Venture funding has hit a new high this year, with total investments crossing $2.46 billion as against $2.34 billion for all of last calendar, and $1.43 billion the year before that (2013). Also considering the high valuations at which stakes are being bought and sold, the question on everyone’s mind is, are we in a dotcom-like bubble again? For cues, we need to look at Silicon Valley.
In a column that appeared on Techcrunch.com, Bill Maris of Google Ventures put across interesting data points for both sides of the arguments. Data that supported the absence of a bubble were the following: a) firms are taking longer to launch an IPO — eight years compared to four years during the 2000 boom; b) total funds raised by VCs was less than a third of funds raised during the dotcom boom ($100 billion); c) the total number of deals during the boom were around 2,000, while now they are way below and just trending up; and d) compared to the total dollars invested in 2000 (about $28 billion), investments in the year 2014 was just half that amount.
On the other hand, data that supported a bubble were as follows: a) this time late-stage financing is replacing IPOs for fundraising; b) average valuation of companies is much more steep than during the dotcom boom (earlier the median valuation of investment rounds used to be less than $100 million, but this time it’s more than $280 million); c) valuations are rising faster than fund raising; d) late stage financing is replacing exits while high-end IPOs are coming in at a dramatically higher level, at least twice as much as the last boom.
Maris left his piece without concluding if there was a bubble, only saying that “when one of these super-valued companies fails — which is inevitable — we’ll have to take a deep breath and ask ourselves whether it’s something endemic or just part of the normal failure rate.”
But the truth, as evident from the data Google Ventures culled out, is that the unprecedented gush of liquidity in the financial system is accentuating distortions in every market and the venture space is no exception. The large amount of money chasing few investment ideas and driving prices high is surely an indicator of a bubble. But as history shows, high stakes and valuations by themselves are no guarantee to the bubble bursting. The hysteria that is typical in the last leg of the bubble is yet to set in — that will probably happen when late stage investors sniffing trouble trigger a stampede in the public market.