On Tuesday the Wall Street Journal reported the results from a survey of bankers which found that three quarters of respondents believe that the ‘valuations of many private internet businesses aren’t justified’. The survey went on to ask what was driving the prices up, with the following results:
- 34% believe it is down to demand for pre-IPO shares outstripping supply
- 25% believe it is down to the growth of the internet itself
- 22% put it down to businesses’ profitability
- 19% thought good performance from recent internet IPOs is the cause
The first and last of these both refer to market dynamics and the second ‘growth of the internet’ is too vague and broad to be anything other than a catch all ‘we think the market is hot’ which means that only 22% of the respondents believe the valuations are being driven by fundamentals.
However, despite this lack of faith in the foundations of recent rises in valuations 62% of bankers also feel that there is the ‘possibility of a second internet stock bubble similar to the one seen in the late 1990s’.
From where I’m sitting that feels less likely today than it did six months ago. A defining characteristic of bubbles is uncertainty over how long they have to run, but the macro picture of stretched government and consumer balance sheets coupled with lacklustre stock market performance and widespread feeling that current private company valuations are toppy leave me thinking that this part won’t run as long as the first internet bubble.
My conviction on this point has been strengthened recently by persistent stories of bankers advising companies to raise money now because it will get more difficult again in the near future.
Disclosure: I genuinely believe everything I’ve written above, but as a VC it is in my interest to talk down the valuations of private companies, particularly at the moment as DFJ Esprit is very clearly a net buyer (we have recently had a run of good exits and closed a new fund).