From Nik Kalliagkopoulos – Prime Ventures (@kalliagk)
Over the last months a huge public discussion has started on the topic of whether we are currently at a new technology bubble. The very high private valuations, as well as the absence of profitability are some of the arguments used to compare today with the dotcom bubble of 2000. The other opinion argues that this time, in contrast with 2000, the market is there and is huge. 5 billion people are connected via their smartphones.
Economy and the market from its nature is moving in economic cycles. The figure below depicts the typical boom and burst cycle. In the beginning of the cycle, the majority of investors are risk averse and as time moves buy they become more risk seeking, moving through the stages of enthusiasm, greed and delusion.
I personally believe that we are in one of the (high) points of the mania phase, with regards to the technology-investing ecosystem. The basic reasons around this belief are related to the below mentioned 3 trends that are observed world wide.
- The average company needs more time to enter the stock exchange. Companies seek listing in the stock exchange, since excluding acquisitions, only the public markets provide liquidity to their investors. The valuation of a private company is virtual and does not necessarily reflect the actual value that an investor can get by selling his shares. In a recent study, the National Venture Capital Association of the US revealed that it took on average 8 years to tech companies in 2015 to IPO, in comparison with 4 years in 2001.
- There is a plethora of available funds. Interest rates are in historical lows. Following the news, one can recognize that the available funds for investments in tech companies are continually growing. There has been a continuous formation of new funds above 100 million in the European Scene over the last months. New funds are even raised from people without any specific experience in the VC sector. Furthermore, traditional public market investors are currently investing directly to private tech companies (in their private market valuations).
- High private market valuations (compared to their public peers). My colleague Pieter Welten has written a post on this matter in the VEECEE blog. Today there are approximately 150 unicorns, companies with a value of more than $ 1 billion. More than 40% of the IPOs of ‘unicorns’ in 2015 was at a lower valuation from the valuation of the last (private) round. The last example of this trend is Square, which had its IPO at a value of $2.9 billion, with the last round valuing the company at $6 billion.
Bubbles take a long time to develop, but only need a few months or weeks to burst. It is yet unknown how long it will take until this bubble bursts, but when looking at the above mentioned trends, it is not unlikely to see soon more careful and diligent investors, less unicorns and more emphasis (from the entrepreneurs side) to profitability.