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Chapter 3. Causing the Bubble > The Software Cycle

The Software Cycle

The significance of the comparison of 1970 and the late 1990s is the appearance of a market cycle in technology stocks. For example, today, software seems to be beset by such a cycle. In a sense, the cycle is the stuff of disappointment and disillusionment. New products come along supplied by a new company. As word of the products and the underlying technology gets out, the shares of the company leap in price. The company has momentum; people come to work for it and it compensates them with options to buy shares in the future. (In the past, options were ordinarily restricted to a company's executives. During the dot-com bubble, share options were frequently extended by companies to most and sometimes all their employees.) The share price continues to rise. The company's initial products do well. Then it has to migrate to a new generation of devices and starts development. Along comes a major stock market correction. The price of the company's shares dive. Soon top programmers and project managers have options that are worthless—“under water.” They leave. Also, the low share price undermines the credibility of the company with customers.

Because entry to the software industry is relatively easy—just personal computers for programming and a loft or garage or kitchen to work in—and there is often venture money available (at the right time in the cycle)—top programmers who leave are likely to find opportunities to start their own companies. If successful, a new company hires top managers and takes it public during the next boom for a huge valuation.


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