We’re not in a bubble. Lots of people have talked about us being in a bubble… I’ve included some of my favorite blogs, articles and graphs at the bottom of this blog. I even have an Instapaper folder called “The Bubble Apocolypse”
Macro Trends
Interest rates are down, so equities are more attractive. There are less places to put money, especially outside of the US, so of course more money is coming into venture capital.
Interest rates aren’t going very far any time soon. They may spike 200–250 bps in the next year, but interest rates follow GDP. GDP isn’t going very far because consumption is down (this is despite earnings being up, as I blogged previously). Consumption is probably gonna stay down for a while, especially as tech helps us be more efficient, helps the rich get richer, and ensures they save faster than they spend.
Private equity is also becoming an increasingly tough game because companies can still raise cheap debt and compete in M&A markets. This is bad for private equity, but good for venture capital because more buyers in the market, more cheap debt to buy other companies etc. == higher exit values.
So in short, there’s more money than there has been in recent history in venture capital. But don’t expect that to slow down for a while.
Nomenclature
“Seed rounds are so much bigger than they used to be!”
“Series A rounds are so much bigger than they used to be!”
“There are so many more billion dollar private companies!”
Yes to all three of those. But it’s not cause we’ve all suddenly lost our minds! It means that companies are expected to be in different places when they raise each of those rounds.
As I mentioned yesterday, seed rounds have changed. I’m also not the only one who things so.
Manu Kumar recently blogged about it.
Hunter Walk has blogged about “what is different in year two of his fund.”
Semil Shah has talked about it.
And they’re not the only ones…
Seed rounds are not raised to build a product and get launched. They are raised when companies already have revenue (often $30k/month) and are getting ready to lock down LTV & CAC so they can go out and raise a series A round.
By the time companies are raising Series A rounds they often are ready to “rinse and repeat” their sales cycles. Rather than raising to build more product (of course that’s a big part of the budget) they are often raising to build out a sales team and ramp up from $2mm in annual run rate to $10mm.
So comparing series A rounds of 2015 to series A rounds of 2010 doesn’t make sense.
Companies are Staying Private
There are many more $1B+ companies in private markets than there used to be. Why? A few reasons:
- It sucks to be a public company. It’s expensive, public market investors are often short term thinkers and many tech companies want to focus on growth rather than focus on earnings.
- Major financial institutions have become desperate to find returns so are dipping into private markets.
- Because institutions like Tiger Global and Coatue broke the dam, large tech companies were able to stay private longer. Microsoft and Amazon both went public while under $1B in market cap. Wealth was made in public markets. Yet Uber is already worth $50B in private markets and Facebook, Alibaba etc all went public at insane market caps. This has forced more and more investors to make large bets in private markets.
- Top tier funds are the ones who score all the returns in VC, so the top tier funds have the ability to raise more and more capital, letting them write bigger and bigger checks and invest later and later into private markets.
These last two points will be the hardest to figure out. Early investors (seed and series A will have to figure out ways to get liquidity. LP’s might start to get frustrated and the private equity secondary market might become increasingly interesting.
Are we in changing times? Yes. But are we in a bubble? No.
Do some companies spend more than they should, raise more than they should and at higher valuations than make sense? Yes. But those are the cases that make headlines and those are the extreme cases, not the rule. People have started desperately chasing unicorns. That’s fine — let them. But the best investors are getting access to great deals, are making money and are just doing so in a market that looks different than it used to.
Please find my favorite “Bubble Apocalypse” Posts Below:
