Tech bubble? There is no tech bubble claims Silicon Valley VC Andreessen Horowitz

17 Jun 2015

One of Silicon Valley's top venture capital firms Andreessen Horowitz claims this is not a tech bubble and IPOs are no longer the endgame.

This is no Year 2000 tech bubble, things are different this time – that’s the gist of the latest slideshare from eminent Silicon Valley venture firm Andreessen Horowitz, which is getting a lot of attention online.

Andreessen Horowitz’s presentation notes that more money is flowing into privately-owned tech companies than at any time since the last tech bubble popped spectacularly in March 2000.

The presentation, compiled by Morgan Bender, Benedict Evans and Scott Kupor, says that while tech market indices are approaching the levels of 1999, it is actual revenues and not price/earnings multiples that are growing.

The tech industries share of the S&P 500 has remained stable for 14 years at 20pc, down from the peak of 30pc in 2000.

Another core difference they point out is that the internet is too big to fail. Growing from 40m users in 2000 to 4bn in 2014.

The corollary of this is that people are spending more money online – US$304bn a year in terms of e-commerce — and online advertising is capturing a spend of approximately US$50bn a year.

The Andreessen Horowitz partners observe that there is still considerable room for growth for the digital economy by pointing out that e-commerce is only 6pc of US retail revenue – “there’s far more room to grow”.

Funding as a share of US GDP is moderate at around 0.3pc, compared with 2000 when US tech funding as a percentage of GDP had soared to almost 11pc of US GDP.

Everything, they say, is more moderate. Tech funding invested in 2014 stands at US$48bn, compared to US$71bn in 1999, and US e-commerce revenues stand at US$304bn compared with US$12bn in 1999.

Partying like it’s 1999 more discreet because IPOs are no longer the norm

It is also going to take firms longer to IPO, with many opting to build up many institutional capital investors long before going public, as in the case of Facebook and Twitter. The median time to IPO is now 11 years, compared with four years in 1999.

They acknowledge that the rise of unicorns – companies valued at more than US$1bn – has people concerned, with 61 US technology unicorns in existence. As well as this, 75pc of the largest venture capital investments in history were raised in the last five years.

They reason that, unlike 1999-2000, the funding surge in these companies happens at late-stage in the company’s development, rather than at every stage.

In fact, this represents a rebalancing away from IPOs.

“The top 20 deals used to be mostly IPOs – now they’re almost all private,” Andreessen Horowitz points out.

In effect, venture capital and private markets are supplanting Nasdaq and the New York Stock exchange. US$40m rounds are now being dubbed “quasi-IPOs”.

All the unicorns combined – including Uber, Airbnb, Palantir, Snapchat, SpaceX, Pinterest, Dropbox, Spotify, Square and Stripe – are equal to one Facebook or two-thirds of Microsoft

The bar for an IPO is now much higher than it was 14 years ago. Where it used to be routine for companies to IPO with revenues of US$20m, now they need to be achieving just shy of US$100m to be considered worthy of an IPO.

Quasi-IPOs – or US$40m+ rounds – have different financials, investors and risk profiles than classic venture capital investment.

The delay on IPOs and the emphasis on bigger rounds is encouraging traditional public market investors and buyout funds to move into the private markets.

Returns used to be made on investment when companies went public in an IPO but, according to Andreessen Horowitz, all the returns are now in the private market.

In terms of the size of companies by market cap, Apple is the doyen with a market cap of US$741bn, followed by Microsoft, which is worth US$374bn, Google, which is worth US$369bn, and Facebook, which is worth US$277bn.

Unicorn image via Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years