Lord grant me one more tech boom and I promise not to screw this one up
Things look pretty bleak now, no question about it. There isn’t even a baseline from history by which to measure what’s happening to our economy. We all know (or at least most of us know) that better days are ahead. While we all buckle down to ride this out, I wanted to give a glimpse into the opportunity and fortunes that lay ahead in the future by taking a quick tour through my misadventures of the past.
I’ve been blessed to be a part of four major economic booms and now four busts. The most recent boom began not long after the crash of 2008. With interest rates slashed to historic lows to help save our economy, investors were in search of better returns and the next Google. Investors are required to cover their eyes and ears to facts and financial statements while getting lured into a “free” business model.
Trust Me with Your Money
Yet the rainbow of cash keeps coming. Even the “smart money” from places like SoftBank Group make unbelievably bad and foolish bets. In one case they got duped in a monumental way by the founder and CEO of WeWork. Call me Captain Obvious, but when I read WeWork’s prospectus it smelled a lot like 1999 all over again. Somehow a commercial leasing company (which is WeWork’s business) positioned itself as a technology startup company that justified their sky-high valuation.
Softbank got so excited by the limitless potential of the dog walking market they also decided it was worth a $300 million investment in WAG. This catapulted WAG’s valuation to over $600 million in 2018. Who’d a thunk the dog walking business was ready for such a disruption. My tongue is firmly inserted in my cheek while I write and snicker at this story. Clearly, a little technology to help organize the ephemeral army of dog walkers can make a buck for a company or two. It looks like Rover will dominate this “lucrative” space of the pet market. Here’s a snippet from their About page.
Rover.com® is the world’s largest network of 5-star pet sitters and dog walkers. Rover connects dog owners with trusted pet care whenever they need it. Millions of services have been booked on Rover, including pet sitting, dog walking, in-home dog boarding, and doggy day care.
Heck, I’m even prouder of my youngest son to learn he was a 5-star dog walker while he did gig work for Rover.
Fun with Tech Startups
In case you think Softbank is the only firm chasing pink unicorns, here’s a sample of the 553 tech startups that folded in 2019 and the obscene $1.9B in investors’ money that went down in flames with them.
The whole idea of a startup excites me more than ever. In 2007, I jumped into the game myself. I’m not poking fun at the startup world but rather the giant pool of investors who seem to throw blind faith and sacks of cash at any and all wacky ideas. Ninety percent of startups fail, as is noted in the above-linked article from Medium. This boom isn’t about new technologies as much as the available technology being applied to disrupt old business models.
Here are a couple of fun ways to learn about the crazy tech startup world: Disrupted: My Misadventures into the Startup Bubble provides a hilarious insider glimpse into the world of tech startups and how people spend other people’s money. Spoiler alert: “like a drunken sailor”. In case you enjoy a good laugh, check out Silicon Valley. As stupid as the show can seem at times, it’s not too far from the truth.
My First Tech Boom
We coded on big iron computers at college in the body-odor-tinged computer science lab. The experience was so underwhelming that I couldn’t imagine a career in this industry. Of course, these were the early days of Apple and Microsoft. The personal computer revolution passed me by like just another Friday night party.
My focus at the time was getting out of college, partying, and chasing girls. The order of those priorities might not be right. I graduated college when the bottom dropped out of the oil & gas business in 1984. This wouldn’t have been a big deal except that I earned a Geology degree and I lived in Texas. The oil bust coincided with the savings and loan crisis that swept the country. Real estate of all types in the oil-producing states wasn’t just devastated, it was nuked. Texas-owned banks vanished overnight due to their overweight assets in the oil business and real estate.
I still have vivid memories of walking through what appeared to be the ghost towns of downtown Houston and Denver. I’d later find out that, in fact, at the bottom of the bust, both cities experienced unoccupied rates of 40 percent in the downtown districts.
My tenure in the oil business was brief. I experienced the embarrassment of getting fired and unemployment. After a few futile months of searching for a job, opportunity came knocking. A friend of my sister said they had an open position at a software company where she worked. The next thing you know, I transitioned into doing telephone support for oil and gas accounting software.
The Internet Boom
At the beginning of the internet boom in 1992, I’d pushed past being a grunt doing telephone support calls. I was actually able to take vacations and enjoy life a little. One of my clients set me up on a blind date that year with my future wife. All the while, the internet boom was raging onward.
Each year, everyone speculated on how high it could go. The then-Federal Reserve Chairman, Alan Greenspan, in a 1996 speech, famously quipped that we were experiencing irrational exuberance. As history has shown us over and over again, an obvious bubble always inflates for longer than anyone can predict. In this case, Greenspan’s warning was off by five years.
In about 10 years I went from single and no worries to married to the love of my life, three kids, and a house I couldn’t afford. Then, in 2001, the bottom dropped out of the stock market and things got shaky at my employer. Luckily, just before it happened, I was blessed to have closed the biggest deal of my life.
