It’s because the ~*~tech~*~ sector fundamentally relies on different economics than most engineering companies, and that has investors absolutely bricked up.
What investors being sold by “tech” companies is infinite ROI. Sure, [YouTube/Twitter/Uber/whoever] has never been profitable more than a few quarters in a row (if that), but think! They have virtually no fixed costs! That means if we just inject a few more millions in R&D we will finally reach the threshold where we can scale deployments to hundreds of millions of users who will be paying us MRR! Hosting costs are virtually nothing and at that scale R&D is basically free as well! And if push comes to shove, we can reduce costs to nearly zero by firing all the engineers! The economies of scale are practically infinite, they say.
It’s the rare instance where capitalists actually care about long-terms gain a bit too much. The tech industry tends to be single-mindedly chasing monthly user counts first and revenue second or third. Then at some point reality catches up, the accountants start getting their way, the product starts getting enshittified, and the users leave for something else. Did the product actually turn a net profit over its lifetime? Who knows, who cares. Everyone who made those early business decisions has long since cashed out.
Where the markets are unbelievably irrational is that this frenzy has spilled over into industries where the the sales pitch for infinite economies of scale doesn’t even make theoretical sense. Tesla sells physical products, so why are they worth more than every other automotive company combined? OpenAI operates at an enormous loss because LLMs are just expensive to train and run by nature, so they cannot be profitable under the current business model at any scale. Yet here we are. Just because it’s labeled as “tech”, investors are throwing our retirement funds into it. And any time the markets are being irrational, there’s a risk that investors wise up to the bad fundamentals and the whole thing comes crashing down.
In Europe we’ve been spared some of the worst of the craziness. Although venture capitalism is alive and well in the software sector, I would wager that European companies tend to have stronger fundamentals on average (but that’s just a gut feeling, I’m not an economist).
It’s because the ~*~tech~*~ sector fundamentally relies on different economics than most engineering companies, and that has investors absolutely bricked up.
What investors being sold by “tech” companies is infinite ROI. Sure, [YouTube/Twitter/Uber/whoever] has never been profitable more than a few quarters in a row (if that), but think! They have virtually no fixed costs! That means if we just inject a few more millions in R&D we will finally reach the threshold where we can scale deployments to hundreds of millions of users who will be paying us MRR! Hosting costs are virtually nothing and at that scale R&D is basically free as well! And if push comes to shove, we can reduce costs to nearly zero by firing all the engineers! The economies of scale are practically infinite, they say.
It’s the rare instance where capitalists actually care about long-terms gain a bit too much. The tech industry tends to be single-mindedly chasing monthly user counts first and revenue second or third. Then at some point reality catches up, the accountants start getting their way, the product starts getting enshittified, and the users leave for something else. Did the product actually turn a net profit over its lifetime? Who knows, who cares. Everyone who made those early business decisions has long since cashed out.
Where the markets are unbelievably irrational is that this frenzy has spilled over into industries where the the sales pitch for infinite economies of scale doesn’t even make theoretical sense. Tesla sells physical products, so why are they worth more than every other automotive company combined? OpenAI operates at an enormous loss because LLMs are just expensive to train and run by nature, so they cannot be profitable under the current business model at any scale. Yet here we are. Just because it’s labeled as “tech”, investors are throwing our retirement funds into it. And any time the markets are being irrational, there’s a risk that investors wise up to the bad fundamentals and the whole thing comes crashing down.
In Europe we’ve been spared some of the worst of the craziness. Although venture capitalism is alive and well in the software sector, I would wager that European companies tend to have stronger fundamentals on average (but that’s just a gut feeling, I’m not an economist).