Overvalued in Silicon Valley, but Don’t Say ‘Tech Bubble’
Today, people see shades of 2000 in the eye-popping valuations
of companies like Slack, whose offices are seen at top; Uber;
and Airbnb, at bottom.
Credit From top: Jason Henry for The New York Times; Sam Hodgson
for The New York Times; and Matthew Millman for The New York
FRANCISCO — It is a wild time in Silicon Valley. Two-year-old
companies are valued in the billions, ramshackle homes are worth
millions and hubris has reached the point where otherwise sane
businesspeople muse about seceding from the United States.
But the tech
industry’s venture capitalists — the financiers who bet on companies when
they are little more than an idea — are going out of their way to avoid the
one word that could describe what is happening around them.
“I guess it
is a scary word because in some sense no one wants it to stop,” said Tomasz
Tunguz, a partner at Redpoint Ventures. “And so if you utter it, do you pop
A bubble, in
the economic sense, is basically a period of excessive speculation in
something, whether it is tulips, tech companies or houses. And it is a
loaded, even fearful, term in the tech industry, because it reminds people
of the 1990s dot-com bubble, when companies with little revenue and zero
profits sold billions in stock to a naïve public.
think we’re in a period of overvaluation and frothiness.”
George Zachary, a partner in the Menlo
Park office of CRV
tech stocks crashed, venture capital dried up and many young companies were
vaporized. Even today, with the technology industry on fire, venture capital
investment remains below its 2000 peak.
lived through that will always wake up and see ghosts,” said Jerry Neumann,
founder of Neu Venture Capital in New York.
people see shades of 2000 in the enormous valuations assigned to private
companies like Uber, the on-demand cab company, which is raising $1.5
billion at terms that deem the company worth $50 billion, and Slack, the
corporate messaging service that is about a year old and valued at $2.8
billion in its latest funding round.
A few years
ago private companies worth more than $1 billion were rare enough that
venture capitalists called them “unicorns.” Today, there are 107, according
to CB Insights, enough that venture capitalists had to create a second term
— “decacorn” — for private companies like Uber and the data analysis company
Palantir Technologies that are worth more than $10 billion.
doubts that many of tech’s unicorns are indeed real businesses and that some
could be with us for decades. But because of low interest rates, tech
companies are raising gobs of money from investors whose desperate need for
returns has pushed them into riskier territory. Start-ups have begun
attracting money from hedge and mutual funds that don’t usually invest in
tech companies before they are public.
and there is no real standard for determining how much a private company is
worth — are inflating, leading some people to worry that investment
decisions are being guided by something venture capitalists call FOMO — the
fear of missing out.
In a recent
analysis, Mr. Tunguz of Redpoint, who was in high school when the dot-com
bubble burst, found that investors were paying twice as much for stakes in
private technology companies as they were for those that were publicly
He called it
“a runaway train of late-stage fund-raising.” He also called it “a really
weird time” and “a really hard environment to maintain financial
“There’s definitely some craziness and people overpaying.”
Anand Sanwal, founder of CB Insights
with the bubble question is nobody seems to agree on what exactly a bubble
is. Robert Shiller, an economist whose work on stock prices earned him the
Nobel Prize and who wrote the bubble
book “Irrational Exuberance,” defined speculative bubbles as “a
psychological epidemic” in which people put reason aside and instead buy
into a story.
complicated social phenomenon that gets people into trouble, just like
smoking too much and drinking too much,” Mr. Shiller said.
matter how hard people try to avoid them, bubbles happen again and again,
from the Dutch tulip bubble of 1636, to the 1929 stock bubble that resulted
the Great Depression, to the housing
bubble that buckled Wall Street in 2008.
smartest get caught up. Isaac Newton, whose laws of motion and gravity
arguably make him the most important scientist ever, bought into the South
Sea Bubble of 1720. It was a bad bet on a company granted a monopoly on
trade with South America by the British government. He reportedly said: “I
can calculate the motions of the heavenly bodies, but not the madness of
obvious after the crash, of course. The problem is they are almost
impossible to see in the present. Mr. Neumann admits he was caught in the
“I was a
true believer in the Internet and all that,” he said.
So, do the
staggering values of today’s private tech companies look like yet another
question is, Are these valuations divorced from fundamentals? I think they
are,” he said.
guess it is a scary word because in some sense no one wants it to
stop. And so if you utter it, do you pop it?”
Tomasz Tunguz, a partner at Redpoint
But that is
not a bubble, he said. Rather, it is “an irrational pricing decision.”
are happy to admit that this torrid pace of investment has started to worry
them. But they still try to steer clear of the b-word, unless they are
describing what Silicon Valley is not.
definitely some craziness and people overpaying” for stakes in companies,
said Anand Sanwal, founder of CB Insights, an analytics firm focused on the
venture capital industry. “But a bunch of bad decisions don’t necessarily
mean we are in a bubble.”
Zachary, a partner in the Menlo Park office of CRV, a venture capital firm,
think we’re in a bubble? “I think we’re in a period of overvaluation and
frothiness,” he said.
president of Y Combinator, an incubator that invests in very young
companies, has grown so tired of bubble talk that this month he countered it
with a $100,000 “no bubble” bet.
which will be donated to charity, is based on several variables, including
his prediction that the five most valuable unicorns, a list that includes
Uber and Airbnb, the home rental service, will be worth more than $200
billion by 2020.
there is a difference between not thinking there is a bubble and not being
concerned about how easy it has become for start-ups to raise money.
“Do I think
companies are overvalued as a whole? No,” Mr. Altman said. “Do I think too
much money can kill good companies? Yes. And that is an important
investors go so far to avoid the word bubble that they describe situations
that sound quite a bit worse.
O’Donnell, founder of Brooklyn Bridge Ventures. His view is that when it
becomes harder to raise money, companies that are funding losses with
outside money will be forced to find profitability by cutting jobs and
slowing expansion plans, Mr. O’Donnell said.
But that is
not a bubble, he said. Rather, as he outlined in a recent blog post, that
would be “the coming zombie start-up apocalypse.”
A version of this article appears in print on May 23, 2015, on page A1
of the New York edition with the headline: Tech Investors See the
Froth, but None Dare Call It a Bubble
© 2015 The
New York Times Company