Yes, it's a bubble. But who cares?
Slack raised $120M round in October 2014, and another $160M in April 2015 (at $2.8B valuation). Companies are raising $2M+ seed rounds.
Snapchat is valued at $15B, while SpaceX is only worth $12B. And Uber’s last round was raised at a $41B valuation. WTF!
It’s crazy out there. The amount of money being poured into startups is beyond ridiculous. In fact, it’s at an all time high.
Not only that, but the average round size now is pretty close to the average round size in the 1999-2000 boom.
Holy shit, right? Wait there’s more. Private companies are now valued at at-least 2.5X as they were in the dot-com boom.
Double holy shit.
Yes, it’s a bubble. And yes, it’s a tech startup bubble. But is it as bad as the 1999 bubble? The charts above show that it might actually be worse.
Back in 1990’s, just when the Internet was becoming mainstream, investors got very excited. A ton of money was poured into the companies, much of which was never recouped. Looking at the recent valuations and the fundraising scene, I think it’s fair to call it a bubble.
But it’s nothing like the 1999 bubble. Here’s a chart that proves that. The blue bars show the number of tech companies that went public in a particular year. The red lines show how profitable the companies were (the lower the red line, the less profitable the company was).
Even though there is a lot of money in the market now, it’s a closed market. The volume of IPOs is nowhere close to what it was in the 1999-2000 bubble. At the time, the data shows, that businesses making only half of their expenses were going public. 2015 is really different.
Here’s why this is interesting. Even if this bubble pops, not many people would even know about it. The venture capitalists would just slip it under the rug and move on; there no public disclosure required for private companies. When the bubble bursts, what will happen is:
- The rich will get slightly poor (smart investors know not to invest more than 10% of their net worth).
- People like you or me, or our parents, who are not accredited investors, will not be affected. They own no stake in the company.
- Companies will get realistic valuations that justify their size and revenue.
- Companies will raise realistic rounds.
If we dig deeper into the VC game, we know that any VC fund raises money from its “limited partners”. These LPs include pension funds, universities, hedge funds, endowments etc. The money that these LPs invest in these high-risk venture comes from, hold it, you and me and our parents. So, if the bubble pops, the effects ripple back to us. The market could be in a havoc. Wrong. VC fund investment is a very small percentage of the overall investment strategy of these LPs. They understand the risk and invest very carefully.
The impact, hence, will be slight. The investments will still continue to invest and new companies will continue to be started. A lot of money might be lost, but not a lot of people will be affected.