In 1890s Britain, the bicycle represented a social and environmental breakthrough. Public enthusiasm for bicycles — and for the shares of publicly traded bicycle manufacturers — then fueled the Great British Bicycle Bubble of 1896.
The bubble inflated quickly, with share prices in British bicycle companies tripling in the space of months in 1896, even as the number of bicycle companies expanded more than five-fold.
But then a flood of low-cost American bikes invaded the market, and the mood soured. Enthusiasm and press hype sustained the mood a while longer — bicycles were the inevitable technology of the future, you see — but eventually the bubble popped.
By 1901 — five years after the bubble had first inflated — at least 40 publicly traded British bicycle companies had gone bankrupt. In the years that followed, at least another 60 went under or left the bicycle business. All told, more than 70% of the companies that had participated in the 1890s British bicycle boom wound up leaving the field or going bust.
Investors in the present day are no different than investors in the nineteenth century. The technology changes, but human nature stays the same.
Here at the tail end of 2020, we observe the full-fledged electric vehicle (EV) bubble now in play and can’t help but think of British bicycles. So much is the exactly the same:
- A technology that took multiple decades to reach critical mass.
- An awakening of the public consciousness as a result of key breakthroughs.
- A credible promise to transform the environment and society itself.
- Charismatic genius types pushing the utopian technology angle.
- Dozens of firms trading at valuations that make no sense.
- Investor faith rooted in stories and blue-sky possibilities, not math.
- The inevitable arrival of oversupply at increasingly cheap prices.
- The overwhelming likelihood of a stock market reckoning.
To be clear, the bicycle itself was a genuine breakthrough success story. The arrival of the modern-day bicycle really did transform the British landscape, much for the better.
The bicycle also set the stage for the motorcycle — more or less a bicycle with an internal combustion engine attached — which in turn begat the motor carriage, which then begat the Ford Model T and the modern automotive age.
But the success is also kind of the point, really. It is par for the course for successful technologies to get way overhyped at their point of true breakthrough, and then to suck in massive amounts of investor capital, and then to destroy most of that capital as the boom goes bust.
William Blake once wrote: “The road of excess leads to the palace of wisdom; for we never know what is enough until we know what is more than enough.”
In addition to being poetic, Blake’s words might as well be a treatise on how the boom-and-bust cycle of technology investing works.
Great innovations require large amounts of capital to build out and deploy. Technology-minded investors, in their voluntary enthusiasm, perform a kind of public service in throwing their money at such innovations. Most of this capital winds up wasted or destroyed, but a small portion is transformative. It happens over and over. You can’t skip the excess, and thus you can’t skip the bust. That is what we got from Blake.
Breakthrough innovations tend to take a long time. There is a tipping point where enthusiasm ramps up very quickly, and the new technology has the feel of an overnight sensation as it suddenly dominates the public consciousness. But that tipping point usually comes after decades of tinkering and adjustments.
The bicycle’s early ancestor was something called a “dandy horse,” a sort of bicycle with no pedals. The rider would straddle the dandy horse and push forward with his feet, Fred Flintstone style. The dandy horse was patented by German inventor named Baron Karl von Drais in Germany in 1818.
The dandy horse had a brief window of popularity, but it never really caught on. Over the next 40 to 50 years, inventors, entrepreneurs, and hobbyists continued to tinker with the concept of a wheeled riding machine. Some had three wheels, others four. But none of these cycles were ready for mass adoption.
In the 1860s, someone in Paris attached pedals and a rotary crank to the dandy horse, creating a crude prototype of the modern bicycle. This was a smart-enough innovation to spur a mini-boom in Europe and the United States, but again the enthusiasm petered out. Because of its stiff iron frame and the iron-and-wood wheels, the ride was extremely uncomfortable, and the bike was dubbed the “boneshaker” for that reason.
In Britain, the bicycle’s design kept evolving, thanks to the interest of tinkerers and hobbyists. And finally, by the 1890s, the bicycle had morphed into a technology the public could embrace.
Key innovations included the chain-driven transmission, which reduced the size of the wheels without sacrificing power, and the invention of inflatable bike tires, which cushioned the bumpiness of the ride.
