With Priceline’s announced purchase of OpenTable coming at a 46% premium to where OpenTable’s stock recently traded, the highest for an internet stock since before the Great Recession, following hot on the heels of Facebook valuing WhatsApp at $19B, and Uber’s valuation recently topping $18 billion in its latest funding round, I figure it’s time to share my thoughts on whether we are indeed witnessing the latest bubble.
First off, how do funding, pricing, and valuations compare to those in previous periods?
Looking at private markets:
- Valuations have risen across all funding stages — Series A pre-money valuations have soared from 4 times in 2009 to 7 times in 2014. While buyout multiples are at 10.7 times versus 6.8 in 2009.1
- Deal flow in internet specific businesses is higher than in 2001: while VCs invested $7B in 141 deals so far this year versus $65 billion in 375 deals in 2013.2
While in the public:
- Nasdaq closed at 4425.97 yesterday. That’s still below its peak of 5048.62 in March 2000, but it far outstrips its post crash high of 2725.16 in the fall of 2007 (and its 2009 low of 1,268.64).
- The first quarter of 2014 saw 13 technology IPOs ($2B raised) versus 11 for all of 2009 ($2.9B raised).
- VCs and PE firms accounted for 72% of total IPO deal flow (of all 68 deals, not just tech) in the first quarter, versus 63% in 2009’s first quarter.3
- M&A is also up strongly, with 57 deals closed during Q114; PE & VC sponsors accounted for 42% of them.4
And what are the supports for valuations? In other words, are they sustainable?
Unlike the last technology bubble, most companies being funded today, have:
- An identifiable revenue stream
Still, do the fundamentals really justify the huge run-up in valuations?
- While startups getting funded now have revenue and there’s often better vetting of management teams, most will not survive. Cash flow and profits still trump revenue at the end of the day — valuations are unrealistic.
- I would argue that the dynamics of funding have shifted to a “winner take all’ dynamic in which a handful of the most promising companies have such an overwhelming lead in terms of customer numbers and share in their market niches: think Uber, OpenTable, that prices have been decoupled from fundamentals as more and more investors seek to join these deals. That’s one point.
- But the spotlight on these has also pushed up valuations for others: social media, gaming, mobility, SaaS, and cloud-based startups.
- On the funding side, there are more and larger investors and many more sources of non-traditional investors, some “sophisticated” some less so.
- There’s a shortage of other investment opportunities that can potentially deliver high returns.
So: many more funders and a lack of other opportunities to score a big payday have driven outsize increases in valuations. The bubble is real and particularly active in early-stage companies.
What do you think? Are tech valuations in bubble territory? Why or why not? Tell us about it in the comments section below.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.
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