Right now, there can be little doubt that the tech startup market – that is, high growth, tech-enabled businesses – is really racing at the moment, especially in Silicon Valley.
Earlier this week, for example, US-based ridesharing startup Uber completed a financing round of $US1.2 billion, valuing the company at a jaw-dropping $US40 billion ($A48.26 billion).
To put that figure into perspective, consider this: As of writing, Qantas has a market capitalisation of $5.3 billion and Virgin Australia of $1.498 billion. Cabcharge Australia, the established direct competitor in the Australian market, is relatively cheap at $523.87 million.
But perhaps that’s a harsh comparison. After all, those companies are predominantly Australian brands, and Uber has global ambitions of being to transport what Google is to search.
So a fairer comparison would be something like McDonald’s, which I guess could be described as the “Google” of hamburgers. McDonald’s has a market capitalisation of $US88.91 billion.
Meanwhile, Ford Motor Company, the “Google” of cars, has a market cap of $US59.39 billion. News Corp, the “Google” of newspapers, is worth $US8.76 billion.
In other words, investors are betting Uber is worth a little under half of McDonald’s, two-thirds of Ford, and more than four-and-a-half times the value of News Corp.
That’s quite a bet, even before you consider the regulatory obstacles Uber faces in a number of markets or its recent public relations stumbles.
It’s still not as bad as during the late ‘90s dot-com bubble. At the peak of the madness in 2000, online media darling AOL found its market capitalisation roughly double that of established media powerhouse Time Warner. Using just its stock, including a hefty premium, AOL shareholders ended up with 55% ownership of the resulting merged company, AOL Time Warner.
Astoundingly, some analysts at the time suggested that AOL had paid too much for Time Warner!
We’re not at that point just yet. Nonetheless, especially after Facebook paid $US16 billion for messaging app WhatsApp earlier this year, quite a lot of people are beginning to wonder if we’re beginning to see another tech bubble.
So is there a tech bubble ready to burst?
In Control Shift earlier this year, I observed there are essentially three ways venture capitalists that invest in tech startups, such as Uber, can cash out:
When a venture capitalist invests in a tech startup, she or he is ultimately betting on the ability to cash out down the road, either by selling that business, often to either another tech company, a non-tech company, or through an IPO.
However, it is by its very nature a highly speculative market. For every investment ending in an IPO or a major takeover, nine will fail.
Currently, there are a number of factors, from the stability of the online advertising market and smartphone profit margins to the price-earnings ratios of social media companies, which are putting those slim chances of a big payday in further jeopardy.
Phrased differently, so long as there are tech companies, non-tech companies or an IPO market for investors to sell their startups in to, or the possibility they become viable companies in their own right, there will be investors lining up to invest.
That being said, especially as the valuations of some of the most hyped Silicon Valley startups grow, there are also good reasons to remain cautious.