Is there a bubble in tech?
We see enormous amounts of money flowing into privately held companies with books that are hidden from the public, and some people like investor Mark Cuban see a repeat of 1999. Other VCs like Bill Gurley agree that we’re in some kind of bubble, even if it’s not the same as last time.
But Marc Andreessen has been one of the strongest voices to say there is no bubble, that things really are different this time. (Although even he warned that some venture-funded startups were burning way too much money and would soon “vaporise.“)
Earlier today, three analysts at Andreessen’s VC firm — Morgan Bender, Benedict Evans, and Scott Kupor — published a bunch of charts that strongly support Andreessen’s point of view.
To boil their argument down:
- Yes, the absolute number of dollars flowing into privately held tech startups is approaching the same levels as the dot-com boom. But by every other reasonable metric — funding as a percentage of GDP, funding as a percentage of people online, P/E multiples of tech companies — this looks nothing like 1999.
- Except for big late stage funding rounds, the average size of rounds is actually smaller than it was last time. There’s no inflation at earlier stages. In fact, more companies are being created than ever, and it’s cheaper to start a company, so those early-stage startups need less funding to get rolling.
- What’s really happening is companies are taking much longer to go public. The tech IPO market is basically dead. So the only way to capture value from a successful tech company’s massive growth phase is to invest when they’re still private. That’s precisely what’s happening — massive late stage investments are being driven by funds that would normally invest in the public markets, but couldn’t capture the massive growth if they waited.
The best example: Imagine you bought into Microsoft’s IPO. Years later, you bought into Facebook’s IPO. The only way your return on Facebook would be the same as your return on Microsoft would be if Facebook were someday worth $US45 trillion — more than twice the entire GDP of the United States.
Here’s the full thing:
Disclosure: Marc Andreessen, co-founder of Andreessen Horowitz, is an investor in Business Insider.