In March of last year, our GV engineering team analyzed market data to assess whether or not the tech industry was experiencing a bubble.
That question was being asked a lot at the time (it’s less prevalent now, in light of some changes in the market). During our research, we uncovered ample evidence to argue both sides of the coin. And even with a great deal of number crunching, we didn’t arrive at a definitive answer.
The most we could verify is that if we were in a bubble, it was a very different bubble from the heady dotcom days in 2000. One important difference is that in 2000, individual investors in public equities bore the brunt of the dotcom bubble burst. If there’s a bubble today, private capital investors and institutions likely stand to lose the most. That includes GV.
Have things changed? More than a year later, our engineering team has repeated the exercise, looking at data from a variety of sources to answer this persistent question of whether or not we’re in a bubble. The evidence still doesn’t point to a definitive answer. Here’s what we found:
The bad news: fewer deals, fewer IPOs, dropping valuations.
Fewer deals. Entrepreneurs in Silicon Valley talk anecdotally about a funding slowdown. Sure enough, the data show that venture capital dollars deployed in Q1 are down 11%, and the number of deals dropped 5% compared with last year.
Fewer IPOs. As we’ve all seen, companies are waiting longer to go public. The first quarter of 2016 was the slowest for IPOs since 2011, and the average time between first funding and IPO is now eight years.
Dropping Valuations. Later stage companies that may be contemplating IPO have seen their valuations start to fall. We’ve seen data that suggest late-stage valuations as a whole have dropped more than 43% since their peak at third quarter of last year.
The good news: Ample venture capital, sustained late-stage deal making, and successful exits.
Ample venture capital. Venture capital funds raised $13B in the first three months of 2016, the largest quarter in fifteen years and a full 59% higher than the same period last year. And it’s worth noting that the National Venture Capital Association reports that the VC industry deployed more capital in 2015 than any year since 1995.
Sustained late-stage deals. Despite the valuation decline, later stage companies continue to raise additional rounds at an enthusiastic pace. In Q1 2016, investments in later stage rounds increased 10%, representing 22% of the total deal volume.
Profitable M&A Exits. The IPO slowdown isn’t necessarily a bad thing, either. In the first quarter of this year, there were 25% fewer M&A exits quarter over quarter, but the deal value was double year over year. Exits through acquisitions seem to have taken the place of some IPOs. The Microsoft / LinkedIn news underscores the M&A environment in the public markets.
Bubble or not, risk-taking startups remain important
So… is there a bubble? What is a reasonable conclusion from this less-than-conclusive data? Data more often lead to solid conclusions rather than predictions, which is what makes this difficult.
I think a bubble that suddenly goes “pop” is less likely given the data from the last few quarters, but caution is still warranted. It’s on my mind as I review potential investments. Like most venture investors, the companies we invest in stand a chance of failing, and unbridled success is rare. Spectacular failures, while unfortunate, are part of our reality.
Regardless of the economic climate, the real job of any investor is to help entrepreneurs build meaningful companies and technologies. The best investors that we know don’t try to time the market, and neither do the best entrepreneurs. We have to keep at it.