Bubbles, Distortions & Startup Realities

There is a lot of talk about there being a bubble. There isn’t a bubble. There is a Series A funding crunch. There isn’t a Series A funding crunch. There are unicorns. There aren’t unicorns. There are too many growth rounds. There are too few growth rounds. It all depends on one’s disposition. A lot of this talk has been spurred on by the stats that were recently shared by investor data research firm Pitchbook.

Pitchbook_Early Stage Valuations

Pitchbook_Late Stage Valuations

What do these charts show?

  • Total number of deals in 2014 were almost flat/in-line compared to 2012 and 2013.
  • However, total capital invested is way up in 2014, which translates into companies raising more dollars on average at much higher valuations.
  • There has been a substantial jump in Series B, C & D median valuations.
  • Bloomberg pointed out that  the “hedge funds and mutual funds moving into late stage venture deals” which isn’t really — Snapchat and Pinterest are two of the big winners of these deep pocketed investors.
  • Their valuation insensitivity is making classic later stage funds get into earlier rounds which is in-turn putting pressure on the early stage valuations.
  • In 2014, there were many more growth rounds and fewer IPOs, which explains why the larger, more public market institutions are making a beeline to the riskier world of hi-growth startups. (More on that, later!)
  • There is a lot of risk in the system, argues Benchmark Captial’s Bill Gurley and backer of Uber, arguably one of the biggest companies of the post-Facebook era.

Rising real estate costs, rising salaries and rising costs of doing business — these are today’s startup realities, especially in San Francisco Bay Area. I also remember that in 2007, mutual funds showed up and invested in companies like Slide and lost their shirts. And then 2008 happened and the circle of life re-started with the App Store, Facebook Platform and Twitter’s slow emergence from the shadows. Brooklyn Bridge Ventures’ Charlie O’Donnell sums up the reality of startup cycles very well in his recent post, The Coming Zombie Apocalypse. However, one thing Charlie leaves out is something Spark Capital’s Bijan Sabet pointed out in his blog post today:

The thing I’m most concerned about are the startups that won’t get their next round done just because they aren’t on a rocket ship. Some companies take time and patience. And I do worry we aren’t valuing or appreciating those startups well enough in this environment. It would be a mistake to overlook them and a loss for our industry.

Bijan makes a very important point. The digitization of our society and the pervasive state of connectedness are slowly becoming a reality. And what that means is that technology is becoming ever more embedded in our lives — and in the long term that’s what matters.

In closing, I offer you the wisdom of George Smiley in John le Carré Smiley’s People:

In my time, Peter Guillam, I’ve seen Whitehall skirts go up and come down again. I’ve listened to all the excellent argument for doing nothing, and reaped the consequent frightful harvest. I’ve watched people hop up and down and call it progress. I’ve seen good men go to the wall and the idiots get promoted with a dazzling regularity. All I’m left with is me and thirty-odd years of cold war without the option.

Additional reading: This 2012 blog post by Chris Dixon is actually a great read in the current context of debates around bubbles vs not-bubbles.