Prominent tech investor Bill Gurley captured headlines coming out of SXSW last week with his rather grim predictions of things to come for the startup economy – and unusual addition to what is generally a celebration of all the potential of what’s new and now in technology (and music and film).
Gurley warned of a “complete lack of fear” in the valley right now, combined with a surfeit of “unicorns,” or startups valued at over $1 billion
"I do think you’ll see some dead unicorns this year,” Mr. Gurley said, noting that some of these unicorns – particularly things going head-to-head like Uber and Lyft or Square and Stripe – cannot all succeed at once.
It is worth noting that Gurley -through his firm Benchmark – invested in Uber and Snapchat, two of the market’s more prominent unicorns. The former is valued at around $41 billion, while the latter is valued at a more conservative $15 billion.
Gurley, however, is not alone and the rapidly rising valuations for mobile startups has been of some concern to the sector for some time. But is that concern well placed? PYMNTS took a closer look at the recent debate to answer that question.
Venture Capital: Building The World’s First Unicorn Preserve
The rapidly rising rate of valuations is not a new concern.
In late 2014, PYMNTS reported on how Uber is changing the way VC’s are doing startup math , possibly for the worse. Fortune dedicated its February cover to unicorns – and reported that since the term was first coined to describe high value startups in 2013, the number of them has more than doubled from 30 to 80.
And, as the image to the left demonstrates, it is impossible to deny that billion dollar startups are certainly exploding.
According to data from Digi-Capital, there were 68 unicorns in mobile Internet companies alone in 2014, with a total combined valuation around $261 billion. Digi-Capital further reports that in the last 12 months alone, tech unicorns have doubled.
Within 24 hours of this story being written, online image sharing site Pinterest announced a $367 million funding round and a new $11 billion dollar valuation, and two BoA/Merrill Lynch BoA advisors hypothesized that Instagram’s value is around $37 billion. Between January and February 2015, there has been $12 billion invested across a variety of types, according to our Innovation Investment Tracker.
And Gurley isn’t the only high-profile investor making noise about the tech bubble in March of 2015. Mark Cuban wrote on his blog that the tech investment scene out there today is “2000 all over again,” but worse.
Cuban’s argument is that unlike during the .com bust of yesteryear – which took down a bunch of public companies forcing investors to liquidate theirs – this time around, the bubble is being inflated by private investors who are pouring funds into apps and small tech companies.
"The SEC made sure that there is no market for any of these companies to go public and create liquidity for their Angels. The market for sub 25mm dollar raises is effectively dead. DOA . Gone. Thanks SEC. And with the new Equity CrowdFunding rules yet to be finalized, there is no reason to believe that the SEC will be smart enough to create some form of liquidity for all those widows and orphans…” Cuban wrote. “So why is this bubble far worse than the tech bubble of 2000? Because the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity. If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it?"
Building The Future Requires Investment
While concerns about the inevitable bubble burst gets a lot of play, it first bears noting that such concerns have gotten a lot of play for at least the last six years. Googling the phrase “tech bubble burst” yields around 58 million results – some of which go back eight years. The Economist in 2010 asked if the Silicon Valley startup craze was the sure sign of a bubble built on tenuous valuations – a subject they revisited in 2014 though they were no longer calling it the startup bubble – but instead an explosion.
That article also pointed out that the analogy to the year 2000, while on the surface is quite apt, really misses some of the point of the technological innovations that are powering what is now a global explosion in mobile-based Web startups.
This time through, the “basic building blocks for digital services and products” are no longer things that firms must build by hand in-house. Instead they are available in a variety of form factors, cheaply and ubiquitously – which means they can be efficiently combined, refined and redeveloped. Between open-source code, cloud-computing startups are more able to run lean. During the dotcom boom, launching a startup was a big bet on a business plan; now not so much, as firms are instead more likely to view their investments as “the first of a series of experiments, an ongoing exploration."
Cullen Roche, the founder of Orcam Financial Group, commenting for MarketWatch, also noted that despite Cuban’s expressed concern for widows and orphans, the reality is that this bubble – if there is one – would have a lesser effect than the 2000 tech bubble pop.
"The primary difference is that this bubble comprises wealthy people living mostly in San Francisco and New York. The tech bubble 15 years ago was a mom-and-pop bubble. It affected the whole country. The bubble today is much more consolidated. So, no, there’s simply no way this bubble is worse than the tech bubble because its scope is nowhere near as large,” Roche wrote.
However, Roche did also note that “things are looking a little frothy out there” and that a bubble burst would be catastrophic – he just disputes the year 2000 analogy as apt.
Adena Friedman, president of exchange group Nasdaq OMX, has gone further – and publicly stated she thinks concerns about a new tech sector bubble are wildly overblown. The Nasdaq Composite index briefly hit 5,000 points last week, its highest level since the peak of the tech bubble 15 years ago.
"I was there in 2000. It was a very, very different index then. If you look at the index today, we now have three of the five largest companies in the world,” said Ms. Friedman. “I personally think that tech is in a huge growth phase,” she said. “There is a rationale for the types of valuations that these companies are getting based on the growth opportunity globally for technology and biotech."
The essential reality is most startups actually fail, which makes a landscape supporting so many high value startups a little scary – as it seems certain some firms with lots of investor money tied up in them will fail.
However, that fact alone does not necessarily predict doom – as Karen Webster pointed out in a recent commentary, many big ideas have come in gone in the years that the bubble pop has been forecasted as imminent. So far no catastrophic chain reaction has happened.
So is the bubble real? From the inside, it is probably impossible to say. But PYMNTS will keep track of the investments week by week, so you can watch the market explode (or the bubble expand) in real time, with the best data.