Beware the Mobile Tech Jobs Bubble
We all knew that the end of the dot-com bubble resulted in widespread failure of companies and the loss of many IT-related jobs. But until recently, there were few hard statistics to flesh out that assumption. Now there are -- at least for Silicon Valley, the heart of the bubble. They indicate that high tech is not necessarily the source of long-term jobs and suggest that the brewing mobile apps bubble could bust fairly quickly if startup funding continues to decline.
Ten years after the peak of the bubble, only one in six of the high-tech companies founded in 2000 still survive, and only one in three of the jobs created then still exist, according to a new study by the U.S. Bureau of Labor Statistics. Internet-related startups, the darlings of Wall Street, fared even worse: Only 8 percent, or about one in twelve, survived.
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But all new businesses have a terribly high failure rate, don't they? Not exactly. In the six-county San Francisco Bay Area, it turns out that about 30 percent of businesses started 10 years ago are still around, a survival rate that's nearly double that of high tech, says Amar Mann, chief regional economist in the bureau's San Francisco office. "You would have done better to open a restaurant," he says.
As interesting as the study is from a historical point of view, its real value may be more in the nature of a warning: Technology appears to have its own business cycle, and like all cycles it reaches a peak and then descends, sometimes very rapidly, to the bottom of the curve. Too much money poured into companies that hire too many people without a clear idea of how to make money is what creates a bubble.
Is mobile set to implode?
That's not to say that the mobile explosion is equivalent to the dot-com boom. It isn't. Investors and entrepreneurs have a learned a lot in the last ten years, and a typical mobile startup today tends to have a business plan that doesn't include shipping pet food across the country. Although hiring is brisk, salaries rising, and venture capital money flowing, it's nothing like the party at the beginning of the century. That gives some hope that the mobile boom won't implode as much as partially deflate.
The perception of a mobile bubble is fed by the examples of companies like Foursquare, which has secured more than $50 million in venture financing despite the fact that it is still trying to figure out how to make money off its mobile "here's where I am" service, according to Wireless Week.
Indeed, despite the common perception that anyone with an idea for a mobile app can get funded, it turns out that venture capitalists are not profligately throwing bags of money at entrepreneurs.
In the first nine months of last year, venture capital firms invested $383.6 million in the mobile industry. But in the same period this year, funding dropped by 57 percent to $163.2 million, according to the National Venture Capital Association (NVCA) and Thomson Reuters. Moreover, mobile funding has slowed every quarter this year, from $81.8 million in the first quarter to $55.6 million in the second and $25.7 million in the second.
Sure, that's real money, but it pales beside the billions pumped into Web startups during the bubble and into the software sector today: Venture capitalists invested $2 billion in software companies during the third quarter of this year, up from $1.6 billion in the previous quarter and the highest quarterly total since late 2001, according to the NVCA.
Is hiring for mobile out of hand?
We've all heard or seen the examples of extravagant spending during the Internet bubble: the industrial-chic offices equipped with foosball tables and catered gourmet lunches. Those perks may have been excessive, but the real destroyer of the balance sheet was the payroll. The Silicon Valley startup class of 2000 started with 27,000 new jobs. A year later, that number had soared by nearly 28 percent to 34,500.
Despite the wild expenditures, more than 90 percent of the startups made it past their freshman year, largely because venture-funded companies nearly always have enough money to get through that period, the BLS study found. But by 2002, survival rates dropped to about 50 percent and kept on declining.
If you're wondering if a particular company making you an offer is likely to be stable, wait until it has at least two or three years under its belt.
Those numbers track with anecdotal evidence I've gathered in discussions with young companies recently. Hiring is clearly very strong, but although salaries are rising, they aren't reaching the heights of 2001, and companies aren't breaking the bank with flashy but unnecessary expenditures.
My bottom line: There is some danger that the mobile sector will suffer a crash if venture funding continues to drop. That's exactly what happened during the Internet boom and bust. But if mobile companies control spending and investors refrain from pushing valuations to ridiculous heights, mobile can avoid the fate of the dot-coms.
This article, "Beware the mobile tech jobs bubble," was originally published by InfoWorld.com. Read more of Bill Snyder's Tech's Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.