Here's a snapshot of just how easy it is for tech companies to raise money right now
Are investors overpaying for businesses that aren't really worth it?
I asked a top European venture capitalist (VC) the question this week and he admitted to me, on the condition of anonymity, that the funding market right now is completely nuts.
Money is as cheap as it's ever been and his firm is "making hay while the sun shines", raising new money for as many of the companies it has invested in as possible. He told me an anecdote that sums up pretty well just how mad things are right now.
A company he invested in was out to raise more money. Seven investors were at the table. Four made formal investment offers, each bidding up the other one.
Then, out of nowhere, an eighth investor came to the table and doubled the highest bid.
In other words, an investor turned up offering the same amount of cash, but saying the deal would double the value of the company. Let's say startup "X" was worth $100 million - now, all of a sudden, it's got a $200 million price tag. While the previous bidders had said "I'll give you £10 million for 10% of the company," valuing it at £100 million, the eighth bidder came in and said. "I'll give you £10 million for 5%, valuing it at £200 million." (Those numbers are hypotheticals, just to illustrate the point.)
The VC didn't say anything about the fundamentals of the business or what industry it's in. But any market where participants can have such a huge disparity in valuations is a warped one. It's a market that favours startups.
The VC blames all this on the flood of hedge fund and foreign billionaire money coming into tech, skewing the numbers. These investors aren't so hot on the mechanics of tech venture capital - they simply see it as a gravy train worth hitching their wagons to.
The tech worlds is one of the few places where people can find returns right now - interest rates globally are at record lows and stock markets aren't up to much.
But while the VC admits valuations are going crazy, he doesn't think we're in a bubble.
So many industries are undergoing fundamental changes because of technology right now - from the taxi industry to finance. And, says the VC, whoever gets it right in each field will be huge. I've heard this argument before, from Gerald Brady, head of relationship banking at Silicon Valley Bank in the UK.
That's why unsophisticated money is flooding into tech right now, because they can see the opportunity and don't want to miss out before it's too late. As a result, money is easy and cheap to raise for tech companies.
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