For the past several years, I’ve been warning that the tech startup boom (and the surge of interest in “coding”) is actually a dangerous bubble that is driven by the U.S. Federal Reserve’s ultra-loose monetary policies since the Great Recession. A recent New York Times piece called “The Hard Part of Computer Science? Getting Into Class” describes how young people are clamoring to study computer science:
Lured by the prospect of high-salary, high-status jobs, college students are rushing in record numbers to study computer science.
Now, if only they could get a seat in class.
On campuses across the country, from major state universities to small private colleges, the surge in student demand for computer science courses is far outstripping the supply of professors, as the tech industry snaps up talent. At some schools, the shortage is creating an undergraduate divide of computing haves and have-nots — potentially narrowing a path for some minority and female students to an industry that has struggled with diversity.
The number of undergraduates majoring in the subject more than doubled from 2013 to 2017, to over 106,000, while tenure-track faculty ranks rose about 17 percent, according to the Computing Research Association, a nonprofit that gathers data from about 200 universities.
Economics and the promise of upward mobility are driving the student stampede. While previous generations of entrepreneurial undergraduates might have aspired to become lawyers or doctors, many students now are leery of investing the time, and incurring six-figure debts, to join those professions.
The tech frenzy can be seen in the chart of the monthly count of global VC deals that raised $100 million or more since 2007. According to this chart, a new “unicorn” startup was born every four days in 2018.
I believe that the tech startup/VC frenzy is predicated on the tech stock bubble of the past several years (a byproduct of the U.S. stock market bubble I’ve been warning about). Surging tech stock prices and valuations spill over into the tech startup bubble because publicly traded tech companies have more buying power to acquire startups and because they allow startups to go public at high valuations.
Lining up the Nasdaq Composite Index and the monthly global VC deals chart shows how correlated the two are:
There are already signs that air is coming out of the tech startup bubble according to a ZeroHedge piece – “For Silicon Valley’s Startups, The Bill Is Finally Coming Due”:
Silicon Valley startups like Hustle, an ad-messaging company that spent lavishly on things like on-tap kombucha and arcade games for employees, are learning the hard way that party is coming to an end and the bill is finally due. Earlier this month, the company announced mass layoffs according to the WSJ . This depressing scene is now playing out across countless Silicon Valley startups, which sprung up like mushrooms when the money was easy and which are now starting to fold as the decade-long credit cycle tests the limits of the current bubble.
Startup investors and company founders warn that the unchecked growth of the past several years—which by some metrics exceeded heights from the dot-com boom—is hitting a limit. A rout of publicly traded technology companies is fostering newfound restraint for investors in Silicon Valley, especially for younger, cash-strapped startups like Hustle.
Startup investor Sunny Dhillon told the WSJ: “The unbridled optimism that inhabits our world is getting a shot of realism.”
It’s only a matter of time before the tech startup bubble truly bursts and leads to a wave of mass startup failures. Unfortunately, the tech startup bubble is likely to burst just as many of today’s computer science students start to graduate, which is what computer science students experienced in 2001 and finance students experienced in 2008. Society is going to learn, once again, about the perils of central bank-driven economic booms.