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The inevitable bubble chatter will pick up steam again. There are many reasons to believe we're in a bubble and in our view, stronger reasons to believe we're

by asanwal 11y ago

The inevitable bubble chatter will pick up steam again. There are many reasons to believe we're in a bubble and in our view, stronger reasons to believe we're not. Here are several in support of a bubble. 1. There were 9x as many $100 million private financing rounds as there were $100 million public offerings. People are starting to call these private IPOs which is a bit of an oxymoron but the point around private market money being plentiful and even providing some liquidity to founders and early investors is happening even in some private transactions. 2. In the first 3.5 months of this year, there were 16 new companies that raised money at a billion dollar valuation or higher. There were 15 in all of 2013. 3. All sorts of new money is flowing into the market, i.e. private equity, hedge funds, mutual funds, corporations and sovereign wealth funds. Why we are NOT in a bubble. 1. All of the US unicorns combined are worth less than Facebook 2. They collectively are worth 3.5% of the Nasdaq 100. Of course, notable tech companies like Twitter are also on NYSE so the % is overstated. 3. The public markets have not lost their mind. In fact, they're fairly hostile to new issuances which despite VC bellyaching is a good thing for VCs and in maintaing the current climate. When retail investors get burned on tech, the bubble will quickly pop. But right now, that's not the case as just calling yourself tech doesn't guarantee a high valuation. The market, while still far from perfect, treats companies with crappy or suspect fundamentals with skepticism (see Box). 4. There is no mechanism that will force a quick contraction. A bubble is typified by rapid expansion and contraction of asset values. The expansion part is happening for sure. 5. But there is not scorecard to provide the contraction. When companies are publicly traded, you have that daily scorecard to force it, but right now, it's private money going in and the beauty of the private markets is you can bury your dead very quietly. In essence, the opacity of the private markets enables investors to point to any failing investment or investor and just say "they were dumb money, we are different". And so there is no event that will pop it. Notes: A. I'm the CEO of CB Insights. We track private company financings and exits. B. A crazy exogenous factor like a disease pandemic, terrorism, a China meltdown, war, etc are not considered in the above. If I could predict those with any certainty, I'd be doing that. C. I gave a presentation at the Quebec Venture Capital and Private Equity conference this past week on this topic "Bubbles, Unicorn and Our Crazy Private Markets". It may be of interest if you're interested in the data behind some of the above bullets. https://www.cbinsights.com/reports/tech-bubble-unicorns.pdf https://www.cbinsights.com/reports/tech-bubble-unicorns.pdf

joshu 11y ago
I think it would be good to define "bubble" specifically. It's not solely when valuations are up. Also, I love CB Insights.
- mbesto 11y ago
  It's impossible to define a bubble until it's popped.
  - marincounty 11y ago
    $10,000 in 12-17 month CD. The bank gave me $10. I'm worried.
  - MCRed 11y ago
    I think that's kinda silly to say. I knew there was going to be a housing bubble in 2001, before 9/11. The reason was the the changes to the CRA under clinton forced banks to make uneconomic loans (Because otherwise was considered "racist' because poor ethnic people had less ability to repay loans and were more likely to be denied. When ability to repay was included in the analysis, it was clear that the policies weren't racist, but this didn't happen until much later.) The other reason was the Fed had interest rates at artificially low levels to try and boost the economy after the dotcom bubble burst (Rather than just let it work out and let interest rates be at the true cost of money.) When you force people to buy things and you incentivize buying things by making the cost of them lower, you're going to get a lot of people buying that asset. In 2001 that asset was houses. By 2007, I had spent 5 years investing on this thesis and called the top. I as off by a year, and missed the actual top which happened in 2008, but I am not complaining. The point being, people who understand economics is a science and were paying attention to what was going on knew there was a bubble, long before it burst, and in fact, before it startsed to inflate. I didn't figure it out myself, btw, I read an article in 2001 that clued me in. I can't say whether there is a bubble in startup valuations. I'm not making that argument. I will say there is a bubble in the US Dollar, because the strategy employed by the government to fight the dotcom bust is the same one they deployed to fight the housing bust, they just changed the targets. As a result we're seeing the stock market in a bubble and a lot of froth in the economy, but it's widely distributed (rather than concentrated in houses). This will likely allow the bubble to inflate much longer.... but it also means the bursting will be much more dramatic and damaging.

by asanwal 11y ago

joshu 11y ago

I think it would be good to define "bubble" specifically. It's not solely when valuations are up. Also, I love CB Insights.

mbesto 11y ago
It's impossible to define a bubble until it's popped.
- marincounty 11y ago
  $10,000 in 12-17 month CD. The bank gave me $10. I'm worried.
- MCRed 11y ago
  I think that's kinda silly to say. I knew there was going to be a housing bubble in 2001, before 9/11. The reason was the the changes to the CRA under clinton forced banks to make uneconomic loans (Because otherwise was considered "racist' because poor ethnic people had less ability to repay loans and were more likely to be denied. When ability to repay was included in the analysis, it was clear that the policies weren't racist, but this didn't happen until much later.) The other reason was the Fed had interest rates at artificially low levels to try and boost the economy after the dotcom bubble burst (Rather than just let it work out and let interest rates be at the true cost of money.) When you force people to buy things and you incentivize buying things by making the cost of them lower, you're going to get a lot of people buying that asset. In 2001 that asset was houses. By 2007, I had spent 5 years investing on this thesis and called the top. I as off by a year, and missed the actual top which happened in 2008, but I am not complaining. The point being, people who understand economics is a science and were paying attention to what was going on knew there was a bubble, long before it burst, and in fact, before it startsed to inflate. I didn't figure it out myself, btw, I read an article in 2001 that clued me in. I can't say whether there is a bubble in startup valuations. I'm not making that argument. I will say there is a bubble in the US Dollar, because the strategy employed by the government to fight the dotcom bust is the same one they deployed to fight the housing bust, they just changed the targets. As a result we're seeing the stock market in a bubble and a lot of froth in the economy, but it's widely distributed (rather than concentrated in houses). This will likely allow the bubble to inflate much longer.... but it also means the bursting will be much more dramatic and damaging.