Claims that we’re in a tech bubble, claims that the bubble will burst and claims that the bubble doesn’t exist. Not everyone can be right, but no one can deny the crazy figures bandied about.
Business bubbles are very easy to spot. All you have to do is wait for a major economic collapse within an industry, look back a couple of months, and often there’s your bubble.
Spotting them in real time is far more difficult and, when those opining on whether or not there is a bubble are the same people investing heavily in businesses within that industry, it’s fair to say objectivity is in short supply.
And so today’s tech environment is hotly disputed in terms of bubblicity. For those wondering, bubblicity is a tech word I just created, and I’m seeking some investment.
The money men talk
Someone I should probably reach out to is Sam Altman, an investor and blogger in the US who wrote a column yesterday about the woes of someone who doesn’t think we’re in a bubble, but must live alongside others who do in world where market criticism is “easy press” .
“I’m tired of reading about investors and journalists claiming there’s a bubble in tech,” he said, claiming he’s “paranoid” about bubbles in general – perhaps bubblaphobic – and that this is not one.
He’s so confident, in fact, that he bets anyone US$100,000 that his predictions of growth are met within five years. Without a detailed macroeconomic mind, it’s hard to establish if his predictions – which include the likes of Airbnb and Dropbox growing significantly – prove anything whatsoever.
Follow the metrics
Though Bill Maris, president and managing partner at Google Ventures, puts forward a decent agreement with Altman, using some fairly convincing data in his piece on TechCrunch. He points out, in comparing now to the bubble of 2000, companies are going public far slower, generating genuine revenues first.
He also shows that VC funding is just a third of 2000’s level, not many companies are actually getting investments and only half of the money invested at the turn of the millennium is invested now.
However he also shows some incredibly worrying metrics, most notably that valuations are increasing far faster than venture fundraising, which makes no sense, and that private company valuations are going through the roof.
Either way, Maris suggests that if we are in a bubble, it’s a “different kind” of bubble. “And this makes sense, because the market and technology landscapes have changed dramatically in the last 15 years,” he says.
A rise in Unicorns – start-ups worth over US$1bn – has lead many to claim we’re in a bubble. Via Shutterstock
Both Maris and Altman admit that some companies inevitably fail, and that some of today’s valuations will make then failures all the more eye catching – unicorns being wiped out, as it were. And that’s something that Michael Moritz, the chairman of Sequoia Capital, agrees with.
“There are a whole bunch of crazy little companies that will disappear. There are a considerable number of unicorns that will become extinct,” he said in The Times – unicorns are start-ups valued at over US$1bn.
“Several years ago the atmosphere wasn’t as euphoric as it is today. Even the zaniest ideas can attract money.
“The valuations are very sporty for absolutely everything. There are some companies that don’t deserve the valuations they have,” he said, agreeing with Maris that even if things did go sour, it will be far different to 2000, as the industry is so different now.
How to value a company?
It’s best to give a bit of context here. Last month Uber, Pinterest and Snapchat had a hoped-for, cumulative valuation of US71bn, the GDP of Panama. Their products equate to a taxi network app, a picture bookmarking site and a social media service for short-term images.
Panama is home to the world’s single-most important commercial crossing for global, international maritime trade.
As Business Insider reports, Benchmark Capital partner Bill Gurley has warned of a tech bubble on numerous occasions. He says people are happily working at start-ups that may be losing millions of dollars a year because the industry is very optimistic. “I do think you’ll see some dead unicorns this year,” he said.
Either way we’ll never know the extent of the bubble, whether it exists and what will come of it until after the event. This is the way it works.
But it’s difficult to shy away from some absolute madness surrounding valuations of companies that offer little and exist for a such short amount of time.
Oh, and when investors are ballsy enough to bet US$100,000 on it, best to be wary of what on Earth is going on. Even other investors, like Michael Arrington, think so…
I’m not overly worried about a bubble, but VCs tossing around $100k personal wagers tells me something is off http://t.co/F9KnlpBnwd
— Michael Arrington (@arrington) March 24, 2015
Bubble image, via Shutterstock