We’ve all seen the recent articles about the Venture Capital “tech bubble.” I understand the cause for concern because private market companies have grown at an exponential rate. There are over 80 unicorn’s (startups valued at $1 billion or more) around today. However, there is absolutely no “bubble” in place. Many people are looking at fat valuations and how they might be blown out of proportion. We need to stop obsessing over current valuations, and start to look at the actual value of these unicorns. These startups are actually very impressive in their numbers. The potential for these companies is not capped, they have much room to grow and expand. The bottom line…this is a different time period. I know you’ve heard that one before, but this is a much different time we are living in. Technology and innovation has never been this essential to each and every one of us. It has never been this cheap to build a tech company. Tech companies have never had the impact on all of us like they do now. This is nothing like 1999.
Let’s look into in the details; courtesy of our friends at @a16z Andreessen Horowitz. The amount of dollars flowing into the private market is approaching a level last seen in the dot com-boom. Let’s dig deeper and look at some metrics like :
-funding as a percent of GDP
-funding as a percent of people online
-P/E multiples of tech companies
This looks nothing like the 2000 dotcom bubble.
What is really happening is startup companies are taking much longer to go public. It is clear that the tech IPO market has taken a hiatus. But, investors still want the massive growth from successful tech companies. Most funds and institutions that would normally invest in the public market, do not want to wait for a successful tech IPO. They are missing out on the potential growth in the pre-IPO market. So this is causing traditional public market investors, who would not typically invest in companies at this stage, to invest in late stage private investments.
The average size of rounds is actually smaller than it was in 1999, before the dotcom bubble. We see absolutely no inflation at the early stages of a startup. In today’s world, we have more companies being created than ever, and it is much cheaper to start a company. With each one needing less money to get started, there are many more small rounds. This caused an increase in seed stage funding.
“The best example: Imagine you bought into Microsoft’s IPO. Years later, you bought into Facebook’s IPO. The only way your return on Facebook would be the same as your return on Microsoft would be if Facebook were someday worth $45 trillion — more than twice the entire GDP of the United States.”-Matt Rosoff, Business Insider
The bottom line…there are great companies being created – RIGHT NOW – around the globe. There is still a great opportunity to invest in startup companies that you believe can have a positive impact on the world. If you can isolate these companies – no easy task – the valuations will take care of themselves!
Until next time-