Sam Altman has already explained why late-stage private valuations -- but not earlier-stage or public valuations -- are bubble-like right now:
>To summarize: there does not appear to be a tech bubble in the public markets. There does not appear to be a bubble in early or mid stages of the private markets. There does appear to be a bubble in the late-stage private companies, but that’s because people are misunderstanding these financial instruments as equity. If you reclassify those rounds as debt, then it gets hard to say where exactly the bubble is.
>At some point, I expect LPs to realize that buying debt in late-stage tech companies is not what they signed up for, and then prices in late-stage private companies will appear to correct. And I think that the entire public market is likely to go down—perhaps substantially—when interest rates materially move up, though that may be a long time away. But I expect public tech companies are likely to trade with the rest of the market and not underperform.
I think "argued" is more correct than "explained." Not everything sama says is guaranteed to be correct.
What I found interesting about this article is that these are mutual funds - i.e. public markets. I had not realized that "unicorns" were being invested in by funds available to the small investor.
There is a bubble at the seed stage. There are tons of people (accredited investors) investing that stage and tons of incubators/accelerators to help introduce those startups to those investors.
Platforms like Angel list are helping fund allot more companies at the seed stage by having syndicates.
Now even non-accredited investors will be able to invest in startups[1]. So the seed stage is bubbling up.
It's not really possible for there to be a bubble at the seed stage -- valuations at that stage are "paper" values because there's zero liquidity. Companies also tend not to stay in the seed stage for long enough to cause an asset bubble; they are either able to acquire follow-on funding (at which point they're no longer a "seed" company) or they aren't and they disappear.
The seed stage is increasingly crowded, but IMO that's a good thing.
It's also worth noting that obtaining Series A Funding[1] is more difficult than ever. The bubble is not with growth stage companies, it's with massive Unicorns that earn 0 dollars.
Interesting point re: not staying at the seed stage long enough for a bubble. What we're seeing instead is multiple preferences layered on in subsequent rounds.
So seed/A investors think they're doing well when the company raises B,C,D,E rounds at higher valuations, when in fact many will be washed out when the company eventually IPOs or is acquired at a lower valuation than their last venture round.
That's what I would expect -- the more crowded the market, the less leverage you have, and the lower your eventual payoff.
There are lots of people willing to provide companies with small amounts of money in exchange for a gigantic potential payoff. As payoffs decrease, lenders will exit the market.
>To summarize: there does not appear to be a tech bubble in the public markets. There does not appear to be a bubble in early or mid stages of the private markets. There does appear to be a bubble in the late-stage private companies, but that’s because people are misunderstanding these financial instruments as equity. If you reclassify those rounds as debt, then it gets hard to say where exactly the bubble is.
>At some point, I expect LPs to realize that buying debt in late-stage tech companies is not what they signed up for, and then prices in late-stage private companies will appear to correct. And I think that the entire public market is likely to go down—perhaps substantially—when interest rates materially move up, though that may be a long time away. But I expect public tech companies are likely to trade with the rest of the market and not underperform.
http://blog.samaltman.com/the-tech-bust-of-2015