seem to hate the tech economy so much right now. Class tensions are undeniably much more fraught than they were the last time the tech economy ran amok. There is an us versus them zeitgeist brewing that is far darker and angrier than the ridicule that was once directed at the Pets.com sock puppet. If you listen hard to Twitter and Facebook and random comments threads, you can almost hear people rooting for the bubble to pop.
Why? Why do we hate the new tech boom?
The answer has two parts. First, there is unsettling realization that the middle is losing economic ground while Silicon Valley execs babble on about “changing the world” for the better. Income inequality is growing ever worse, and it is increasingly clear that one of the forces fueling this trend is the technological innovation flowing out of the Bay Area. Second: The very fact that this boom is not a bubble, and will not suddenly vanish, means we can’t ignore it, or laugh it away. This is the new normal, and for those not lucky enough to have catered foodie gourmet lunches in brand-new downtown office complexes, the new normal sucks. Back in 1999-2000, the ridiculousness of what was happening was so obvious that it was hard to take it seriously. Everyone knew an economy boom built on online pet product company IPOs was doomed. Sooner or later, the bubble would pop and sanity would be restored and all those annoying dot-commers crowding your favorite bar or restaurant would go back to where they came from. The traffic would finally ease up.
But that’s not going to happen this time. The current boom isn’t a flash in the pan, doomed to disappoint arriviste gold miners. It’s here to stay. A mature Internet economy is generating huge riches, and it is remaking the face of San Francisco and the larger Bay Area in the process. But unless you really, truly want a job chauffeuring the new rich around town, or delivering their same-day groceries, or pouring their flights of craft beers — jobs that, incidentally, won’t pay enough to afford you an apartment anywhere in San Francisco — this new boom may not seem worth cheering about. Might as well root for it to fail.
* * *
Seven Bay Area tech companies filed to go public in August. Thirteen tech IPOs are scheduled for the last week of September, alone. The rush to market is a logical consequence of the fact that technology IPOs have been doing particularly well of late, performing better, reports the Wall Street Journal, than at any point since 2000. In mid-September Nasdaq reached its highest mark since September 2000, though the exchange is still a long way from its peak in March 2000, just before the bubble burst.
Any time you hear the words “since March 2000,” you have the right to start reaching for the Alka-Seltzer. The spring of 2000 saw phenomenal wealth destruction. Publicly traded technology companies were losing 90-95 percent of their market capitalization in a matter of months. The prospect of that happening again, and destroying the economy of California — and probably the entire U.S. — all over again, is unappetizing. Thus the worried headlines.
But if you go back and start sifting through the press coverage of the dot-com boom, you realize very quickly that we are far from anywhere near the level of insanity that dominated 13 years ago.
In 1999 there were 308 technology IPOs. But by mid-September 2013, only 22 technology IPOs had launched all year. Even taking into account the horde of companies going public at the end of September, we still aren’t within a country mile of the dot-com peak. Indeed, venture capital financing has fallen through the first half of this year. In the second quarter of 2013, VCs spent around $2.6 billion. In the second quarter of 2000, VCs spent $9.3 billion.
There’s also a huge difference apparent in the quality of technology companies into which VC money is being funneled. A list of the biggest blowouts of the dot-com era — Webvan, TheGlobe.com, Pets.com, eToys, DrKoop.com, Kozmo, FreeInternet.com, Flooz.com, Boo.com, MVP.Com, Go.com, Kibu.com — is a roll call of companies that quite often went public without any history of generating meaningful revenue and with only the sketchiest of business models. Pets.com raised $82 million in February 2000, and filed for bankruptcy nine months later! By comparison, Facebook, reviled last year for supposedly the worst Internet IPO of all time, is now trading at higher than its initial share price offering, and boggling analysts with robust mobile advertising revenue figures.
The blatant chicanery of the dot-com boom IPO scene was impossible to ignore at the time, although that didn’t stop the suckers from rushing in. In many cases, the obvious goal wasn’t to build a business at all. The imperative was simply to stage an IPO so as to cash in on investor-driven speculative fever. The IPO was just a gambling vehicle.
That’s still true, of course, but to a much more limited extent. When you look at the tech companies that are currently going public, it’s hard to see many similarities between them and DrKoop.com. (1998 revenues: $43,000. June 1999 IPO: raised $90 million. August 2000: delisted from Nasdaq!) Rocket Fuel and FireEye offer an excellent window in. For starters, it’s hard to imagine safer bets in today’s economy than the domains of advertising technology and Internet security. Even better, both companies actually have products that customers are currently paying for!
