Thursday, January 1, 2015

1/1/2015: Tech Bubble 2.0 & the Irrelevant VCs

Very interesting take on the growing irrelevance of the VC sector in terms of tech funding and tech valuations bubble:

Some quotes:

"…standard VC line on a standard question in technology today…" is that "it's been a very good year for VC, but 2014 fundraising is still nowhere near levels of 1999 and 2000". Hence, no tech bubble, despite the fact that "Soaring valuations for private companies, some of them in sectors previously thought bubble-prone - even media start-ups are being valued at over USD1 billion these days - have made the bubble question one of this year's most asked". In fact, "2014 has been the year of the monster funding round, led by taxi service Uber, which raised USD1.2 billion in June; Cloudera, a big data start-up, and Flipkart, an e-commerce site, also closed rounds greater than USD1 billion." Note: Uber is now being forced, literally, out of major markets by legislators, regulators and bad PR.

The reason why VC industry is below 1999-2000 bubble funding allocations is, however, not the absence of the bubble, but the decline of the VCs relevance to the sector, where increasingly funding comes from hedge funds, large mutual funds and other non-VC investors.

The above makes it also harder for us to put actual data behind the argument as to whether or not we are witnessing a bubble formation in tech funding, because many non-VC funding sources are not transparent. Two players who tried to put the number on 2014 funding inflow into tech sector find "overall equity funding levels for this year, including investments from traditional VC, dedicated seed funds, angel investors, corporate venture arms and private equity, in the region of USD100 billion. Once mutual and hedge fund stakes are added, it seems fair to conclude that investments in private companies will end the year at or above the levels seen during the dot-com boom."

Ouch! There is a good indication of a bubble maturing, not just forming.

And double-ouch! The old VCs are simply not as relevant anymore.

And triple-ouch! When the dot-com bubble burst in 2001-2002, much of the impact was absorbed by the VCs, which have weaker exposure to the markets at large. This time around, the impact is going to be more broadly based, with adverse spillovers to the markets, pensions funds and bigger investment funds.

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