Is this a tech bubble 2.0?
The unprecedented level of growth has caught the eye of numerous skeptics, some of whom (e.g. Mark Cuban, notorious business man and investor5
and Todd Dagres, partner at VC firm Spark Capital6
) have classified the digital/tech sector as a bubble, likening it to the 2000 dotcom boom and ultimate collapse. Their fears are not unfounded but the current context is quite different compared to the past tech era.
Firstly, key performance indicators (KPIs) are not as unsettling as they were in 2000. For example, total funds raised by VC’s in 2014 represent around 50% of the funds raised in 2000 (~$47bn in 2014 vs ~$100bn in 20007
). Similarly, the average valuation multiple (EV/revenues) is 30% lower now than it was then (~20 in 2014 vs ~29 in 20008
Secondly, there are a number of differences in the business fundamentals: digital companies going public nowadays have a much more solid business plan/model in place than in the past (e.g. real revenues, often positive margins and not just customers). Digital investments now transcend across geographies (with growing relevance in Asia and Europe) compared to being a largely North America phenomenon in 2000. Valuations are now shifting towards engagement and true monetisation, not just subscribers or eyeballs as in the past.
The other clear difference is that the Internet is more pervasive; global Internet penetration stood at ~40% by the end of 2014 vs. only 6% in 20009
. This market growth potential for companies is real.
If not a bubble, are tech companies at least overvalued?
There are some indicative red flags suggesting some valuations are inflated (hyped). Firstly, the average EV/revenue multiple for non-listed digital companies at ~20x is perceived as high compared to ~10x for listed10
. Also, subsequent funding rounds in short timeframes are resulting in companies experiencing extraordinary upward revisions in valuations. For example, Uber valuation grew 10.3x while Airbnb grew 6.7x within 16 months and two rounds of fundraising (see Exhibit 2), way faster than their growth in fundamentals.
Secondly, public markets are showing a certain degree of skepticism on the valuation numbers. Our analysis on the share price performance of most relevant digital-based IPOs in the last 18 months (e.g. King, Lending club, Box) shows a drop in value of ~4% post-IPO debut11
, implying that the public investors are struggling to accept these numbers.
There are several underlying reasons for such valuation levels and the main one is the available excess liquidity. While the traditional investors (e.g. VC firms, Angels) are increasing their investments, new digital entities (e.g. Internet titans, telco funds, mutual/hedge funds) are entering the space with deep pockets. The growth in availability of funds (+165% in 2014) is way above the growth in number of digital companies (+15%-20%) (see Exhibit 3).
Another potential driver of inflated valuations could be that investments are typically led by few notable and influential VC firms, driving valuations rapidly on investees for the benefit of joint investors. In fact, we have observed that eight VC funds have invested (in varying degrees) in 42% of the current set of unicorns12
, potentially driving some kind of self-prophecy effect.
What does this all mean?
Unicorns are here to stay. The digital industry’s stellar 2014 performance (the only other two sectors that achieved double digit growth were healthcare and real estate13), technological advancement and expanding digital ecosystem (e.g. IOT, cybersecurity, analytics), indicate attractiveness and exciting opportunities for the future.
Some unicorns might be overvalued and will receive a ‘horn cut’, but as per the ‘power law'14 some will also be undervalued (and sizably so). Potential setbacks and adjustments as valuations get ahead of themselves should not scare the investors away from the digital space. While remaining cautious, they should embrace the journey of finding the ‘real’ opportunities as the long-term direction is unquestionable.
Source: Delta Partners estimate based on a number of sources: Ovum, eMarketer, Gartner, IMS research, GSMA, Goldman Sachs back
Source: CB Insights, Tech.com back
Unicorns are defined as technology companies founded in 2000 or later and having a valuation of $1bn or more. These companies must not be owned by a corporate entity and can be based anywhere in the world. Facebook is excluded not to distort the picture back
Delta Partners Unicorns tracker based on WSJ, Capital IW, GP Bullhound, Fortune, other public sources back
Source: Tech Crunch; Hedge Think back
Source: Delta Partners analysis, based on a basket of listed and not listed digital companies back
Share returns as of Mar26, 2015; value at IPO based on closing price at the day of IPO; Source: Delta Partners analysis based on data from Google Finance, Bloomberg, press clippings back
Source: Delta Partners analysis based on data from MSCI indices, Bloomberg back
Daniele Pe is a Manager at the Delta Partners’ Advisory division in Singapore. With over 7 years of global experience in the telecoms, media and digital (TMD) industry, Daniele specialises in digital strategy, supporting telecom players in capturing opportunities in the digital space and digitising their business model and customer experience. Daniele holds a Master of Science in International Management from ESADE (Spain) and a Bachelor's degree in Businesses Administration from Bocconi University (Italy).
Raghav Fatehpuria is an Analyst with the Delta Partners’ Advisory division in Singapore. With a functional focus on mobile data, value proposition definition, LTE, digital and data centres, Raghav has been involved in projects all over South East Asia. Prior to Delta Partners, Raghav has interned with Deutsche Bank, Adams Street Partners and Credit Suisse. Raghav holds a degree in Business Administration from the National University of Singapore.