Is San Francisco on track for another dot-com bust?

Editor’s Note: Every month, The Standard’s ‘State of the City’ dashboard analyzes the outlook for San Francisco by monitoring data on the city’s economy, health, crime, housing and other key performance indicators.

After a summer of shifting economic headwinds, an autumn of high-profile tech layoffs, and months of weak earnings and waning venture capital investments, many are worried that the United States is heading towards a recession—and San Francisco’s position at the heart of the tech industry puts it right in the eye of the storm. 

In particular, the stock market’s latest declines have experts—including former Treasury Secretary Larry Summers—pointing out the chilling similarities between today’s market and the dot-com bubble. 

But is the comparison warranted?   

The tech industry grew massively during the pandemic, as headcounts ballooned and company valuations skyrocketed. But now that the Covid expansions have slowed, some of the most stable tech corporations are tumbling, sucking up crucial investor dollars, causing mass layoffs and tanking the stock market in the process. FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks have lost trillions of dollars in market value over the past year, with Meta—Facebook’s parent company—reporting a 75% collapse since September 2021. 

Today’s tech stock performance bears a striking resemblance to the boom-and-bust cycle the SF Bay Area stomached during the dot-com bubble era 20 years ago. From January 2019 to November 2021, the tech-heavy Nasdaq index rose 144% and peaked at 16,057—before tumbling 30% in the following year.

The dot-com bubble witnessed a very similar rise and fall: Nasdaq shot up 500% between January 1995 and March 2000, before tanking by 76% across the next two years, effectively canceling out the gains of early internet economy players—and upending San Francisco’s economy, as well.

During the dot-com days, the same economic forces were at work: interest rates were low, venture capital investments were high, and the internet’s earliest companies relished in millions of dollars of investment money that they spent on lavish parties, $1,000 office chairs, team lunches, cool offices and other work perks now considered must-haves in tech workplaces today.

The parallels between the two bubbles are certainly uncanny, causing some to dub the present-day tech business woes the “Dot-Com Bust 2.0.”  

But the robustness and maturity of today’s tech industry will likely prevent a crash of the magnitude experienced when the first dot-com bubble burst.

“What we saw in the [dot-com era] was some really comparable patterns, but the real difference is that everything [is now] many orders of magnitude larger,” said Margaret O’Mara, a historian of the high-tech economy at the University of Washington.

Venture capital invested in tech companies, for example, has quintupled in the last two decades, rising from roughly $60 billion in investments during the dot-com bubble to around $330 billion today. And Nasdaq’s value has more than doubled, as well.

And even as companies announce rounds of layoffs and tech CEOs admit to pandemic-era overspending, experts say the losses accumulated by major firms is not likely to result in their disappearance altogether.

The effects of tech’s latest hits will hurt San Francisco the most. While the first dot-com bubble caused problems for the city’s commercial real estate sector, today’s combo of an empty downtown corridor and a shift to remote work is extremely concerning. But economists believe low unemployment rates and hiring levels earlier in the year indicate the relative stability in the SF job market compared with years ago. 

Ultimately, market analysts and historians like O’Mara say that the ebb-and-flow of the market is “the Silicon Valley way,” fitting well within the oft-repeated narrative of boom-and-bust cycles in tech. And recent efforts to trim extraneous costs and spending may reflect more of a natural course correction following pandemic turmoil, rather than a massive overhaul of the industry.  

“Tech is a cyclical business. Not every tech superstar is going to be a superstar forever,” O’Mara said. “In this industry, like any other, fundamentals of good management and business still apply. I think it’s good to not get too carried away when it’s a boom, and not too bummed out when it’s a bust.”