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Everyone has an opinion about whether the current state of startups in Silicon Valley is actually a bubble — a sort of history-repeating feeding frenzy that will come crashing down in a spectacular fashion as it did in 2000. The argument is on the rise recently, and Om pointed out in May that there are some signs that things could take a turn for the worse. While it’s easy to look at the latest funding round from ride-sharing service Uber, in which it netted $1.4 billion with a post-money valuation of $18.4 billion, and say we’re in a bubble, a series of talks onstage at 500 Startups’ PreMoney conference on Friday in San Francisco suggested that the argument is more nuanced.
500 Startups founder Dave McClure, Andreessen Horowitz partner and COO Scott Kuper and Upfront Ventures partner Mark Suster agreed that the startup market was “bifurcating” — splitting between seed investors making smaller investments in new companies, and high-wealth funds pouring capital into big-market products. Kuper argued that the divide is a sign that a bubble could be forthcoming, but isn’t quite here yet because the big money is going into companies that are taking their time going public: companies in the 2000s took just 3 years to IPO on average, according to the NVCA Yearbook by Thomson Reuters, but now that time is more than double.
“Because companies are staying private longer, it’s not surprising to see them getting a billion-dollar valuation,” Kuper explained.
As companies stay in the private market longer, they become more attractive to the investors that hold the highly concentrated wealth within Silicon Valley. Suster said in his presentation that in a lot of ways, the environment is positive. Revenue for companies looking to IPO has tripled since the dot-com days, and valuations are less than half of what they were as well — a sign that investors are making smarter choices about where they put their money. But as more companies stay private and pursue later-stage investment, the high concentration of wealth comes into play: Suster says that according to the Q2 2014 PitchBook US Venture Industry Data Sheet total amount of money involved in Series D rounds is groing rapidly up 24 percent in the last four years, and they’re only rising. This means that companies have a potential for big investment, but also big risk.
“If you have a need to raise additional capital later on, that bar you set in the last round may not be appropriate anymore,” Suster said.
Both Suster and Kuper believe that the landscape for funding is changing radically — and behaviors will need to change quickly as mid-level VC firms dwindle and money continues to concentrate around big players. But whether or not it’s accurate to say that Silicon Valley is in a bubble is more complicated, and that question might have to do more with the market’s natural cycles than with existing investing behaviors.
“We’ve effectively been in a bull cycle for the last five years, which means you’re playing the odds,” Suster said. “The likelihood of getting to a bear market in the next two years is pretty good.”