Reaction: Empire of the Geeks (The Economist)

Article link:

The news focuses on the latest short-term, large impact news, which at the moment is China. While I feel like beating a dead horse, venture capital funding levels should also be a point of interest. The Economist attempted to understand the Valley this weekend, and, for the most part, got it right. The link isn’t to the full article; you’ll need a subscription (which I highly recommend).

Everyone keeps mentioning that, even if there is a bubble, the current environment is different than the 2000 tech bubble. While there are many similarities, I believe this. The key point is that people aren’t quitting their jobs to day trade, and there are far fewer IPOs, which means less general exposure. For example: there were 632 tech IPOs in 1999 and 2000, only 53 in 2014. In addition, many companies are making a conscious decision to remain unprofitable in a bid for growth, something that’s fueled by newer up rounds.

However, a bubble is still a bubble, and we need to recognize that without obvious liquidity options, valuations are likely to fall. Bill Gurley from Benchmark, which has already expressed its concern with valuation in the market, notes “If your competitors are acting like capital is free and doesn’t matter, then you have to live in that world.” And competitors now encompass large mutual fund operators, including Fidelity and T. Rowe, which are leading new rounds at higher valuations (though with participating preferred terms).

Only time will tell how this will end. As quoted in the magazine, “One cynical venture capitalist sees many of the valuations as relying on a ‘squint test’: If by squinting you can convince yourself that a company looks vaguely like one which has already commanded a high price, you should value it as people have the other one.” However, Facebook stayed private for 8 years, with an investment by Microsoft in 2007 for $240m at a valuation of $15b, and now is worth $276b. (Of course, the VC investors at the time will begin to lament immediately about Friendster).


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