Funding for tech startups appears to be going strong, but there’s a looming concern that it could be too strong — strong enough that it’s already fueled the next tech bubble.
Some investors and analysts have been reluctant to say outright that we’re in the midst of overgrowth in tech.
Fifteen years ago, the sector was relatively young but now with established tech companies like Apple, Microsoft and Facebook leading the charge and better tech representation among the S&P 500, the industry has matured, according to Angelo Zino, analyst at S&P Capital IQ.
Relatively firm-footed tech giants are one thing, startups are an entirely different world. The market for tech startups today may be just as speculative as it was during the first bubble, suggested Nick Bilton, technology and business columnist at The New York Times.
“The valuations of companies are just completely out of whack and no one has any idea where these numbers are coming from,” Bilton said in an interview with CNBC, adding that the existence of billion-dollar startup “unicorns” in tech, is a major sign that we’re in a tech bubble.
Among those unicorns is ride-hailing company Uber, worth $51 billion; electronics company Xiaomi, worth $46 billion; and short-term apartment rental site Airbnb worth $25.5 billion, according to a recent Fortune ranking.
“At the beginning of every bubble burst or every recession, there’s always been a race to build the biggest skyscrapers in the world. And it’s usually from money that has come in from bubble-gotten gains,” he said. “Often when you have these buildings built, there isn’t anyone to fill them and it starts to be one of the things that causes the bubble to burst,” Bilton posited.
The skyscraper indicating a bubble this time around, according to Bilton, is the Salesforce Tower, which is currently under construction. That skyscraper is expected to stand 200 feet higher than the Transamerica Pyramid, which is currently the tallest building on the San Francisco skyline.
But whether there’s a bubble at risk of bursting or just some high-flying start-ups that need to gear up for a descent, Bilton seems conservative.
“My best advice to protect yourself is put your money in your mattress,” Bilton said.
But risk is par for the course at VC firms.
“Most venture capitalists … are absolutely comfortable with tech companies needing time to reach profitability,” said Tony Tjan, CEO and managing partner at venture capital firm Cue Ball Capital, in an email.
“What you are looking for first and foremost is great people. Human capital matters more than anything in good and bad markets,” Tjan said.
Image credit: CC by Paul Hudson