Later, I would discover my name was on the list of account executives to get whacked at the end of that quarter. But things kept improving and I closed more deals before August of 2001. Within six months, I went from unwittingly walking the plank of unemployment to competing for the number one sales spot at the company.
Although tech stocks were sinking lower each day, things got unimaginably worse on September 11, 2001.
The six months that followed were an awkward time for business. The three weeks after 9/11 were just a blur as we mourned the loss of so many countrymen. But the slow-moving hands of time worked their magic again. People went back to work, travel resumed, and another sinister bubble was created.
I also made a massive investment gaffe. I pushed a good portion of the money I made on my commissions into a stock called the QQQ. The Qs represented the 100 largest technology companies. It was a less risky way to invest in the technology boom, or so it seemed. The QQQ peaked in 2001. The high set in 2001 wasn’t eclipsed again until 2016.
That was how I learned what the phrase “catching a falling knife” meant and felt like.
Social Media Boom
The third tech boom, often called Web 2.0, was well underway with new social platforms exploding with millions of users and being replaced overnight by new competition. Remember MySpace before Facebook? There was also Friendster, StumbleUpon, and many others that didn’t survive. Many other companies created during this era like LinkedIn, Twitter, and YouTube are part of everyday life now.
While Web 2.0 was brewing, the bubble of all bubbles was inflating with the toxic gas of financial chicanery. Somehow the geniuses on Wall Street found a way to collect large batches of mortgage loans and offer them as high-quality bonds to their lemming clients. The pressure to get more of these bonds incented banks, mortgage brokers, and other firms to not just lower the bar for a mortgage but get rid of it altogether. Commonly called liar loans in the industry at the time, these loans and their derivatives almost sent our country into an economic depression in 2008.
As one major financial institution imploded, its peers followed. The stories of massive fraud and greed sickens me even as I write this now because no one went to jail. The brilliant writer Michael Lewis unravels how these crooks plied their fraud in his book, “The Big Short”. The movie of the same title is well worth the time too.
The Canary in the Coal Mine
Little did I know two deals in the mortgage industry I worked at the time were fully immersed in the fraud that would get exposed a few years later. One deal in 2005 was with a subprime mortgage company. Each visit to the client required a shower to wash away the predatory and nasty business practices I’d been exposed to that day. Fortunately, we lost that deal. It’s hard to imagine how the senior executives of that company faced themselves in the mirror each day. They knew they were ripping off their clients by hard-selling ignorant home buyers into mortgages they couldn’t qualify for even with a thumbs-up from God.
The other deal, which did close, was with a large and highly regarded mortgage company. This company focused on A paper borrowers. Translated, it means people who will very likely pay off their mortgages. The partner involved with me along with the client celebrated the deal at a fine dining establishment in Dallas. The guys in attendance from the client were the Chief Operating Officer (COO) and the Chief Information Officer (CIO). During the dinner, I asked the COO what their loan portfolio mix was today. The question was about how many of their loans are traditional 30- and 15-year loans compared to other loans.
“What percentage of non-conforming (high risk) loans do you think we process, David?” he asked me, turning to his associate to share a laugh.
Since this was supposed to be a top-tier outfit, I guessed 20 percent of their business was of the high risk. He laughed again and told me I wasn’t even close. He explained that the mix was closer to 20 percent being A paper and the rest non-conforming and subprime. I recall having a holy shit moment when he shared these facts. Little did I know that in two years the world would be on the edge of financial armageddon because of these rotten and greedy business practices.
Preparing to Make Your Fortune in the Next Business Cycle
Some of us are going through a severe shock right now. You may have lost your job, or you’re in fear of losing your job or scared of contracting Covid-19. It’s challenging to think about the future when you’re stressing out about making your mortgage payment, paying off car loans, and so forth. The story I told today was a simple reminder that economic booms and bust happen and they’ll continue to happen. A virus caused this rush for the exits, and it will certainly be something different the next time.
My story isn’t unique. What you can learn from it is to keep making progress. Our education doesn’t stop after school ends, it’s really just starting. When we grow our knowledge, try new things, expand our contacts, and seek out new opportunities, the bad times aren’t so bad. It gives us a unique ability to peek above the trees and see the real beauty of the forest.
Think about Uber and the vanishing world of retail stores. Business disruption will slow, but it won’t stop because of this pandemic. There are so many ways to participate in the coming technology booms. Whether it’s biotech companies finding a vaccine or a cure for cancer, or technology companies harnessing quantum computing, the possibilities of the world to come are endless and bright.
Avoid the Negative News and Speculators
The doom-and-gloom gang sees all that is bad in the world and overplay its impact. The information we consume is often slanted at best, filled with opinions and frequently just wrong. To gain a sense of how wrong our own perceptions are of the facts, I kindly suggest the book Factfulness. In a world full of opinion and conjecture, this book will illustrate the facts, build your confidence, and make you proud of the real progress our society continues to make.
