With 2013 behind us, we’ve got another year of data on investment in the tech sector.
It’s very healthy indeed — perhaps too healthy.
We noted recently that tech investment appears to be approaching a peak, possibly a bubble. Now, with the new data in, the debate is not whether the tech sector has hit a peak. It has hit a peak. Some financial metrics in the tech sector — deal volume in particular — have actually exceeded those seen in 1999 and 2000, as we show below.
Rather, the debate now is whether this peak is part of a long, ongoing boom fuelled by game-changing companies with real revenues and real customers — Facebook and Twitter being the most obvious — or whether the rollercoaster has reached the top of its track and is headed for a gut-wrenching fall.
Here’s the evidence.
The Nasdaq has hit 4,000 again. Last time it did that, it was 1999.
On it’s own, it’s just a coincidence. But remember that these stocks are responding to an environment in which interest rates are at zero. Stocks are the sensible alternative when there is no money to be earned via interest on savings. The moment the Fed raises rates, investors will be able to get a risk-free return greater than zero from cash savings … and a bunch of money will exit stocks. Falling stock prices will have a domino effect across the tech sector, as newly poor investors think twice about backing venture funds and new startups.
Last year saw more tech IPOs than any other year since the dot com era.
The total value of tech IPOs peaked in 2012 at a sum greater than the excesses of the 1999-2000 bubble, about $US18 billion (see the blue bars). But the total number of IPOs in 2013 exceeded any year since 2000, according to data from Birinyi Associates (see the green arrows). Taken together, we’ve seen two tech IPO metrics peak in two successive years.
Tech investment funding has hit a new peak.
If you think tech IPO data suggests a bubble of over-investment, then you’ll be reassured/terrified by the new report on tech startup investment funding from PricewaterhouseCoopers: In 2013, the software industry received 37% of all venture capital for the year, the highest percentage since PwC began tracking investment since 1995.
Internet-specific companies got more than $US7 billion in new funding in 2013. In 2007, the peak year before the credit crunch recession, those same types of companies received just over $US5 billion.
It’s worth remembering that at the height of the dot-com bubble in 2000, internet venture investment peaked at over $US41 billion, according to PwC. So we may have a way to go before the bubble bursts.
Having said that …
We’ve exceeded the level of software deal volume we saw in 1999.
There were 1,523 software company funding deals in 2013, up 10% from 1,384 in 2012, according to PwC. The peak, during the dot-com boom was 2,167 in 2002. However, bubble-watchers should note that the 2013 peak EXCEEDED the number of deals made in 1999, the year the bubble really began to pop.
The number of tech deals is largely flat, but in 2013 values were suddenly inflated.
This box shows that the number of tech companies who were acquired or merged stayed mostly flat, rising from 225 in 2012 to 236 in 2013 for the first nine months of each year, according to BIA/Kelsey (see left column). But note that the value appended to those deals rocketed 65% from $US6.1 billion to $US10.1 billion.
Much of that boost in dollars came from the mobile sector.
Although the number of mobile deals increased from only 43 to 57, their value more than doubled in 2013 to $US2.5 billion.
Funding for video games has also hit a peak.
According to Digi-Capital, both the number of funding deals for video game companies and the value of mergers and acquisitions in the game sector have hit peaks at the same time. Note that the value of those investments (the dark blue bars) is actually now in decline. That’s evidence that more money is chasing declining value.
The smart money is heading for the exits.
This chart from Prof. Jay Ritter of the University of Florida, appears to show anti-bubble data: The percentage of all IPOs that were from venture-backed companies declined in 2012 and 2013. The overall trend, however, remains up. when VCs want their IPO exits it’s a sign they want to cash out of their investments — a bearish sign for a market at its peak.
And note three things: 1. These numbers don’t yet include Square, Box, AppNexus, and Dropbox, all expected to be huge IPO exits for VC funders in the coming year or so. 2. That peak in 2011 is pretty close to the pre-burst peak of 1999. 3. The accompanying explanation from The Information is, basically, “this time it’s different,” which is what everyone says right before a collapse.
The ‘late’ money is arriving.
Justin Bieber is an investor in a $US1.1 million funding round for Shots of Me, a social networking app based on selfies. Path, the quirky social network that limits the number of friends you have, took a $25 million funding round from a group of investors that included Indonesia’s Bakrie Group. Bakrie is best known for its gas and drilling business, which back in 2006 rendered 14,000 people homeless after its activities caused a devastating mudslide in Java. Prince Alwaleed bin Talal of Saudi Arabia bought $US300 million of Twitter stock on the pre-IPO private market.
In a bubble, everyone can make money, regardless of their expertise — or lack of it.
Programmers don’t want to take jobs even when the salary is $US500,000.
The hiring market is incredibly tight. We previously mentioned that engineers and programmers in Silicon Valley are able to make ridiculous compensation demands, such as Tesla cars. Twitter’s SVP/technology gets paid more than the chairman of the board. Facebook’s vp/engineering, Mike Schroepfer, got $US24.4 million in 2011. And now we hear that a Google programmer turned down a $US500,000 job at a startup because he’s already being paid the equivalent of $US3 million in stock and benefits.
A virtual currency that has no assets behind it trades at $US1,000 a unit.
We’re talking about Bitcoin, of course. Sure, you can make international transactions for very little money using Bitcoin, but at the end of the day it is an intangible asset — it only has value because a bunch of people agree it has value. If something goes wrong with Bitcoin, none of its users or investors have any recourse — and its value falls to zero.
Tulip bulbs, anyone? This chart shows recent Bitcoin exchange prices from Mt Gox, a large Bitcoin exchange:
Everyone wants to live in San Francisco.
We recently pointed out that real estate prices in Silicon Valley have gotten so bad that anyone who wants to live there needs to make at least $US100,000 a year in order to not be “poor.” Yet people keep pouring into the area. By the numbers, the population of San Francisco County barely even noticed the dot com bubble of 2000 (see chart below). Fourteen years later, more people live there than ever before. Serious people are starting to question whether it is sustainable to have cities where only the rich can live. Kevin Starr, a professor specializing in California history at the University of Southern California, told the New York Times, “If you leave it to the free market alone, the system will collapse because you won’t be able to run a city.”
A lot of companies that don’t have real revenue are trading on ‘vanity metrics.’
Snapchat has told people that its service handles 400 million “snaps” per day.
Similarly, Pinterest touts its 1.5 million travel related “pins” per day.
Those stats make the companies sound huge. But how big are they really? Business Insider recently discovered that Snapchat’s monthly active user base is only 30 million people.
Graybeards who lived through the 2000 dot-com bubble are seeing the same things today.
Here, verbatim, are a couple of quotes from the New York Times on the subject of Twitter’s stock price. The background is that Twitter does not make a profit but its stock has hit $US62 at the time of writing:
“I just haven’t seen something like this in a long time,” said Robert S. Peck of SunTrust Robinson Humphrey, who had set a price target of $US50 before the I.P.O. but cut his rating to hold two weeks ago when shares reached $US59.” They don’t have earnings. They don’t have free cash flow.”
As Barron’s, an investment advisory publication, put it over the weekend, “At $US45 billion, the company may have the highest market value of any firm that isn’t generating any earnings since the dot-com bubble of 1999-2000.”
The New York Times quoted one tech investor:
“We all know how this plays out,” said Paul Kedrosky, a venture capitalist and entrepreneur. “There is no question that this is fueling some kind of bubble.”