Are We In A Tech Bubble?

Lou KernerJanuary, 2015

My Background

What is A Stock Market Bubble?

A bubble is when investors drive prices beyond any rational reflection of value, as determined by the performance of the companies. Like soap bubbles, investing bubbles look like they’ll rise forever, but they always pop, and the money invested in them dissipates into the wind

Source: Investopedia

Smart People We’re Saying It’s A Bubble Earlier In April ‘14

• George Zachary (4/3/14)– Charles River Ventures– “There is desperation to not miss out on what will be the next big

thing.”

• David Einhorn (4/22/14) – Greenlight Capital– “Now there is a clear consensus that we are witnessing our second

tech bubble in 15 years… Indications include… huge first day IPO pops

• Peter Nieh (4/22/14) – Lightspeed Venture Partners– “I must admit when I first saw the WhatsApp valuation I thought I

needed to get bifocals. I thought I must have missed a decimal point.”

Searches For “Tech Bubble” On Google Recently Peaked In April

Source: Google Trends, November 2014Peak (F) Was When LinkedIn Went Public

Spotting A Bubble Is Easy… After It Bursts

Source: Yahoo FinanceNASDAQ Composite

Growth In To The 2000 BubbleBillions of People Online

Source: ITU, a16Z

Growth Driving Valuations NowBillions of People Online

Source: ITU, a16Z

Classic Way To Spot A Bubble Before It Bursts

Sustained Outsized Market Gains = Bubble

Source: Yahoo Finance

10 Year NASDAQ CAGRs

Source: Yahoo Finance

Current 10 year CAGR in line with the 44 year historical NASDAQ CAGR of 8.9%

“Easy” Monetary Policy Continues To Surprise Market Forecasters

Consumer Confidence Is Trending Up

Volatility Is Low – A Bullish Indicator

Tumbling Crude Prices Is Bullish

Stock Market P/E Ratio

S&P Composite Is Above Long-Term Trend

Massive Day 1 IPO Pops = Bubble

Source: Renaissance Capital

Eventually ….Bubble’s Burst

Source: Renaissance Capital

IPO Pops then Vs. Now

Source: Renaissance Capital, Yahoo Finance

Largest IPO Pops Now Are Just 1/5 of Circa ‘99-’00

Source: Renaissance Capital, November 2014

Peak Growth Stock ValuationsThen & Now

Number of Technology IPOs By Year

Source: Jay Ritter, University of Florida, 4/14Tech IPO Volumes Appear (at the new) Normal

Companies Are Taking Longer to IPO

More Mature Companies At IPO Is Sign of A Healthy Market

Companies Are Taking Longer to IPO Because….?

• Being public is increasingly painful– Oppressive Compliance (Sarbanes Oxley passed in

2002)– “The 90 Day Shot Clock” (term recently coined by

Michael Dell)– Minimal sell side coverage if not a multi-billion

company – Electronic trading has dramatically decreased trading spreads

Companies Are Taking Longer to IPO Because….?

• Companies that are IPO Candidates Can Get All The Capital In the Private Markets– Avoiding all the trouble of being public

• More Difficult For Public Co’s to Attract Talent– Options in a private company an be given at a

significant discount to a preferred financing

Emerging Technologies Are Driving Innovation That Is Disrupting EVERY Industry

The Pace of Darwinian Corporate Evolution Is Accelerating

Corporations Are Acquiring InnovationM&A of VC Backed Private Companies

Corporations Are Ramping Their Private Shares Investing

Source: CB Insights

VC Backed Companies are Acquiring Other VC Backed Companies

# of Acquisitions 2010-2014

Hedge Funds & Mutual Funds Are Ramping Their Private Shares Investing

Source: CB Insights

Later Stage Valuations Are Rising

Years To $1B Valuation Is Decreasing

Source: CB Insights, Aug. 2014

Tech M&A Future Is BrightBalance Sheet Cash of Top 25 Tech Companies

Source: E&Y, Nov. 2014

Tech M&A Is Growing RapidlyYTD 2014 Thru Q3 up 2% vs Total 2013

Source: E&Y, Nov. 2014

Another Classic Sign of a Bubble?“Outfront Media which that owns about 40 billboards along the coveted stretch of the 101 freeway, said that soaring demand for billboards among tech companies have caused billboard prices in the area to more than double since 2011”

- Bloomberg, November 19th, 2014

Conclusions

• Broad stock market valuation metrics indicate that valuations are stretched

• Tech valuations appear reasonable within the context of the broader market

• We are clearly NOT in a tech bubble that is in anyway comparable to ‘99-’00

• The current opportunities for value creation from disruptive tech companies remains at all time highs