There is no question that tech valuations are frothy (to say the least) at the moment. People however try to argue that ‘this time it’s different’, amongst other reasons a commonly cited one being that tech companies today deliver ‘real value’, have real revenues, scale etc etc.

Firstly : there’s never been a bubble in history during which a certain few were not convinced that ‘this time it’s different’. Unfortunately for the rest of the people those ‘certain few’ are often the influencers and not surprisingly the ones with the biggest vested interest in profiting from the inflated valuations that they so help drive. In the subprime mortgage bubble it was the same: a certain few convinced themselves that ‘this time it’s different’, fundamentals don’t matter, and that people could be handed mortgages way above their affordability , no matter if they couldn’t repay them, because ‘this time it’s different’.

It’s easy to cook up why this time is different. It’s harder to de-clutter the noise and figure out why the fundamentals still remain the same (as they always do).

Whilst I don’t disagree for one second that todays tech companies do actually deliver real value (after all I am a tech entrepreneur myself and I see that both in my products – PeoplePerHour.com & SuperTasker.com and the ones I use so avidly), whilst I don’t disagree that the way we live and do business is rapidly changing and being disrupted by tech, I think the ‘Valuation vs. Value’ argument is intrinsically flawed for a few reasons

1. Value is not enough

Its not enough to just deliver value. You need to do it in a way that’s sustainable in the longer term and builds on fundamentals. You can shoot for the moon overnight and fall to ashes just as fast if you’re building a business without fundamentals. Many examples come to mind, from Fab.com, Colour, Joost to more recent from our space – HomeJoy – who filed for bankruptcy a few months ago after raising ca. $100m. All of these were once amongst Silicon Valleys darlings, had multi billion valuations and some achieved hundreds of millions in revenues. Yet that wasn’t enough.

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I’ve finally decided to write my two pence on what’s become quite a bubbly discussion in itself: are we in another tech bubble?

Let me start by saying rather controversially that first I think this is the wrong question to be asking. Great companies have emerged out of bubbles as we’ve seen in the Web 1.0 phase. Yes there were a lot of failures, busts and losses in early 2000’s; but what we forget is that there have also been big winners whose collective gain outstrips those losses. Companies like eBay, Amazon and Cisco all came out of the first tech bubble and have proven to have strong and sustainable businesses which are still growing. So focus on what YOU are doing not what the herd is doing I say.

And what is a bubble anyway? There are tonnes of text book definitions which ultimately focus on technical definitions like valuation. Are things over-priced and is there too much liquidity being pumped in a sector or asset class? To me these are the wrong definitions. We are at the onset of a paradigm shift (which I explain below) so almost by definition existing valuation models will be wrong, So for me multiples being high means very little. What it comes down to is people getting ahead of themselves and investing in things they don’t fully understand or appreciate – and why? Because someone else is. “Oh I have to jump on this bandwagon…everyone’s doing it” That’s what leads to irrational exuberance . continue reading »