“Both Rocket Fuel and FireEye have exhibited the growth IPO investors crave,” reports the Mercury News. “The latter has more than doubled its annual revenue in each of the past two years, while Rocket Fuel managed to double revenues to more than $100 million in 2012 and rake in nearly as much in the first six months of 2013.”
Actual profit, not so much, but you can’t be too picky!
Other Bay Area IPOs that launched in late September included firms specializing in cloud-based telecommunications management, enterprise memory storage, fiber-optic networking and Internet phone services. Basic infrastructural stuff that is obviously necessary for the expansion of the Internet economy. You might reasonably be able to characterize the current mini-stampede as “frothy,” but it is not the stuff of tulip-mania or the delusions of crowds. It’s business as usual. It feels grounded in reality.
* * *
But you know what else is grounded in reality? How about the fact that if you want to rent an apartment in the Mission district of San Francisco, you would need to work the equivalent of 5.5 minimum-wage jobs to afford the average $2,920 rent. Make that 7.5 such jobs if you want to live South of Market, where so many tech firms are headquartered. Also grounded: the shocking decline in the percentage of San Francisco’s residents who are African-American — nearly 20 percent in just the decade 2000-2010. All over the Bay Area, according to Joint Venture Silicon Valley, average incomes are rising, while median household incomes are falling — a strong sign that the wealth created by the thriving tech economy is not getting evenly distributed.
Unemployment is obviously and thankfully down — but serious questions remain as to the distribution of the new jobs. It’s a familiar story nationwide: The last couple of decades have seen the middle class get squeezed, and new technological innovations that have resulted in the automation or outsourcing of jobs are a big part of that narrative. The rising antagonisms directed at the tech economy’s nouveau riche are a direct consequence of a couple of decades of seeing “Star Trek”-like technological advances accompanied by a measurable fall in individual living standards.
The unkindest cut of all? Food writer John Birdsall returned from a Portland, Ore., food festival and reported that the Bay Area’s vaunted “populist craft foods” scene might be as “extinct as the $1,500 flat.”
Maybe when today’s tech bubble goes the way of the last one, and the white-linen four-tops disappear from Valencia Street, maybe then San Francisco will get the populist craft cooking a lot of us want to thrive here. Until then, hey: Fares to Portland really aren’t that bad.
With reasoning like that, one can understand why some people might be hoping for the bubble to pop, even if that would inevitably mean higher unemployment and closed restaurants and vacant office buildings. It’s beyond annoying to think that Facebook and Twitter millionaires are driving up the price of a kick-ass burrito. But what’s even more annoying, and potentially rage-inducing, is the nagging worry that the bubble isn’t going to disappear, that the Bay Area is fundamentally changing. In that scenario, the enduring power of the tech boom turns out to be far more troubling, and meaningful than the fraudulent scamming endemic to the first dot-com boom.
Of course, San Francisco has always been a boom and bust town populated by get-rich-quick hustlers. That’s part of the city’s DNA. That’s why the city exists in the first place. And for a city that thinks of itself as “progressive” there’s an odd sort of conservatism visible at work in the anguish over what is being lost. As Farhad Manjoo argued in a recent San Francisco Magazine cover story, the real challenge is to figure out ways to move forward, to funnel tech-driven economic growth into improvements in the region’s housing stock, transportation infrastructure, and social services so as to raise the standard of living for everyone.
Manjoo’s piece sparked a strong critical response and an ensuing spirited back and forth. A big driver of the backlash was the perception that Manjoo wasn’t acknowledging the unequal distribution of the benefits of the tech boom. Yes, it’s great that unemployment has dropped so much, but job polarization that groups a smaller and smaller number of workers at the high end and a growing number of workers at the low end is hardly the grist for outbursts of ecstatic enthusiasm. At this point in the evolution of the Internet economy it is not irrational to question the ways in which technological progress is contributing to growing class disparities. In fact, the San Francisco Bay Area may turn out to be the ground zero for resolving that paradox. A liberal region is wrestling with the illiberal consequences of the Internet revolution.
No wonder tensions are high. Because this is no bubble, no fickle gyration of the business cycle. This is the story of the 21st century.