By Joe Kearns
No two bubbles are alike. The most famous tech bubble, the dot-com bubble of the 1990s, experienced substantially different market conditions than those existing today. The NASDAQ Stock Market reached a peak of 5,408.62 in March 2000, compared to a real value (in 2000 dollars) of about 3,600 today. The U.S. economy has grown so much since 2000 that the NASDAQ would have to hit 8,500 to reach the same position. None of these facts, however, rule out the possibility that there is another tech bubble ongoing today. Though there appears to be no widespread tech bubble across the public markets, there are numerous signs from private equity and high-end public tech companies that there is a bubble elsewhere.
The current tech bubble is concentrated in specific parts of the tech industry. Across the broader tech industry, late-stage financing from private equity firms nearly tripled since 2000 and supplanted IPOs. According to Bloomberg Business, late-stage companies received two-thirds of the $59 billion of investments in U.S. tech startups in 2014. In one year, a record 62 firms were valued at more than $1 billion, a total which was nearly three times the total in 2013. Curiously, investors are willing to pay more to reap fewer benefits. Hedge funds and mutual funds are now paying between 15 and 18 times projected sales for tech companies annually, compared to 10 to 12 times five years ago. SharesPost 100 Fund investment manager Sven Weber warns that as the number of billion-dollar startups increases, so will the odds that investors will suffer huge losses.
There is evidence that a correction to the tech bubble is underway. Private equity firms like Bain Capital Ventures and SharesPost that financed late-stage deals are beginning to scale down investments in expensive tech companies in favor of cheaper startups. Those firms are ahead of the curve, as tech companies like Box Inc. and Hortonworks Inc. are going public at valuations lower than their final private-funding rounds. These occurrences show what happens when irrational exuberance takes the valuation of some firms to unreasonable heights. Now is the time to take cover. The bubble is already beginning to burst.