Is the Internet Bubble About to Burst?

Are we headed for an Internet bubble burst, and how will current market circumstances affect your business?
February 11, 2016

Not all small businesses today existed when the historic dotcom bubble burst from 1999 to 2001, but that colossal failure of many early Internet-based companies is remembered as a testament to what can happen in the wake of overvaluation.

In light of recent stock plunges, some of which are affecting Internet giants, it’s not surprising that some market forecasters are predicting we may be headed for another busted Internet bubble. Reasons for this include a decrease in private startup funding rounds and more startups finding it necessary to raise money overseas, because big investors no longer seem to trust Internet valuations.

Internet Bubble Bursting?

Despite recent setbacks in the stock market, some small-business owners in the trenches don’t feel that the Internet bubble is bursting. 

“I do not think the tech bubble is ending. True innovation always has a place in the market,” says Nicole McMackin, president of Irvine Technology Corporation. “Many of the companies experiencing lower stock valuation have become stagnant to the users and/or investors, but people will always invest in new and creative devices and concepts. Small and large firms alike are busy working on the ‘next greatest thing’ that will change the way we work, communicate and live. Those companies that demonstrate a true value to society will receive proper financial backing.”

Rich Pleeth, founder of Sup App, a free mobile app that notifies users when friends are nearby, sees investors becoming increasingly cautious, given the current state of the stock market.

“Looking at this from an early startup’s perspective that is raising funds, we can see that investors are becoming increasingly cautious. The stock market is going through a period of adjustment, which means investors and high net worth individuals are not seeing the huge returns that they have seen in recent years,” Pleeth says. “In the past five years, we’ve seen stocks increase dramatically, which results in more capital to put into startups, but now many public companies' stock prices are decreasing, as they cannot prove those prices.”

Future Outlook for Small Tech-Related Companies

Investor caution in general may have an effect on how growing companies obtain funding.

“It’s going to be increasingly hard to raise funds, as high net worth investors will have less funds available than in previous years, because their public stocks will not be doing as well,” Pleeth says. “There is always going to be investments available for great startups that are solving a problem, but what we’ve seen in recent years is that when it comes to startups, investors have become increasingly less interested in investing in very early stage companies.”

This can make the funding landscape especially difficult for small companies that thrive on innovation, as they can often require a vast amount of funding for research and development. That may continue to be an issue, McMackin adds. “Small firms typically need to procure a hired gun to get them through funding and angel investing. If these firms lack the knowledge to gather funding, they normally do not succeed, regardless of the ingenuity of the business idea or product. Smaller firms need to be cognizant of their bottom line while enhancing development of their products,” she says.

“We’re entering a period where it is even harder to raise funds," Pleeth adds. "It’s important to realize that if startups were easy, everyone would be doing them and everyone would be raising crazy amounts of capital. The truth is it’s hard. Ensure you have a great product, a great team and you’re solving a problem, and you should be able to raise the funds you need to succeed.”

Read more articles about raising capital.

Photo: iStock