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After the AI boom that allowed Nvidia investors to achieve exceptional returns in 2024, what’s next for tech’s golden goose?
<h2 id="h-which-bets-pay-big">Which bets pay big</h2>
The Big Tech companies are currently the most valuable companies in the world. Amazon is now worth 1.75 trillion, but the total amount in private markets before its IPO was just 8 million dollars.
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At the time, <a href="https://en.wikipedia.org/wiki/History_of_Amazon" target="_blank" rel="noopener noreferrer nofollow">Amazon</a> was valued at only 60 million dollars. Even accounting for inflation, that represents a return of over a million percent.
So there’s a lot of money to be made in choosing the next Amazon or the next Google!
That’s why venture capital firms make money. And even if you’re just an individual investor who bought Google or Facebook at the IPO and held onto your shares, you’ve made quite a bit of money.
<h2 id="h-which-opportunities">Which opportunities?</h2>
So the question for the future of the tech industry is whether this type of return is still available. Not just for a few lucky individuals, but for the wider public.
In reality, it seems that it will become more difficult in the future.
Because fundamentally, the tech boom was tied to the building of the internet. And now that the internet is practically built, it’s not certain that another technological breakthrough (AI, deep tech…) can offer the same kind of huge rewards for small capital commitments.
<h2 id="h-the-building-of-the-internet">The building of the internet</h2>
The global internet is not yet completely finished, but it’s getting close, especially in wealthy countries.
There is still work to be done to wire countries that do not have extensive broadband networks, but local telecommunications and Starlink or Huawei will likely handle most of that work.
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There’s not much growth left in the physical construction of the internet.
The century-long quest to connect all the human beings on the planet to high-speed text and voice communications powered by electricity is coming to an end.
<h2 id="h-a-mature-tech-industry">A mature tech industry</h2>
There are still many new clothing companies that succeed (Shein, Uniqlo…). But because everyone already has clothes, the success of these companies tends to come at the expense of existing brands and manufacturers.
Sure, clothes get a little better over time, and manufacturing processes become more efficient, but the pace of improvements is much more modest than in the past when new materials were invented left and right, and fashion for the general public was a growing industry.
It will be the same for most internet industries.
New social networks, new video apps, and new SaaS solutions will emerge, and some people will get rich by investing in these products.
But the pace will slow because to succeed, these new software companies will have to cannibalize the old ones.
In fact, this is a big part of the reason for the tech sector collapse in 2022.
Sure, rising interest rates triggered the price drop, and there was concern that the new antitrust movement was targeting big tech companies.
But it was also partly because tech product markets were generally smaller than expected.
<h2 id="h-what-has-changed-in-tech">What has changed in tech</h2>
Take Shopify, for example. Shopify is one of the mid-sized tech companies that was heavily hit by the 2022 crisis and hasn’t recovered since.
The company is still worth 90 billion dollars, but ultimately, it competes with Amazon for a limited amount of online commerce dollars.
The pandemic created the illusion that online commerce was much bigger than it really was, so people might have thought that two online commerce companies the size of Amazon could exist side by side.
In any case, the stock market crash was felt as a correction of an erroneous optimism that was quite specific to technology.
The NASDAQ has recovered, but it has only risen 4.5% since the late 2021 peak, while the S&amp;P 500 has risen over 13%. Tech companies experienced a giant wave of layoffs even as the economy as a whole reached record employment rates.
The end of the pandemic and the rise in interest rates were triggers that allowed investors to wake up and realize something they should have realized a while ago: the internet is a mature industry today.
In terms of expected returns, this poses a problem both for large tech companies and for the venture capital and startup sector, as they must determine where the next source of growth will come from.
<h2 id="h-where-do-tech-returns-come-from">Where do tech returns come from?</h2>
Aside from internet-related software and hardware, large tech companies and venture capital firms can invest their money in a number of other areas.
But the nature of the internet gave it certain key advantages, from an investment perspective, that won’t necessarily be easy to replicate elsewhere.
The internet is inherently a network. It’s about connecting people, whether physically or through software.
The value of a network increases as the square of the number of nodes in the network, providing a source of increasing scale returns.
