The looming bust in digital is far more scary than Brexit

Do you remember a company called Pets.com? No, I didn’t think so. It was an online retailer for pet accessories that started operating in 1998. It ran a wildly successful marketing campaign, featuring an odd doglike sock puppet but more notably it was an early pioneer of selling stuff on the under-explored plains of the World Wide Web.

In the late 1990s companies were springing up like mushrooms after the rain, fertilised with bags of investor cash just for adding “.com” to the end of their names.

Pets.com was a poster child of that boom. And regrettably as it turned out also of the bust. Listed publicly on the stock market in August 1998, fewer than 270 days later it filed for bankruptcy – a remarkable feat, even as the internet ushered in a new era of speed.

The problem was that the rise of the web had prompted almost unprecedented economic speculation. It opened up a galaxy of opportunity for both consumers and entrepreneurs. And every investor with cash in their pocket and dollar signs in their eyes wanted a piece of the sacred pie.

Companies that had yet to turn a profit – and, as it later turned out, never would – were valued at billions of dollars. Rock-bottom interest rates made bank funding readily available. And then suddenly, almost overnight, the glossy ecosystem of newfangled corporates started to unravel dramatically. Investors woke up to the idea that many of these new corporations lacked the basics: a fundamental ability to generate money on a sustainable level.

What happened next has been documented exhaustively but in recent years this particular tale of economic demise has been drowned out in the bars, restaurants and boardrooms of Wall Street, Canary Wharf and Silicon Valley. It’s become folklore. One for the annals of crises past. The mistakes of our ignorant forefathers.

Many of those making the investment decisions, launching the companies and even writing about them today don’t remember how they felt when the Nasdaq tech stock index lost almost 80 per cent of its value in the space of just over two years. So what’s there to say about it today?

The only tech they (and we!) cared about was making sure Tamagotchis got fed. Mark Zuckerberg was 15 when Pets.com went bust and even a whizz-kid like him probably wouldn’t have been able to tell you the merits of calculating a price-to-earnings ratio.

Now as Amazon’s share price surges above $1,000, as Google owner Alphabet looks back on 30 per cent of share price growth in the past year, and as investors start predicting that Apple will hit the $1 trillion valuation mark, it may well pay to start dusting off those history books.

Truth is, the evidence we might be heading for trouble is staggering and far more worrisome than what the global fallout from something as isolated as Brexit might be.

And you don’t have to take my word for it.

Last month Robert Bouroujerdi, chief investment officer at Goldman Sachs, and most definitely someone who does remember the last dotcom boom, published a report in which he cautioned of the growing risks presented by the meteoric rise of the Big Five tech behemoths: Apple, Amazon, Facebook, Alphabet and Microsoft.

Bouroujerdi noted that in the year to the start of June, these companies added a total of $600bn of market capitalisation – the equivalent of the gross domestic product of Hong Kong and South Africa combined. Parallels to the 1999-2000 crash are becoming increasingly evident, he said.

The note roiled the market, giving us a taste of just how nervy some of the investors in these companies are becoming. Apple shares fell 4 per cent, swiping about $30bn off the market capitalisation of the world’s most valuable company, and this was a relatively moderate warning. Just think of the impact a more harrowing premonition might have had.

Tech companies are deeply intertwined: when one falls it often takes scores of others down with it and often psychology dictates that the more a stock falls the more likely it is to fall further. Imagine rats scuttling for the exit on a sinking ship. No one wants to be caught inside a cabin and sink.

The question we should be asking ourselves now is what will cause the first domino to topple. It could be any number of things.

The European Union last month slapped Google with an eye-watering €2.4bn fine for abusing its dominance in the market for search engines. Now others are in the regulator’s crosshairs because of concerns around everything from advertising standards to consumer privacy.

The EU certainly has the teeth and the clout to curtail big tech companies’ dominance. Some campaigners have even called for a break-up of the tech giants, borrowing the “too-big-to-fail” refrain from their banking buddies. Might that be enough to send investors scampering?

And then of course there are the reputational dramas that have engulfed the sector. A string of exposés has cast an unflattering and deeply necessary light on the rampant sexism and abuse prevalent across many of the big companies and their smaller protégés.

Capitalist warriors looking for a quick buck or the prestige of being a Silicon Valley hero might not necessarily care about such issues as discrimination and misogyny for now. But they certainly will once the big financial endorsers determine that things have gotten a little too risqué for them to be involved.

The tech sector is a small world and reputation can be quick to destroy and hellish to rebuild. Perhaps that will be the straw that breaks the unicorns’ backs.

It might seem hard to think of companies of such titanic magnitude as anything other than unflappable. But once again, giants have fallen before. General Motors was the biggest company in the world 20 years ago. Today it doesn’t feature in the top 10.

The business landscape is constantly evolving, sticking to a boom-and-bust cycle, as we experience and then forget what happens when we become too greedy.

A doglike sock puppet may have been an unlikely victim of the last dotcom crisis. I don’t see why a precocious unicorn wouldn’t be just as good at playing that part.