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Navigating the Tech Boom: Risks, Returns, and Realities
Richard Hadler here from Founders Capital. We scour Europe for the top 1% of Start-ups led by epic Founders, giving them access to our world-class investor & partner network to scale their ventures to heady heights.
If I had a pound for every time someone asked, “Is AI a bubble?”…
While our sweet spot at Founders Capital lies in late Seed and Series A, we’ve also backed several later-stage giants because we believe the right ones have plenty of room to grow.
The surge in US tech stocks, especially with the buzz around AI, is certainly unprecedented. But, as research shows, this doesn’t necessarily mean it’s a bubble.
Despite their remarkable climb, hyper-growth startups and established tech giants alike are poised to keep driving returns.
Yet, there’s a catch…
A handful of big-name tech companies command a disproportionately large share of market value, which can increase risk for investors. This is why we believe that diversification into smaller tech firms and sectors beyond the “new economy” could offer valuable growth opportunities, particularly with the anticipated rise in infrastructure spending.
Tech Sector: Outperforming in Numbers
Since 2010, tech has contributed 32% of global equity returns and an impressive 40% in the US.
This isn’t a stroke of luck!
Robust financial fundamentals are behind this surge. While tech’s earnings per share have grown over 400% from their pre-crisis peak, other sectors have risen just 25%.
The key players? A select few US giants with earnings that dwarf the broader market, driven by their advantage in software, cloud computing, and now, AI. Their valuations are buoyed further by sky-high expectations surrounding AI’s potential.
Historically High Stakes and Potential Pitfalls
It’s a familiar story in finance: revolutionary tech attracts major investment, followed by intense competition. Even without a bubble, returns often moderate as rivals enter the scene. Often, it’s not the early pioneers but the later players—like social media and ride-sharing companies during the internet boom—that capture the lion’s share of market value.
Today, AI-driven tech giants are investing heavily to maintain dominance. In 2022 alone, over 60,000 AI patents were filed, up from about 8,000 just four years prior. This surge of patents signals a fresh wave of competition, creating opportunities for savvy investors: the next wave of tech leaders may be innovators we haven’t yet heard of.
AI Boom: Big Investment, Big Risks
Unlike the software-led growth of the late ’90s, today’s tech giants are capital-intensive. This massive spending may ultimately impact returns, as increased competition could weigh on profits and slow growth even for the biggest names.
The Risk of Market Concentration
Today’s tech giants are more dominant than ever—a concentration that comes with real risks. Their size and power may seem justified, but it also makes markets more vulnerable to specific stock-related disruptions. It could even attract antitrust scrutiny, as we’ve seen with past monopolistic giants.
To put this in perspective, only 51 companies have been on the Fortune 500 list since 1955. History suggests that even today’s giants might one day be replaced by newcomers in industries we can’t yet envision.
Diversity is the Spice of Life
While tech may not be overvalued, this concentration underscores the importance of diversification. Many non-tech sectors are positioned for growth with solid margins and high returns on investment. From healthcare to finance, industries are harnessing AI to deliver new products, advanced cybersecurity, and cutting-edge robotics.
The bottom line?
At Founders Capital, we’ve long championed this view. We believe a well-diversified portfolio not only mitigates risk but also unlocks the full potential of emerging AI opportunities across sectors.
Until next time!
Cheers,
Rich