The technology start-up market is “overheated”, a top venture capitalist (VC) told CNBC, although he stopped short of saying it was in a bubble.
“We are seeing the market overheat,” Fred Destin, a partner at venture capital firm Accel Partners, told CNBC in a TV interview. “I don’t think Uber means it’s a bubble, but I think we are seeing a lot of tension.”
Last year, companies, from taxi-hailing app Uber to accommodation website Airbnb and Chinese smartphone maker Xiaomi, raised stunning amounts of money as venture capitalists, banks, and institutional investors poured money into the hot technology sector.
“I think when people talk about bubble they tend to focus on the outliers – Uber, and maybe Bla Bla Car,” said Destin. “I think that these do not signify a bubble because these companies go from a hundred million to a billion to 10 billion, but it’s because they scale at the speed of the web and at the speed of mobile.”
Entrepreneurs risk getting “burnt.”
VC investment hit its highest level in 2014 since 2000, with $86.7 billion invested in 6,507 deals, according to a report by EY. This was up from the $53.5 billion invested in 2013 in 6,551 deals. While the number of deals fell in 2014 from 2013, the size of the investments significantly increased.
For example, Uber received a $1.2 billion round of funding last month, valuing it at $40 billion. Airbnb raised $500 million in April last year and currently has a valuation of around $13 billion.
Xiaomi is perhaps the most valuable private technology company, with a valuation of $45 billion.
Destin warned that mega-valuations had caused high levels of optimism in the market, with companies that might not have solid fundamentals coming to market.
“We see immense price pressure in the early stage rounds, we have hedge funds, institutional investors, late stage investors from the U.S. who are coming in and pricing up investments,” Destin said.
“My concern with that is always for the entrepreneur, because when you raise too much money to early, and the market turns, it’s the entrepreneurs that get burnt.”
A food delivery start-up called Deliveroo raised $25 million in series-B funding on Thursday, which was led by Destin. Accel also has investments in companies such as Bla Bla Car and Dropbox.
Strong performers in acquiring venture capital last year included consumer services companies such as Uber, Snapchat and Flipkart. The consumer services sector raised $29 billion last year, the highest amount in the last 6 years, EY’s report said.
But not all VCs agree that the market is too hot. Early-stage investor Eileen Burbidge said companies coming to market had solid fundamentals and there shouldn’t be any concern about the amount of capital being raised.
“I am more optimistic generally and don’t expect a cooling down (in investment),” Burbidge, a partner at Passion Capital, told CNBC by email.
“But the market is very strong and frothy right now so one would expect that it can’t last forever and the market does swing back and forth, so at some point there is bound to be a slight deflation or correction.”
Image CC by Dennis Skyley.