I’m back to the bubble question this morning.
First up we had an interesting post from Fred Wilson arguing that frothy activity is restrictred to Series B rounds and later in private companies, whilst Seed and Series A and public markets are still rational. He used this chart as evidence:
Second, I read Josh Kopelman’s/First Round Capital’s Open Letter to Investors from May this year which says that seed valuations are up 3x from 2007-2015 without a corresponding increase in exits. Note that we can see a similar increase in Series A valuations in Fred’s chart above.
Third, I was talking with a potential investor in our fund yesterday about market conditions here in the UK. He was asking whether with all the new funds in town valuations are rising and returns are likely to suffer. My view is that the market here is the healthiest I’ve seen it. When I joined the VC industry in 1999 there was too much money in the market, and then over the course of 2000 that flipped to too little money a position from which we are only just recovering now.
Whilst the odd deal is getting done that looks a little bubbly there isn’t much of that at idea and seed stage here. The valuations Forward Partners is paying haven’t moved in the last couple of years and nor are deals getting done in dangerously short timescales. I sat down with our investment team this morning and talked through some of the hotter deals that have been done in our sectors lately and how investors are responding to the deals we bring to them and we aren’t seeing anything other than isolated pockets of investors getting irrational.
Pulling it all together, I think that unless there is a correction in late stage private investing the frothy activity will trickle down to earlier and earlier stage rounds. Fred Wilson’s chart shows that US B and C rounds have already caught the bug and Josh Kopelman’s letter shows that seed markets are also getting hot. The trickle has two dimensions – down to smaller and smaller rounds, and across to other geographies. The trickle down happens faster than the trickle across, but absent a correction in the US valuations will start to rise here at some point in the next couple of years.
If the public markets maintain their discipline I think a late stage correction is more likely than irrational activity trickling all the way down to UK seed investing. If not, not.