Are Tech Companies Overvalued? Top Investors Think So

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Is Winter coming? It may already be here, according to VCs like Fred Wilson of Union Square Ventures and John Lilly of Greylock. We asked some of the world’s most respected investors about state of valuations at TechCrunch Disrupt NY. The consensus is that public tech company prices soared too close to the sun, and their fall is now dragging down fundraising and IPO potential for private companies.

Late 2013 and early 2014 saw companies rushing to take advantage of boom-time valuations. Uber, Pinterest, and Dropbox all raised rounds north of $200 million, stockpiling cash in case the market went sour. Twitter’s IPO was a blockbuster and Facebook’s share priced hit new heights, opening the door to the public market. Companies like King, Grubhub, Zulily, Weibo, Castlight, and Coupons.com jumped at the chance, and many had big first-day pops.

But then everything went to hell. Twitter, LinkedIn, and many other public companies saw share prices plummet. Suddenly, the IPO door slammed shut, and reports indicate Box, Square, and others may delay IPOs until things get sunnier.

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What happened? Wilson gives the most direct answer, explaining:

“I think in general the public market valuations got too high, and then that went down into the private market, and the private market valuations got too high, and now the public market valuations are correcting, and now there’s a bunch of companies that raised money at really high valuations in the private market and they’re going to have to deal with that.”

While others like Y Combinator’s Sam Altman agreed parts of the tech industry got too big for their britches, he believes the Standard & Poor’s index is even more overvalued.

Bijan Sabet of Spark Capitol cautioned this isn’t a bubble that’s about to burst like in the dot-com crash because many of these companies generate real value and earn real revenue. But Sequoia’s Alfred Lin admits things go in cycles, and Greylock’s Lilly believes the tech sector is destined to thrive but will be a rough sea to sail for some time.

In the meantime, companies will have to take a long, hard look at the metrics that really matter. Not eyeballs and existing revenue but customer acquisition cost, churn, and lifetime value. If those don’t look right, they better grab a jacket. It’s going to be a cold summer.