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Are We In A (Fin)Tech Bubble?
Lou KernerJuly, 2015
Lou Kerner Background
FORMER
The Israel Syndicate
On AngelList
The Stock Markets Swings Between
Fear & Greed
Bear Market
Bubble
Capitalism
Amara’s Law Causes Bubble
What Happened (IMHO) To Pop The Bubble In March of 2000
"For the first time in a decade, our model portfolio is no longer
recommending an overweightedposition in tech”
- Abby Joseph Cohen
Goldman Sachs Guru
March 28, 2000
Investors Think The Stock & Bond Markets Are Overvalued
Source: Survey of 145 investors by BofA Merrill Lynch, April 2015
“Tech Bubble” Searches Recently Surged
Source: Google Trends, July, 2015G = May 2011, LinkedIn IPO Surges 109% to $9B, $28B today
Jet Raises at $600 Million Pre-Launch
Source: Twitter, February 11, 2015
New Jet.com RaiseWSJ – July 20, 2015
“Despite steep losses and looming competition with Amazon.com, online retailer is in talks for capital infusion that could value it at…….. “
$3 Billion
What’s Going On?
Multiple New Technologies Are Enabling The Disruption of EVERY Industry
Convergence Of Disruptive Technologies Is Enabling New Business Modes
Borrowers get better rates, Investors get better returns
Passengers get better, cheaper rides, Drivers make more money
Better way to communicate, share text, images, audio, location ….
Founded 2007, Valuation = $5.4B
Founded 2009, Valuation = $40B
Founded 2009, Valuation = $19B
Causing Unicorn Production To Soar
Source: CB Insights, July, 2015
Causing Investors To Invest Increasingly Ever Greater Sums In U.S. Tech Co’s
Unicorn Production Is Growing Even Faster Outside The U.S.
Source: CB Insights, July, 2015
Next Wave of Emerging Technologies Are Poised To Accelerate The Disruption
Wearables Virtual Reality
Are We In A Tech Bubble?
Spotting A Bubble Is Easy… After It Bursts
Source: Yahoo FinanceNASDAQ Composite
Internet User Growth Driving The 2000 Bubble
Source: ITU, a16Z
User Growth Driving Valuations Today
Usage Growth Driving Valuations Today
What’s Going On In The Public Markets?
Sustained Outsized Market Gains = Bubble
Source: Google Finance
Source: Google Finance
Current 10 year CAGR is below the 45 year historical NASDAQ CAGR of 9.5%
S&P Composite Is Above Long-Term Trend
The Buffet Indicator Is Above Long-Term Trend
2015
Tech Co Market Value A % of S&P 500 Is In Line W/ Long Term Trend
Source: KPCB, Morgan Stanley, Bloomberg, CapIQ, LK Estimate
Massive Day 1 IPO Pops = Bubble
Source: Renaissance Capital
Quote From Theglobe.com CEO
Filmed as part of a CNN Documentary in 1999, in a Manhattan Club, dancing on a table in leather pants with his model
girlfriend…
"Got the girl. Got the money. Now I'm ready to live a disgusting, frivolous life.”
- Stephen Paternot
Eventually ….Bubble’s Burst
Source: Renaissance Capital
IPO Pops Today Are Incomparable To 2000
Source: Renaissance Capital, Yahoo Finance
Largest IPO Pops Now Are Less Then 1/5 of Circa ‘99-’00
Peak Growth Stock ValuationsThen & Now
Source: Renaissance Capital, Yahoo Finance
FinTech In The Public Markets
PayPal’s Market Cap Soars Past Ebay
What’s Going On In The Private Markets?
# of Deals Is Down But $’s Is Up
Source: Pitchbook, July 2015
Source: Pando Daily, January, 2015
Because # Of Large Deals Is Soaring
# Of $100M Financings Continue to Soar
As Participation From Non-VCs In VC Deals Is Ramping Dramatically
Source: CB Insights, April 2015, Includes Corporations, Hedge Funds, Mutual Funds, Sovereign Wealth Funds, and PE Funds
Most Active Investors In 2013 In$100M+ Rounds
Source: Mattermark, June 2015
China’s BATs (Baidu, Alibaba, & Tencent)
Are Ramping Their Investments In Unicorns
(See Slide on Next Page)
Private Fintech Investments By Wall Street2009-2015
Top Corporate Fintech Investors
Source CB Insights, 2010-2015YTD , May 2015
As Fintech Investing Soars
Dollars In (Raised) Is Going Up…. But Dollars
Out (M&A, IPOs)….. Not So Much
Source: Pando Daily, January, 2015
While IPO Volume Was Trending Up
2015 IPO Volume Is Off 40%+
Source: CB Insights, NVCA July 2015
Companies Are Taking Longer to IPO
More Mature Companies At IPO Is Sign of A Healthy Market Source: NVCA Stats for Software Companies, 2015
Companies Are Taking Longer to IPO Because….
• Being public is increasingly painful
– Oppressive Compliance (Sarbanes Oxley since 2002)
– “The 90 Day Shot Clock” (Term coined by Michael Dell)
– Minimal sell side coverage if not a multi-billion co
• More Difficult For Public Co’s to Attract Talent
• Companies that are IPO candidates can get ALLthe capital they want in the private markets
Tech Funding (IPO and Private)As A % of GDP
Source: Andreessen Horowitz, June 2015
U.S. Tech Private & IPO Funding
# 0f VC Backed M&As Is Falling
Source: NVCA, July 2015
$1B+ M&A Is Plummeting
Many Billion Dollar Companies Continue to Appreciate In Value Rapidly
Public and Private Market Valuations Inform Each Other…..
I think tech sector is making a huge mistake in thinking that they know their
companies and how to value them better than Wall Street. That kind of
thinking is arrogance and pride comes before the fall.
Fred Wilson, July 2 2015
All Else Equal… Public Companies Should Trade At A Premium to Private Companies Due To
Liquidity & Other Factors
Est. Revenue Multiples For Many Unicorns Are Higher Than Multiples For Rapidly Growing Public Companies
Source: CB Insights, April 2015, Yahoo May 2015
Companies Going Public Below the Last Private Round Is A Sign of A Bubble
But actual private market “valuation” can be more complex than the price reported in the press. Take Box, for example. Box’s last round had a ratchet provision, enabling the
investors the right to additional shares, bringing their price paid to 10% less than the IPO price.
Source: Bloomberg Business Week, Yahoo Finance
Are VCs Making Bad Bets In Late Stage Companies?
You only find out who is swimming naked when the tide goes out
- Warren Buffet
Beware of confusing donkeys in party hats with unicorns
- Bryce Roberts OATV
It’s hard to stop dancing when the music’s still playing- Chuck Prince, CEO of Citibank, 2007
My Conclusions From The Data• Broad stock market valuation metrics indicate valuations are
stretched • Public market tech valuations appear reasonable within the
context of the broader public market• We are clearly NOT in a tech bubble comparable to ‘99-’00• Private market financings are far outpacing liquidity events, a
trend that can’t last ad infinitum, raising the risk of an investing crunch if liquidity events don’t pick up
• The increase in private market investors other than VCs is happening concurrently with a dramatic growth in unicorn creation and high revenue multiples relative to public markets, raising the risk that valuations are getting stretched
• The current opportunities for value creation from disruptive tech companies remains at all time highs