We’re updating this post with more bubble perspectives we gather over time. If you want to jump to the new opinions & commentary on the bubble we’ve added, you can click the links below.
Update 2: (7/8/2014) – More commentary on the bubble debate added from:
- Yes, it is getting bubbly – NYT The Upshot, Adam Lashinsky, Mark Suster, Steve Blank, Greg Becker
- We’re not in a bubble – Scott Kupor, Barry Kramer, Kevin Ryan, John Borthwick
Update 1: (4/25/2014) – We’ve added perspectives on the bubble debate below from several new folks including:
- Yes, it is getting bubbly – David Einhorn, George Zachary, Peter Nieh and FiveThirtyEight
- We’re not in a bubble – Fred Wilson, Roger Lee and Ben Horowitz
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
“Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.”
“As with so many of the telltale signs of a bubble, I have seen this before. When times are so good that executives are willing to disregard the difference between ethical and unctuous behavior, it’s just one sign that the end, relatively speaking, is near. It’s not the only sign. The over-supply of journalism jobs covering the technology industry, for example, is a good indicator.
I can also gauge the tech bubble by the flow of dinner, drinks and other social invitations in my inbox. I could easily dine out four nights a week on the dime of some public relations firm that is hosting a dinner in an attempt to drum up publicity for its client. The caveat is that I have no idea when this game of musical chairs will end and who will be left standing. I just know that it will end.”
Mark Suster, Upfront Ventures:
“For me a bubble is simple, it’s when people are paying significantly higher prices for any asset class that is in great excess of the underlying value of that asset. (One area that is subject to that definition right now is) late-stage financing of tech companies of companies like ZocDoc, or maybe even Dropbox, AirBnB and Uber. I’m not arguing (late-stage investors) are crazy, I’m arguing they’re irrational.”
Steve Blank, serial entrepreneur:
On WhatsApp acquisition: “One would have thought that a company with no revenue would be valueless. But for the first time users are equivalent to sales”
(Also see his 2011 post on the ‘new Internet bubble‘)
Greg Becker, Silicon Valley Bank:
“There’s absolutely a frothiness out there in certain sectors. With some of these companies, we’ve never seen growth rates like this before. How much is that growth worth? What’s the value? That’s what people are trying to get their arms around.”
George Zachary, Charles River Ventures:
“It’s been a steady sequence of very large rounds. It means we are in bubble territory…No one wants to say because nobody wants to break it. Everybody wants to cash out before its over.
…We are seeing expansion of valuation even from the seed stage all the way up…(There is) desperation to not miss out on what will be the next big thing.”
David Einhorn, Greenlight Capital:
“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.”
Andrew Flowers, FiveThirtyEight
“Today, however, as interest rates remain at historically low levels and are expected to stay low at least into next year, there is growing concern among investors, economists and central bankers that a new bubble has emerged, and that increased regulation isn’t enough to stop it…So what bubble are we talking about? It’s not the one you might expect.
What are the signs of a bubble in the bond market? Stein points to three things: first, the rising level of private-sector debt as a percentage of the U.S. economy; second, narrowing spreads between risk-free Treasuries and corporate bonds; and third, the growing proportion of corporate debt going to riskier companies, i.e. companies that have a greater likelihood of defaulting on their loans.”
Peter Nieh, Lightspeed Venture Partners
“I must admit when I first saw the WhatsApp valuation I thought I needed to get bifocals. I thought I must have missed a decimal point.
Tech has become a more pervasive part of our lives, so it does make sense that the valuations for tech companies should increase. It’s to what extent? It seems that some of these valuations are very frothy.”
Bill Gurley, Benchmark 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.”
Tim Draper, Draper Fisher Jurvetson
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.”
Josh Green, Mohr Davidow Ventures:
“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.”
Dr. Marc Faber, Editor & Publisher of the Gloom, Boom & Doom Report
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.”
Nick Bilton, New York Times Bits Blog
“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
Scott Kupor, Andreessen Horowitz:
“All of this bubble-mongering encourages headlines, but it makes little sense if we look beyond the run-up in valuations of tech startups.
Before we can say a bubble is brewing, we need to consider what’s causing the value of tech companies to soar. For venture-funded technology companies, the time it takes to go public is inexorably longer today than in previous years. Is it really any wonder then why so many of the 1999-2000 bubble-era Internet companies failed? The markets into which they were selling were simply too small…By contrast, not only are the end-user markets today vastly bigger, but the technology costs required to support these markets (think Amazon Web Services, open source software components, etc … ) have plummeted. The economics finally work.”
“We are not in a bubble. There’s a limited number of select companies, they’re valuations are incredibly high. You also see tons of companies with pretty good business models, but it’s hard to get high valuations. People still remember and learn from the dot-com era. Those memories will keep the market players from getting too crazy.”
Kevin Ryan, Gilt Groupe/Business Insider/MongoDB:
“(Today) is completely different from 1999. 1999 was a bubble. The definition of a bubble is when the entire sector goes down by like 85%. It happened with tulips, it happened with Internet stocks. There’s no chance its happening now. There will be some companies that go down, that will lose 40% of their valuation and some that will maintain. So there will be little blips but overall you’re seeing companies that make money, that are growing, that are changing the industry and will be around for a long time.”
“I went through the 1999-2000 error and i think this is very different. I think that the scope of the shift is taking place as we move from the desktop to the mobile phone, data into the cloud, wearables and what is the on the phone, there is so much innovation.
In certain areas you see these clusters and bubbles. We talked about it earlier, but these micro-bubbles, or capital runs into one corner of the room and inflates it and then deflated. What you have today is a pre-ipo market where there is a very darwinian process going on where companies that are growing really fast are breaking through and other companies are not.”
Fred Wilson, Union Square Ventures:
“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.”
Ben Horowitz, Andreessen Horowitz:
“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.”
“When you’ve seen these huge funding rounds in the past, people have laughed at them. Think of Yuri Milner’s investment in Facebook six or seven years ago at a $10 billion valuation. People thought he was crazy. When we did the Groupon investment, people thought it was crazy. Well, lo and behold, both turned out to be great investments.
It’s important for people to recognize that the opportunities in these markets dwarf what has historically been available to investors. So it makes sense for pubic market investors– be it Tiger Global or someone else – to try and cherry pick which companies in an era 10 years ago would probably already be public and that, once they are [public], [will] have a chance to become multibillion dollar companies because they’re selling into markets measured in the billions.
Is any one company overvalued relative to where it should be? That’s a very company specific discussion. In terms of the broader market, I could argue both sides frankly. With certain companies, the opportunities are so large that we’re underinvesting in them.”
Marc Andreessen, Andreessen Horowitz
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.”
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