In this long arc of technology development — from 1818 to the 1890s — you may already notice the similarity to EVs, which have been around for a very long time. The first electric motor was developed in the 1830s, and the first commercially produced car (which flopped) arrived in 1884.
For 1890s Britain, the bicycle was a social and environmental breakthrough due to the heavy toll of pollution and the high cost of horse-drawn carriages.
The streets of London at that time were overflowing with horse manure. There were so many horse-drawn carriages — and thus so many manure-emitting horses — that people were afraid they would drown in the stuff, as we explained on Dec. 17 of last year.
When the bicycle exploded in popularity, thanks to a series of breakthrough innovations finally coming together, it was a genuine game changer. Finally, there was a way to transport people and goods with no ghastly pollution (horse manure) spewing out behind.
The bicycle also had a profound impact British society, as David Rubenstein wrote in his 1977 article, “Cycling in the 1890s”:
The Bicycle brought a new dimension to British social life in the 1890s. In a period marked by sharp changes in social attitudes, cycling provided not only a practical means of transport but a symbol of emancipation.
Advanced spirits were conscious of living in the fin de siecle decade, of passing from old ways to new in a number of important respects. Novelty was sought for its own sake. The result was the beginning of greater social freedom, above all for the middle classes to whom the bicycle was particularly precious.
Personal mobility, independent of railway timetables and stations, had previously been restricted to the minority who could afford a horse and carriage. Even carriages, however, had limitations in terms of flexibility and distance which the bicycle could easily overcome.
With its aid townsfolk could more easily reach the country and rural dwellers their nearby towns. As physical distance became less formidable, additional encouragement was given to demands for freedom from restrictions of the past…
All of this set the stage for the Great British Bicycle Bubble of 1896, which was kicked off by a massive speculative bet from a property dealer named Ernest Terah Hooley.
By 1896, bicycles were soaring in popularity with the British public. Those who couldn’t afford to buy one were renting by the week. There were 15 or 20 British bicycle companies at this point, but demand was overwhelming supply.
Ernest Terah Hooley smelled opportunity and had the guts to go big. He put together a hyper-aggressive leveraged buyout of a rubber tire maker, using bank funds to purchase a company called Pneumatic Tyre for 3 million pounds (an insane amount of money at the time).
Hooley’s purchase price represented a massive premium relative to revenue and profits, not unlike the nosebleed price-to-sales ratios in the EV space in 2020.
Hooley then changed the name to the Dunlop Pneumatic Tyre Company, spent a small fortune on marketing hype to bid up the company’s potential, and flipped it to another buyer for 5 million pounds.
Hooley’s brazen score set off a kind of bicycle gold-rush mentality among British investors and entrepreneurs. Within the space of months, the share prices of publicly traded British bicycle companies had tripled, and the total number of British bicycle companies rose by more than 400%.
With the dramatic expansion of production capacity, there was soon more than enough supply to meet demand. And yet, oddly, British bicycle manufacturers avoided cutting prices. The average price of a bicycle stayed stable, in what appeared to be a kind of gentleman’s collusion agreement.
And then the Americans came in.
The United States had the ability to ship and sell bicycles at about half the cost of British ones, likely due to greater scale of production.
When the American bikes started invading the British market, they were frowned upon at first. But the public soon enough realized they did the job fine and were easily a better deal at half the price. And so came the end of the Great British Bicycle Bubble, as competitive reality set in — along with a deluge of supply — and profit margins disappeared.
It took a while for the mood to sour, in part because the British press continued to focus on the bullish story aspects of the bicycle as a historic game-changing technology, the superior aspects of British bicycle craftsmanship over cheaper American versions, and so on.
But in the end, what mattered was the ramp-up of competition, the inevitable destruction of profit margins, and the unforgiving economics of supply and demand for an industry with far too many players.
In our view, the same exact things will matter for the electric vehicle space — where the competition is truly global, and affordable supply will soon enough be overwhelming. Perhaps, a few decades hence, a financial historian will look back to write about “the great Global EV Bubble of 2020.”