I don't think we're in a bubble, I think we don't have enough investment vehicles for rich people and so the lack of supply has driven up prices. Imagine you have $10M, how do you get your > 10% annual return now that the ponzi schemes have been rolled up? Not a lot of choices.
I think this is the exact definition of a bubble. The phenomenon of runaway demand by a 'new class' of investors/investments has always been the hallmark of bubbles. 1920s a real national stock market with almost instant communication, now 'anyone' could trade stocks. This created a demand for stocks, so a demand for companies that listed as stocks. The 1960s, aka the go-go years. This bubble was around the conglomerate instrument. Some conglomerates did well, so everyone wanted to invest in the 'new' thing conglomerates. 1980s. Junk Bonds, or high-yield debt as we call it now. New financial instrument initially does well, demand soars. 1990s, internet companies. Recognition that the internet is going to change the world, everyone wants to own a stock in internet companies, a ton of crappy IPOs. 2000s, market conditions ripe for housing bubble. late 2000s, stat-arb blows up ( for unrelated to stat-arb reasons ) due to over-reliance on new financial vehicles. 2010s, being an 'angel' is easier than ever, and who wants to miss out on the next google/facebook.
Make no mistake, there is a bubble in early stage companies/financing. What is driving it is the same. runaway demand. This particular bubble is different than the last, because the primary implication of the last has not yet been absorbed. The regulatory structure for raising capitol and 'exiting' has not caught up to a simple reality. New technology displaces old technology faster than regulated exits can be executed. Just look at Groupon. Why do I, as a business, list with groupon, when I can just as easily list with 600 competitors who might be more specialized/niche?
"I think we don't have enough investment vehicles for rich people and so the lack of supply has driven up prices"
I think there's a strong correlation between the end of the recent Housing Bubble, and the start/ramp-up of all these $Billion tech companies.
I think you're right that rich people need to put their money somewhere, whether that makes this surge in tech valuations a bubble, I'm not sure, I sincerely hope not; but I am fearfull of when the "rich money" starts looking for greener pastures...
If memory serves, the only reason the Housing Bubble happened in the first place was because of the end of the "web 1.0" tech bubble.
Most of the venture funds are actually investing the money of pension funds and university endowments, not "rich people". "Rich people" - meaning recent tech multi-millionaires are driving an increase in angel investing, but they are not who's driving these 50x revenue multiples for later stage companies. If were to give anyone credit for these multiples, it would be Facebook. They've definitely inflated the value of companies that went out before them (Zynga, Linkedin, Groupon, Pandora) and have helped push up valuations of Dropbox and others. When $100bn is your ceiling for a "private" company value, psychologically it allows for much more aggressive private valuations. And it's likely that Facebook private valuation is an extreme outlier, not a "new normal", which will lead to a boatload of companies that have their highest valuation ever before they go public.
When I heard about the instagram acquisition I did wonder if Facebook partly made that purchase with that timing and an insane valuation in order to ramp the value of their own IPO shortly afterward. This is not sustainable, and it's going to make it very difficult for startups to get funding in a few years when it all goes sour. But the best insurance, as ever, is to try to build a great company, not try to build something that some VC will want to buy with borrowed money.
I was going to comment about the feedback loop of unionized public sector workers underpaying for retirement benefits and then realized that thought was too scary to think about. :-)
Well Groupon had a pretty obscene private valuation as well. To your point though, aren't pension funds and endowments only taking a small portion, and putting it there for the same reason? Higher potential returns at increased risk? And those return demands are being driven by future payout expectations contrasted with existing returns? Whether you're a multi-millionare or a multi-billion dollar pension fun, getting 1.6% on your money isn't going to cut it.
