What kind of a bubble is this?
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Over the past few months there has been a lot of discussion in tech circles about the possibility of whether we are in another tech bubble. Part of the rationale for this assertion stems from a few ominous indicators that proponents of said Bubble tend perpetuate: 1) The fact that the average series A valuation has crept over $4 million 2) That mega rounds of financing are becoming routine ($200 million+) 3) That there are multiple tech companies that are considering filing for an IPO in the coming months. 4) More early stage financings are being done without a viable product or prototype.
Sure, some of those indicators may be giving certain individuals flashbacks to the late 90's but there are several major differences with these companies. The fact that series A valuations have crept above $4 million on average should be of marginal concern. In fact, there is no real precedent delineating that this average should be above or below a certain number. While not indicative of a bubble, it may be a sign that the competition for Series A funding is increasing among VC's. This is a good thing for entrepreneurs. VC's? Not so much. The second issue is also misleading given that the majority of companies that have received these mega rounds of financing are growing revenues and profits monthly, with viable business models beneath them. This is far from the "pie in the sky" business models days pravlent in the last cycle. The fact that multiple companies are considering filing for an IPO (Facebook, Groupon, Zynga) should also not be alarming for some of the same reasons made in the last point. These are real companies with incredible cash flow generation potential. These are exactly the kinds of companies that should be going public in the web based economy.
But point 4 is the only one that gives me real pause. The "getting funded without an actual product" model pervasive in the last bubble was a major part of the problem as, millions of dollars in capital was wasted . We have all heard the legendary stories of would-be entrepreneurs walking into a VC meeting with only a pitch-book, yet would walk out with $20 million in funding. It's one thing to value something or someone on their potential as so much of this comes down to a "gut call"; for some of these early stage companies, that can be the only rational way to do it. But it's quite another thing to assign excessive valuations to companies that have not created even a hint of value or a successful prototype (Color anyone?). I believe this is where the tech industry went awry last time and it concerns me that we seem to be headed down a similar path. There is no doubt that the market is starting to heat up...a really exciting development for those who work in this industry and have struggled through some difficult times over the years. And one has to expect a certain degree of mania with any up-cycle. But I would like to think that some lessons were learned from the last bubble, that capital will be reserved for only the best ideas that have a chance to scale into successful web properties. Over the long term that is good for VC's, LP's, and most of all, entrepreneurs. Â