Private tech bubble will end badly: Avalon's Kinsella

Unicorn bubble trouble brewing?

The bubble in private market start-up valuations will end badly and could spill over into the public market, Kevin Kinsella, founder of Avalon Ventures, said Friday.

"It ends pretty badly. It ends several ways," he told CNBC's "Squawk Box." "The stock market takes a tank. I think there's enormous tension between private valuations of companies and the stock market. That'll lead to a tear in the fabric if you will."

Once interest rates begin to tick up, money will start moving to fixed income away from equities, putting pressure on private valuations.

"Sooner or later if you're a venture capitalist, you've got to get your money back," he said. "As they say, investors like unrealized returns, but they love realized returns."

Read More Do 'unicorns' like Uber point to a tech bubble?

Kinsella has been involved in the formation, financing and development of more than 120 early stage companies, including Acceleron Pharma, ride-sharing app Sidecar and video game developer Zynga.

He has said big-name venture capital firms including Kleiner Perkins Caufield & Byers and Andreessen Horowitz are investing in companies with billion-dollar valuations during late-stage rounds in order to add those names to their list of investments. The practice is widely known as logo collecting in the venture capital world.

As for whether this cycle will be different from the late '90s boom that led to the Internet stock crash of 2000, Kinsella said the assumption that today's start-ups are real companies making real money is only true to a certain extent.

"Companies are subsidizing their markets by millions of dollars and they keep raising, and sooner or later the chickens will come home to roost," he said.

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