Is There A Tech Bubble?

A Quantitative Look at Tech Bubbles, Unicorns, Fund Formation, and More

Below is a transcript of a presentation given at the PreMoney Conference by CB Insights CEO, Anand Sanwal.

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From investors to journalists, the cries of a tech bubble have intensified as of late.

So lots of bubble chatter. There's a lot of talk about bubbles right now. A lot of smart people are saying there is a bubble, there's not a bubble. You have hedge fund guys, you have VCs, you have the press. All sorts of folks are coming out on different sides of this topic. So lots of intensity around this conversation. 


There's also other signs that there might be a bubble. Revenue is now a feature. Burn rate doesn't matter. This one I like, you now can get stock options as part of your house purchase. This one's my favorite as we're based in New York City, so when investment bankers start taking less money to go to start-ups, you know the end could be near because these guys like money. So that's a problem.

Our thesis on all this stuff is we are a data company. So there's a lot of anecdote and very smart narrative but we live by this motto: "In God we trust, all others must bring data."


I'm going to go through this why it's a bubble part, and then we'll go through a little bit of why it's not.

Everybody here should know this, but what's a unicorn? Private companies valued at over $1 billion. Unicorn exits, that is those that have exited for over $1 billion via M&A or IPO. Just a level set.

These are a lot of the factors that a lot of folks say are the reasons for a tech bubble. Lots of new fund formation. You see this is kind of a breakdown of funds that have been created over time by size. People say lots of new VCs rushing into the market, must be a bubble. Lots of new unicorns. This is where it's just ridiculous. We have a unicorn tracker on CB Insights just because we got questions from the media so much and we'd give them a data point and by the end of the day it was already outdated. So there's lots of new companies that are getting that billion dollar mark in the private markets. The exit picture is not very pretty.

VC deal and funding activity is down. Last quarter, 11.3 billion, 805 deals. But when you start pulling in the hedge funds, the mutual funds, the sovereign wealth funds, the corporations, funding is actually up very big. There's a lot of money rushing in, then, again, we must be in a tech bubble. It is much easier to raise money right now at billion dollars than just to exit at one. If you look here, in Q1 '15, there was one IPO over a billion, there were several private company financings at a billion dollars. There's a little bit of a problem there.

IPO activity has not been very good. Q1 2015 was pretty grim. I think Fitbit might be the only one right now that's waiting in the wings. There's not really a very healthy exit environment, but lots of money and lots of people saying that companies are worth a lot.

Josh Kopelman kind of coined this phrase "the private IPO." What you see here is, the orange line, are all the $100 million plus rounds, and that's sort of the median in an IPO raise. What we're seeing is sort of the private IPO. It's a bit of an oxymoron, but that's what's kind of taking off. Collectively, the black line is private plus public IPO, so a lot going on there.

The other thing we see is all this new cast of characters. You have the Fidelities, all the Tiger Cubs which is all the hedge fund guys coming in, you have a lot of corporations in Asia, so you have the Alibabas, and Tencents, the Huaweis, and all those folks kind of doing a lot of investments as well. What we see here is Tiger Global and all their sort of offspring and all their investments, so a lot of hedge funds.

Corporate VC deal activity is way up, again, the dumb money. This is what everyone calls the "dumb money". The number of corporate VCs 

jumping in keeps going up. So then, the refrain from VCs is that these guys are dumb. I think that does two things. First, if you look at VC returns, it takes a lot of gall to call any other investor dumb. I think the other thing is there's competition. Nobody likes competition, so the easy way to frame it is we add a lot of value and we do all these artisanal things that make companies successful. But the numbers don't really prove themselves out. This is the other refrain, like there's so much dumb money out there rushing into the market; we must be in a bubble.

Then you have price to revenue multiples of unicorns. So this is probably a couple months ago, but Uber and Slack, from a multiple perspective, are pretty off the charts. Again, eye-popping valuations and multiples. You look at Box versus Dropbox. There's a private/public company dichotomy. Companies are valued much higher in the private market than their public market peers, e-commerce companies are trading at 5, 6x in the private markets and in public markets 1 to 2. Again, this disconnect is a problem.