Increasing scale returns often create market power because it means large companies can naturally defeat small startup competitors.
And market power means profit. Software companies generally tend to have very high margins, and network effects (which also exist for other types of software, like Windows) are a major reason for this.
But because internet companies are not very capital-intensive, they don’t require huge fixed costs to set up: all you need to do nowadays is hire a few engineers and pay a few cloud bills.
Even in the days when startups had to own their own hardware, it wasn’t that expensive. With network effects, the low startup costs allowed software investors to make a very large number of bets, many of which had the potential to offer huge returns.
<h2 id="h-ai-deep-tech-and-crypto-next-tech-bubbles">AI, deep tech, and crypto: next tech bubbles?</h2>
The new industries that interest the tech sector generally don’t offer these two characteristics at the same time.
Cryptos do, but so far, cryptos haven’t really found many major use cases. Bitcoin is still struggling to establish itself as an authentic store of value or a non-inflationary alternative to the dollar.
Deep tech technologies are obviously incredibly useful: the world needs new semiconductors, sophisticated drones, better batteries, new cancer drugs, etc.
In the 1970s and early 1980s, venture capital was essentially about funding hardware companies. High fixed costs for hardware are a source of increasing returns, and thus a source of market power, meaning that hardware startups offer the potential for exceptional returns.
The problem is that hardware, unlike software, has incredibly high startup costs. To develop a manufacturing company, you need to build large factories, like Tesla. Which is very expensive!
Biotech companies have to pay huge fixed costs for research, testing, and drug approval.
<h2 id="h-investing-in-deep-tech">Investing in deep tech?</h2>
Deep tech technologies are always sought after by venture capital funds, but they are more difficult to manage than software companies.
To mitigate these issues, investors try to put their money into deep tech companies that only do design, not the actual manufacturing (Apple, Nvidia).
But given the decoupling between the US and China and the inherent difficulty of maintaining a design lead without controlling factories, there may not be that many purely design-focused deep tech companies.
<h2 id="h-investing-in-ai">Investing in AI?</h2>
Goldman Sachs reports that FAANG companies plan to spend 1000 billion dollars on AI in the coming years.
Many people believe that AI will be absolutely transformative, and it might be. But undeniably, it requires significant startup costs.
Companies are spending billions of dollars today to train cutting-edge AI models, and as researchers improve AI through exponential scaling, costs could soon reach tens of billions.
It’s much more expensive than a few geeks in a garage. And young companies hoping to apply AI to business problems or consumer products will also have to bear their share of these huge costs. AI, unlike internet software, is simply very capital-intensive.
As for the returns available to AI sector winners, no one knows yet. But people are starting to doubt that the list of use cases justifies the amount of investment spending in the near future.
If AI doesn’t live up to its promise and companies find few use cases, then the AI industry could experience a big collapse, as railroads and telecommunications did in their time.
<h2 id="h-the-future-of-tech">The future of tech</h2>
It’s possible that there is no technology on the horizon that can replace the windfall investors have reaped from the internet. Technology might just be slower and harder from now on.
What does it mean for technology to be a mature industry?
One is about growth versus efficiency. Fast-growing companies can afford to be sloppy, hire too many employees, and ignore government policy unless it is particularly egregious.
Slower-growing companies don’t have that luxury: they must please their shareholders by squeezing every drop of efficiency out of their operations.
This means that in the future, technology might be a somewhat less hospitable place to seek a job. In the 2010s, educated people thought that if their professional endeavors failed, they could always find a well-paying job in tech. This might no longer be true: the recent wave of layoffs could be the new normal.
The building of the internet was a very special and unique period in the history of technology and business. Generations of investors were able to make colossal profits and become wealthy. But it seems that in the future, <a href="https://www.cointribune.com/en/the-financial-results-of-the-tech-giants-are-causing-bitcoin-to-drop/" target="_blank" rel="noopener noreferrer nofollow">opportunities</a> will become scarcer, given the degree of industry maturity. The deep tech (semiconductors, biotech, batteries…) and AI industries seem best positioned to generate cash in the coming years.

Get Rich with the Next Tech Bubbles?

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