As valuations soar and IPOs accelerate, the public is taking on more startup risk

With record venture capital totals, record numbers of startups worth $1 billion or more and eye-watering revenue multiples available for private and public technology companies alike, you could be forgiven for having concern that we’re heading for a dot-com-style correction.

The believers are not convinced. And for good reason, it turns out.

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It is always risky to say it’s different this time, but today’s technology boom and the dot-com rush are, in fact, rather different. In the dot-com period, companies with little to no revenue went public at titanic valuations, leading to a simply massive accretion of risk in the public markets. Regular folks wound up exposed to that risk and were burned when the winds shifted and tech valuations plummeted.

It’s entirely fair to say that most tech upstarts today that are richly valued are far less revenue-free than their dot-com forefathers.

But while it has been fair to say that risks have been contained by company quality — the existence of revenue and the shock-dampening effect of strong revenue multiples for technology concerns, broadly — we’ve seen a steady erosion of the argument in recent quarters. Even more, we’re seeing the quality of tech companies that go public at times decline, leading to more risk available to consumer investors — not just the professionals.

Revenue-lite becomes revenue-free

There are two vectors that underpin the argument that inherent risk in today’s rich technology valuations is not a concern. The first is that the valuations in question are not built on air. The second is that the public is not directly exposed to high-risk companies:

  • Startup valuations are not a concern because the public cannot get involved in companies that could yet go poof, and the companies in question have real revenues.