Dec 18, 2006

Bubble, et al

A common topic of conversation these days seems to be whether or not we are in another tech/Internet bubble. Famous industry names have weighed in such as Forbes/Karlgaard (not sure), Scoble (yes but its different this time), Kedrosky (not only is it not different, its actually riskier this time).

While I don't pretend to be smart enough to begin to analyze such an esoteric question, having been involved in technology venture capital since 1998, I will make a few, lightweight, observations:

-At one, fundamentally important, level venture capitalists (VCs) are buyers of stock. The stock happens to be illiquid, unbelievable risky to get a return from, and hard to value, but VCs buy stock in companies nonetheless.

-All buyers of equity should attempt to buy at a low price and sell at a higher price.

-The valuations (ie, price of the stock) of venture backed companies are rising precipitously.

- I am seeing a marked increase in M&A books done by bankers pitching venture backed start ups, with astronomic valuations associated with the potential sales of such start ups

What does this mean? I lived through this same scenario in 1998-2001, and I think it always ends up badly for VCs and start ups in terms of returns (to both) and expectations (in running their businesses). Higher venture round valuations mean higher exits are required to sustain appropriate VC returns, which leads to entrepreneurial business decisions being made that are a function of expected returns, and not primarily on sound business judgment.

Whether this is a bubble or not, I don't know, but any lack of discipline in any investing arena can/may/will lead to money and time being lost.


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