As others continue to weigh in, we will continue to update this post with their commentary.
Update 1: (4/24/2014) – Fred Wilson, Ben Horowitz, David Einhorn
Billion dollar private company valuations, enormous funding rounds to companies with no revenues, a surging Nasdaq and the ability to sell even a failed tech company for tens of millions of dollars have gotten the tech bubble chatter swirling once again. Predicting bubbles is fashionable – we’ve been seeing predictions every year since 2009 when the recession ended. The chatter has gotten a bit more feverish as of late.
The beauty of bubble predictions is that making them is easy as there is generally little downside. If you get it right, your pundit Klout score has climbed and you’re a genius. Of course, nobody remembers that you’ve been predicting a bubble every year for the last five. A few years ago, Josh Kopelman of First Round Capital compiled a list of bubble predictions by year and concluded his post writing “Even a broken clock is right two times a day. By proclaiming a bubble every year, everyone can say they “called it.”
For the record, we don’t think that we’re in a bubble now. We do acknowledge there is some frothiness in the market:
- An unprecedented level of consumer tech startups valued at over $1 billion
- A growing number of private tech companies worth over $100 million
- Seed investment activity continues to be very strong even among corporate VCs
- Too many undifferentiated seed / micro VCs
- An influx of money from corporations, hedge funds & mutual funds and Asian investors
- Public markets are still behaving relatively sane. For every LinkedIn, Workday or Veeva Systems who does well post-IPO, there has been a Zynga, Groupon and Violin Memory which get crushed. Just being “tech” or “high growth” doesn’t get you a free pass.
- A clear move to companies with real revenues and metrics with 70% of largest tech financings going to the enterprise
- While there is lots of seed financing going on, even if every seed deal failed, it’d be the equivalent of a couple of large VC funds failing. Clearly, that wouldn’t be good but also not cataclysmic. Also, incredibly unlikely.
- The frothiness is mostly limited to private market investors. Yes – lots of angels, micro VCs, VCs and others will lose money but again, the damage is limited. It is nothing like the dot com boom of 1999-2000 which saw Main Street investors get pummeled.
“On one hand, you could easily say it’s a bubble — look at those large valuations and look how much money people paid to get into the big deals.
On the other hand, there were definitely a large number of startups that were having difficulty getting to their next funding round, because there were some big important winners and many were very nervous that all of the returns would accrue to those winners.”
Yeah, it is getting bubbly
“Now there is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand and what might pop it.
In our view the current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm. Some indications that we are pretty far along include:
- The rejection of conventional valuation methods;
- Short-sellers forced to cover due to intolerable mark-to-market losses; and
- Huge first day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital.”
“I think there’s two things are going on: One, there’s quite a bit of capital availability out there, and if you look at how low-interest rates are, and what are the alternatives to invest capital and get return, that causes asset prices to rise. The stock market’s up, as well.
You know, this is a cyclical industry, and when times get good, they get really good. Last time we saw that was 1999 and many of the people at this conference might not have been paying attention, because they were in high school. But money is definitely freer flowing today than it was three or four years ago.”
In this video, Draper says we are in a bubble and adds -
“Beware. You want to be investing on the way up. And you want to take some money off the table on the way down. In the US, we are in the early days of a bubble. We have 3 to 4 good years to go.”
“All business activity is driven by either fear or greed, and in Silicon Valley we’re in a cycle where greed may be on the rise. I don’t think we’ll ever get back — and should never get back — to the days of the late 1990s. But in venture capital we live in alpha world. It’s all about taking risks. This will not be orderly.”
Just from his report’s name, you can guess his perspective. It’s more public equities focused but the principles still hold
“The Federal Reserve, by keeping interest rates artificially low, creates bubbles,” says Faber. “How are you going to value a Warhol painting or a Picasso if interest rates are at zero? How are you going to value stocks when interest rates are at zero? You create a complete mispricing of everything in the system.”
“Since the dark days of 2008, the Nasdaq has risen more than 150 percent, twice as much as the old-school Dow industrials. Money has been pouring into social media stocks. As of Friday, Twitter had risen nearly 60 percent since it went public only a few weeks earlier.
Once again, new “metrics” are being applied to justify stratospheric valuations. Twitter is losing money. A price-to-earnings ratio? There is no E in the P/E. But its stock is trading at 20-odd times the company’s annual sales. Good enough.”
All the bubble chatter is overdone
“It is the combination of these two factors, which are really just one factor (cheap money/low rates), that is the root cause of the valuation environment we are in. And the answer to when/if it will end comes down to when/if the global economy starts growing more rapidly and sucking up the excess liquidity and policy makers start tightening up the easy money regime.
I have no idea when and if that will happen. But until it does, I believe we will continue to see eye popping EBITDA multiples for high growth tech companies. And those tech companies with eye popping EBITDA multiples will use their highly valued stock to purchase other high growth tech business and strategic assets at eye popping valuations.
It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.”
“It’s hard to see us in the bubble like we had in equities if we’re not even back to [the year] 2000 in terms of the Nasdaq,” Horowitz says, noting the index remains about 20% below its all-time peak. “Are there companies ahead of their valuations and performance? No question. But it was very different then, when we were in a bubble.
…In the old days, companies went public at a much younger stage,” recalls the former CEO of Loudcloud, which went public in 2001. “Look at the financials [of today's IPOs]. They at least have big time revenue if not big time profits. The big difference is the businesses are working.”
The people who say it’s all like the ’90s and it’s all going to come crashing down just don’t know what they’re talking about.”
“There’s not any question that valuations are getting high. But I think when you go back and look at the dot-com bubbles, a few of the businesses were legitimate, but a lot of companies were based on eyeballs, and it was not clear how they were ever going to make revenue or profit despite their valuations.
It’s easy to do a hand wave and say the same thing is happening here. Snapchat and Instagram and Pinterest are isolated companies and don’t make a bubble. Dropbox and Uber also valued richly but they’re also real businesses.”
“I’m not going to say there is a bubble or there isn’t a bubble. But I lived through the first bubble, and I was in disbelief the entire time, and I don’t see anything of that magnitude or scale here today.”
“The companies prepping to go public today have real metrics, sustainable unit economics and much different growth and scale paradigms than they did in 1999.
Valuations are flourishing, especially on the later-stage side. High-profile startups with real traction are able to raise seemingly infinite amounts of capital at stratospheric valuations… [But] momentum investors have adopted the mantra that the ones you miss out on hurt you more than the ones where you are wrong.”
Interestingly, our newsletter subscribers disagree with us with almost 40% believing we’re in or are headed for a bubble.