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Why the Tech Crash May Have Been a Good Thing

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Few people have good memories of the dot-com crash that crushed companies and ravaged stock portfolios between 2000 and 2002.

But as we slide into an even more dire correction, a silver lining is starting to emerge around those earlier bad times. By pushing a lot of froth out of the system several years ago, the dot-com crash has spared us from a true “Perfect Storm” of an economic crisis in 2008.

There are a lot of crises converging this year, most notably home foreclosures, weaker consumer spending and financial excess. But thankfully, a vast tech bubble isn’t among them. True, Silicon Valley was ground zero for a major financial earthquake seven or so years ago, but that shock also let off seismic energy that could have worsened the jolt now shaking the foundations of the world’s economy.

Here are a few reasons why:

Lower-priced tech stocks — While some companies were overvalued, tech as a whole this spring was nowhere near as pricey as it was in 2000. The Nasdaq was trading at 2,200 when Bear Stearns collapsed in March, or less than half its peak of 5,132 seven years earlier. Several trillions of dollars of market value had vanished and not come back. Imagine the shock effects if that was added to the market correction now.

Fewer bad apples — The dot-com crash not only removed companies that had no business being public, it unmasked fraudulent companies in different industries: Enron, WorldCom, Tyco, etc. The credit crisis is driven by a lack of confidence in banks. If investors also had to also grapple with a crisis of confidence in accounting at non-banks, the outcome could be a lot worse. There may be a bad apple or two still, but most companies took the lessons of Enron to heart.

More disciplined management — In the late 90s, earnings often grew because of short-term strategies, spurious accounting and senseless acquisitions. Since tech bottomed out in 2003, they are more likely to be driven by greater efficiencies from outsourcing and IT investments. Executives (and analysts) still tend to be optimistic about 2009 earnings, but the gains in productivity may provide a modest cushion.

More demanding investors — Tech stock investors have become obsessed with profit margins, which can measure how well a company is holding down costs. And venture capitalists have grown pickier and more tightfisted with investments. Remember the fears about a Bubble 2.0, from just a year ago? Many of those concerns were coming from VCs themselves.

Of course, some argue that the dot-com crash (followed by 9/11) gave the Fed a reason to loosen credit too much and simply move the bubble from tech to housing. But this financial bubble has been a few decades in the making, and it’s long been a question of how it would all unwind.

And if you’re going to have two of the largest financial bubbles in history go bust on you in the same decade, you probably want them to be spread out as far as possible. It’s not that the dot-com crash is making this bust any easier. But without it, things could have been a whole lot worse.

And these days, that passes for good news.

10 Responses to “Why the Tech Crash May Have Been a Good Thing”

  1. ol' yeller

    This sounds prematurely self-congratulatory to me.

    I see a swarm of web 2.0 and mobile feature companies without defensible technology or user bases. Most of these companies can be quickly made irrelevant by much larger companies like AT&T, Apple, Google, Microsoft once any given feature they are trying to build a company around is proven using VC money. What does Apple do when they see a feature they like? They build it themselves.

    Of course there are still many great start-ups out there, but clearing out the chaff will involve some pain.

  2. Kevin Kelleher

    @Hugh: Thanks for the memories.

    @Chris: I guess it comes down to your definition of a bubble. I think it means a mix of excess liquidity and a large-scale herd mentality creating a frenzy of speculative and senseless buying. I haven’t seen much of that this past month.

  3. I don’t know why people keep saying there’s no tech bubble. We still have overvalued companies with sizeable investments that are seeing little profit gains if any at all. Hell, many web 2.0 companies have no revenue strategy to speak of. Even the guys at the top are still in search of sustainable models.

    To me, that’s a bubble. The cash flow won’t last forever. What happens when the cash flow stops, and these companies still have no sustainable revenue streams?

  4. Hugh J. Sloan III


    Allow me to share some of my memories:

    Trophy-wife candidates bringing their resumes to coffee at the Sundeck with references including the Dalai Lama and cannabis-enlightend EST leaders from Marin.

    Neighbors in Los Altos running to put the Fore Sale signs on their house when their AMT bills approached the GDP of small banana republics.

    Associates being promoted en masse at the top litigation firms and Larry Sonsini having the time to actually return calls. (I highly recommend WSGR)

    Farzad at Niku showing me his NASDAQ photos on IPO day.

    Kind regards,

    Hugh J. Sloan III