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Forum veteran returns "bubble" analysis to front page


For another recent report of evolving trends in venture valuations co-authored by the same reporter, see


Source: The New York Times, May 22, 2015 article


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 Times


SAN 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 it?”

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.

“I think we’re in a period of overvaluation and frothiness.”

George Zachary, a partner in the Menlo Park office of CRV


In 2000, 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.

“Anybody who lived through that will always wake up and see ghosts,” said Jerry Neumann, founder of Neu Venture Capital in New York.

Today, 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.

Nobody 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.

Valuations — 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 traded.

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 discipline.”

“There’s definitely some craziness and people overpaying.”

Anand Sanwal, founder of CB Insights


The problem 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 2013 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.

“It’s a complicated social phenomenon that gets people into trouble, just like smoking too much and drinking too much,” Mr. Shiller said.

And no 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 in the Great Depression, to the housing bubble that buckled Wall Street in 2008.

Even the 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 people.”

Bubbles seem 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 dot-com bubble.

“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 bubble?

“If the question is, Are these valuations divorced from fundamentals? I think they are,” he said.

“I 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 Ventures


But that is not a bubble, he said. Rather, it is “an irrational pricing decision.”

Investors 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.

“There’s 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.”

Does George 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.

Sam Altman, 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.

The 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.

Of course, 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 difference.”

Some investors go so far to avoid the word bubble that they describe situations that sound quite a bit worse.

Take Charlie 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


Material dated between January 1999 and July 2001 was originally published on the web site of the New York Society of Security Analysts ("NYSSA"), and was provided by Gary Lutin as co-sponsor of a "Forum Program" conducted for public educational purposes with NYSSA's Committee for Corporate Governance and Shareholder Rights during that period. Material dated after July 2001 was not published by the NYSSA unless specifically indicated.

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