Uber is valued at $62.5 billion, Airbnb at $25 billion, Dropbox at $10 billion and Snapchat at $12 billion. The question is: are these valuations justified? Gone are the days when private companies worth more than a billion dollars were called “unicorns”. With 111 of these, you can’t really call them unicorns (They call it “Decacorn” now!).
Low-interest rates and desperate investors in need for returns has pushed tech companies to raise loads of money. Moving beyond “Angels”, hedge funds and mutual funds have gotten attracted to “start-up’s”. Where are we headed to? Why do we choose to ignore the “bubble” we’re living in?
Some believe that investment decisions are being guided by Venture Capitalists’ “Fear of Missing Out”, and I agree – VC’s are looking for ROI and don’t want to miss out on anything. Well, you can replace the term bubble, by terms like “poor pricing decisions”, but like the “dot-com” bubble, that is where we’re headed to.
Here’s some evidence – A private fundraising last year valued Square at roughly $6 billion. The initial public offering (IPO) priced it at $2.9 billion, down by half; and to top that, it has lost $420 million since 2012.
Fred Wilson of Union Square Ventures puts it well – “I think in general the public market valuations got too high, and then that went down into the private market, and the private market valuations got too high, and now the public market valuations are correcting, and now there’s a bunch of companies that raised money at really high valuations in the private market and they’re going to have to deal with that.”
tech bubbleAnother point to consider is that unlike the dot-com bubble, investors don’t even have liquidity to sell their stocks! Mark Cuban puts this well in a single line – “…the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.”
225,000 investors, a million “ideas” seeking funding, desperate hope for a return in the long run and no liquidity. Ah,printf(“Something’s wrong!”);
Is there a solution to this? I’m no expert, but the rectification needs to start with the way investors price the firms, rather than the market performing the rectification after the IPO, leading to overwhelming cut in valuations.