tech.is_in_bubble?(actual_data) # => false
Yes. Given my limited view, Color is probably overvalued. Yes, Groupon better role out something new, and fast, or it will never give any decent ROI for its investors.
But enough with the anecdotal evidence. For each Color or Groupon there is a Google (also had high valuations) or a Dropbox (quite possibly the most awesome company on the planet).
The real question about whether a bubble is happening.
“An economic bubble is trade in high volumes at prices that are considerably at variance with intrinsic values”
source: Wikipedia
Right now interest rates available in Canada are south of 1% and from what I can glean online current “risk-free” interest rates in the United States are even less.
At less than 1% it would take over 70 years to double an investment. (I put aside inflation because A. it will only further my argument and B. I have a controversial view on inflation that I don’t want to get into.)
Let’s look at the expected returns from startups. I was going to write a CrunchBase API client, but luckily a site already does this for me.
So first thing to notice: Total amount invested is barely changing, even despite plummeting interest rates. Second, and more importantly, total acquisition amount: $450 Billion. This isn’t including Facebook, or any other cool startups that haven’t been acquired, it doesn’t include companies that went IPO, it doesn’t include companies that have always stayed private, unfunded and quietly paying out dividends to their founders.
But lets work with $450 Billion just because we’re trying to really make the case.
60,000 companies on CrunchBase with a total of $450 Billion in acquisition spend.
Imagine it was like buying a lottery ticket. If you invested at valuation of $7.5mm per company right from the beginning (seed stage or Series A) you would expect to break even (well, actually you would probably have a 1X liquidation preference, so in reality it would be higher than that but lets ignore that).
Complaining about “sky high valuations” is crazy talk. Most of the companies coming out of the best incubator in the world are getting about $5mm well below the $7.5mm figure and that doesn’t even account for the fact that they are objectively better performers than a random sampling of companies.
The truth is this: Bubbles don’t exist without my aunt’s mutual fund getting involved or my next door neighbor getting told to mortgage his house to invest by his financial advisor. Web 1.0 was all about IPOing on the nasdaq and fleecing the public with business models that disregarded profit. This time around things are different. At every stage of the process you see startups with business models. Guestlist, Github, FreshBooks, heck even Groupon, are making nontrivial money relative to the valuations and expected future growth.
People are getting online, and living online. Just as it wasn’t a bubble when we entered the automotive era and huge car companies were popping up everywhere, it isn’t a bubble when whole groups of people are spending more time online than watching TV or book reading or newspaper reading.
Except pure* social.
Stay the %&#* away from social. Go find an online circuit board diagram company to invest in or something.
* to differentiate from something like Github which calls itself “social coding”.
