Morgan Bender, Benedict Evans and Scott Kupor recently released their U.S. Tech Funding – What’s Going On?” report. It’s not surprising that one of the Silicon Valley’s top venture capital firms should initiate some thought leadership on the burning questions “Are we in a bubble?” Nor is it surpassing that the Andreessen Horowitz senior analysts came to the bold, confident conclusion that ‘No, we are not in a bubble!’
If you haven’t yet gotten around to reviewing the 53 ‘Bubble? What bubble?’ PPT slides, I have summed the main points below:
If you adjust for inflation, current VC funding hasn’t grow as fast as it seems. It’s nowhere near the levels it was in 1999/2000.
The S&P IT Index has been growing at a steady rate. It is not peaking quickly like we saw in 1999.
Real earnings are growing at the same pace as venture capital investments. So ‘over-valuation’ not likely.
S&P IT index has been flat for the last 14 years. This means tech stocks are heating up the market.
The user base is real this time. Roughly 4 billion internet users and smartphone users.
Funding per internet/smartphone users has also been flat for the last 14 years.
Online spending has grown tremendously ($350 billion)
but commerce is still only 6% of retail, so there is tons of potential for more growth.
funding is actually quite moderate if considered as a % of GDP
U.S. Tech Funding: $71b (1999), $48b (2014)
Funding as % of U.S. Tech GDP: 10.8% (1999), 2.6% (2014)
S&P IT Index forward P/E: 39.0% (1999), 16.1% (2014)
Global internet population: 0.4 billion (1999), 3 billion (2014)
U.S. e-commerce revenues: $12 billion (1999), $304 billion (2014)
Number of IPOs: 371 (1999), 53 (2014)
Median time to IPO: 4 years (1999), 11 years (2014)
The funding surge is in late stage companies with higher valuations. Companies that would have been IPOs in the pre-bubble 1999, are now large private equity placements.
Tech IPOs are dead (dropped and stayed flat since 2000)
The bar for an IPO is now MUCH higher (Does this mean the general public is being kept out of the good tech investments?)
Companies that used to do IPOs are now doing late-stage private rounds
$40M+ rounds are effectively ‘quasi-IPOs’
As IPOs are delayed, returns move from public to private investors. Therefore, tradition public market investors and buyout funds, who would not typically invest in companies at this stage, have moved into the private markets.
Non-traditional investors are driving growth rounds
Tech returns that used to be in public markets, have now shifted to private
For Facebook to make Microsoft’s public market returns it would have to be worth $45 trillion (currently Facebook is valued at about $245 billion)
All ‘unicorns’ combined = ~1 Facebook
Since 2001, VC funding has been growing moderately (no surge)
VC funding as a % of tech GDP is down by 1/2 from 1980
Overall $$s raised are dominated by the large, late-stage ‘quasi-IPOs’ (which aren’t really VC)
Late stage funding is a small part of the ecosystem. The number of companies raising capital has doubled since 2009.
Volume of rounds is up 2.5x. Size of rounds is down 1/3
The cost of creating a tech company has dropped, so ore companies are being founded that need less money.
There is a surge is seed stage funding
$1-2M seed rounds have increased 7x in the past 10 years.
During the bubble very young companies got a surge of funding. That isn’t happening anymore.
55% of Bubble funding $$s went to companies under 2 years old. Now 80% of funding goes to companies over 3 year old.
Deal volume is up. More companies are being created.
Over the last 6-7 years round size is flat, while round volume has more than doubled
The cost of creating a tech company is falling
While less money is needed to get started, the costs of scaling up to large markets, hiring top talent and office space has gone up.
Round sizes are mostly flat (to down)
Late stage round sizes are not spreading down the chain.
It’s never been cheaper to create a tech company
Company creation is increasing (and that is a GOOD thing!)
Summary: Andreessen Horowitz analysts Morgan Bender, Benedict Evans and Scott Kupor put together a pretty convincing argument for the case that we are not in a repeat of the dot-come tech bubble, because everything is different. Do you agree?