The wave builds until everything decouples from the reality of the ground wire of "the E in the P/E." When the key valuation metric becomes solely P/S (price to sales) ... look out! At that point, investing in high growth companies becomes "all about psychology" and the cycle builds momentum until it breaks.
As I write, we may be emerging from a long, 16-year period sucking on roots in the forest.
Year 17. It's been 17 years since the last "tech cycle" valuation peak in March of 2000. Will year 18 result in an upward thrust of activity, followed by a bust? I have offered this observation to many over the years: There seems to be a natural, roughly 17 year cadence in this modern era to the cycle that drives tech IPO "bubble valuation" peaks.
Some of the factors that lead to "irrational exuberance" and a subsequent "return to reality" in prior cycles are emerging with respect to tech IPOs. Investing in early stage companies involves "discounting the future into today's price." When IPO purchasers shift en masse from buying into business models because they believe in them, with their own clear view of how the "E" will eventually drive the "P/E" toward buying shares simply "because they will go up" the foundation of investing erodes, and along with it, the stability and durability of an emerging company's investor base and its share price. There seems to be some of that mentality building. Coupled with that, we now have a rising interest-rate environment, which typically compresses the P/E over time, as we did going into the peak of the cycle. In the '99 -'00 we also had a rising interest rate environment.
Shares of social media giant Snap and software company Mulesoft soared more than 40 percent in their recent debuts despite the fact that Snap is losing a ton of money and warned in its IPO filing that it "may never achieve or maintain profitability." And, there are more tech IPOs coming down the pike, including data-analytics company Alteryx and unicorn cloud software company Okta.
There is no way to "have a bubble" until and unless, current investors have collectively lost any memory of the pain of the last burst — it seems now that the institutional memory of the last bubble is completely erased. Most investors today have now forgotten the pain of 2000, and likely do not even know that there was another massive peak and downdraft roughly 17 years prior to 2000 — the bubble and bust of 1983. I remember that peak because I later joined a start-up of that era called LSI Logic, which, in less than 2 years after forming, did a record setting IPO off the back of a roughly $1.5 million (trailing) revenue year, raising $153 million (more like $300 million in today's dollars). The stock priced in the teens and traded into the $70's by the year 2000.
Three generations. Roughly 5 to 7 years each, (very loose math). Roughly 17 years. We may be entering the final phase.
The ride continues. Enjoy the updraft, and play it carefully!
Click here for a scrollable stack of 83 IPO prospectuses from the tech bubble of 1999-2000.
Commentary by Bill Tai, a partner at Charles River Ventures. Originally trained as a computer-chip designer, Tai has served on the board of seven publicly-listed companies he initially funded as start-ups, including Internet infrastructure operator iAsiaWorks, which he founded as CEO. He co-founded both IPInfusion, the leading provider of Linux-based routing software and Treasure Data, a Hadoop-based "big data" platform, as chairman. He also serves on the Tech Pioneer Committee of the World Economic Forum. Follow him on Twitter @kitevc.
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