Those are all the reasons it is a tech bubble. 


So why is it not a tech bubble? Rainbows shooting out of a unicorn's ass. So this is awesome. So why is it not a problem? It's kind of the old software is eating the world kind of thing. One of the things that we've been seeing is that the interest in tech is coming from lots of non-tech places. You look at Honeywell, all the companies going after somebody like Honeywell. All the companies going after the car. So it's not just tech companies attacking other tech companies anymore; it's a little bit more pervasive. We've got P&G being unbundled, 

you have FedEx and UPS, Wells Fargo, Bank America, Citi. I think it's not just the U.S., we've done similar around HSBC, there's a ton of activity around Europe, in Asia. There's all these sort of death by a thousand cuts that's happening. 

I think the other thing that is promising for start-ups is that the old guard are waking up. Goldman has this "Rise of the New Shadowbank." Anything Goldman does has to sound super crazy espionage. It was just a fintech report but they just made it sound very sexy. Jamie Dimon has kind of talked about the rise and the fear of Silicon Valley. I think these guys waking up, the big corporates, is kind of a sign that there's going to be a legacy here for start-ups.

The other thing is, the chief investor of BlackRock put out this good presentation on share buybacks. So basically his view on it was that companies are not investing in what he calls "productive capacity". They're basically just doing financial engineering because that's what hedge funds and other folks want to see. So the benefit to start-ups is they're not investing in innovation, so there's this opportunity. There's markets and business models that people want that big companies are not going to invest in 

because they're too busy trying to goose their EPS with these share buybacks and other things. I think this is another reason that innovation is going to be kind of continuing.   

That earlier chart on VC fundraising being crazy, it's really not that crazy. It's a bunch of small micro-VCs, less than a hundred million dollars. You add up all of these guys, you probably have an NEA. They're doing great stuff, but in the grand scheme of is this an asset class that presents this immense risk to the general economy, they're like a rounding error. It's just not that big of a deal. They get a lot of fanfare because tech gets a lot of fanfare.

This has gone up a little bit, but the point being every unicorn combined is worth less than Facebook. I think the team is working on redoing this; I think they're more than Facebook, less than Microsoft right now. So they moved up a little bit, that's partly just because there is a new unicorn like every six minutes so that's part of the reason for that. Unicorns, as a percent of the NASDAQ 100 total market cap, 3.5 percent. This is probably about the same because the NASDAQ has also climbed since I pulled this together.

Public markets aren't so crazy, so this is where, when people ask us about the tech bubble . . . We launched CB Insights five years ago, we've gotten the question every month, now it's daily, about a tech bubble for all five years. Eventually you'll be right. If you keep predicting there's going to be a tech bubble, you will definitely be right. That's a good strategy if you want to be bold. But public markets are one area that haven't been crazy. If you look at the multiples, I think this is for SaaS companies, they've actually been kind of contracting. This is this crazy chart, but in the public markets, ho-hum, kind of mediocre companies that have gone public have been punished. I worked at in the first dot com boom, and then if you were dot com, you got a crazy valuation right from the get-go. Now if you look, all the Ad-Tech companies have kind of been smoked on the markets, Box is doing all right, not great, the Lending Clubs of the world are also facing headwinds. I think public market rationality is a good thing for the private markets. That's, I think, another reason that we think there's not really a bubble.

Then finally, I think this is the biggest point in our view, is that a tech bubble is kind of a rapid expansion and rapid contraction of the values, and what we are seeing is that there's a rapid expansion of values. The contraction side is going to be a bit harder. Public markets kind of expose you; everyone knows your scorecard at the end of the day. With the private markets, like have you ever met an angel investor that says they have not made money? There's so much selection bias 

and survivorship bias in what people talk about in their returns. So the private markets let you bury the dead very quietly. What will happen is that some hedge fund that came into the market and didn't make money will exit and everybody will say well, they didn't make money because they were just dumb. It wasn't because everybody is not making money. Nobody publicizes this. I think this opaqueness of the private markets is one reason that the contraction side is going to be very slow. When bubbles pop, I see this is going to be more of a slow deflation over time than a pop.