A Private Bubble, and a Public Boom
- Posted by Leigh Drogen
- on April 23rd, 2012
At least once a day I hear someone saying that we’re in a new tech bubble. These aren’t lay people either, they are veteran entrepreneurs and venture capitalists.
I was at an event last week called the Entrepreneurs Roundtable where Bo Peabody, formerly of Village Ventures, and now at Greycroft, was speaking. He said something very insightful that really stuck with me. Bo remarked that we’re in a private bubble, and a public boom.
He went on to say that there are companies recently which have come public, like Demand Media and GroupOn, who were not ready to be public companies. They had great growth, but their business models were flawed and they had not yet figured out how to turn a profit. Bo went on to remark that as long as firms like his are losing money, and not the public pension funds, mutual funds, and mom and pop, we’ll be fine.
Back in July I wrote a post titled “The Coming Tech Crash” in which I made the case that we were in fact not headed for a classic asset bubble, but would see many new tech companies come public, and flop, losing public investors a ton of money.
I wasn’t able to articulate it as simply as Bo, but it is true, we are in a private market bubble and a public market boom. Valuations for private tech companies are through the roof, beyond any rational metrics used to value companies, even very high growth companies with massive markets to execute on. Instagram gets bought by Facebook for one billion dollars without a stitch of revenue, enough said.
Interestingly enough, these valuations are not being driven by asset inflows, the cause of asset bubbles. In fact, venture funding has actually been declining recently.
Our private market bubble is being driven by speed and scale. Like no other time in history does a company have the potential to scale as quickly and to such great depth as they do now. This changes the game for investors, who in the past had the opportunity to jump in along the scaling process. Now, because a tipping point can lead to scaling so quickly, investors have moved up their time frames, and are pumping large sums of capital into companies at earlier stages.
These valuations are not being driven so much by classic valuations metrics as they are simply by venture investors wanting to pump large sums of money into companies which they believe have the ability to turn scale into profit down the road.
Bo is right, many of these companies are not ready to be public where they face a market which use classic valuation metrics to determine where they will trade. We’re seeing that in the demolition of Pandora, GroupOn, Zipcar, and Demand Media now. Scaling a user base to massive proportions does not equal being able to show stable growth in profit quarter over quarter.
And that is why we’re seeing these companies stay private for far longer market cap wise than we used to. While companies can scale a lightning speed, it still takes just as much time to build a real business, a business that can withstand the scrutiny of public markets.
One thing that the recently passed JOBSAct does is allow companies to stay private longer by raising the number of shareholders a company can have before having to file an S-1. Many in the market peanut gallery were dismayed by what seemed as giving companies a pass on transparency. While I didn’t quite voice this opinion loudly, I did agree. But, while the transparency issue is an unfortunate side effect, what I realized the other night is that it goes a long way to preventing these companies from coming public well before they should.
And as Bo said, the important thing is that its people like him who lose money on the inflated valuations of these companies, not public investors. While I strongly believe that individuals should be investing in startups at the earliest stages given they undertand the risks, the last thing we need is for these companies to end up in mutual funds. As long as we privatize the losses that this private bubble is going to create, we won’t see a market crash which has a material effect on our economy.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.
blog comments powered by Disqus
Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
- SunTrust Joins The Estimize Platform, All 299 Other Sell Side Firms to Follow
- The Real Problem With SigFig’s $10/Month Portfolio For Everyone
- NHLPA Idiocy Needs To Stop
- The Promise, and Problems of BayesDB
- The Bad Days
- Two Years of Estimize
- The Smarter You Are, The More Roadblocks You’ll See
- Is Bitcoin a Commodity, Currency, or Technology?
- Why I Bought One Bitcoin
- On Bloomberg TV Talking Twitter and Tesla Estimates
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011