Why are valuations still so high???

Unicorn Count - from Pitchbook

The latest VC figures are out (from Pitchbook, see link). It strikes me as strange that the market continues its exhuberance in the face of so much global slowdown.

Is this being driven just by VCs having too much dry powder and nowhere to spend it?

Or do people still think things are going swimmingly economically-speaking? Because I sure don't.
I think we're entering winter, what with trade war in full swing and taking a toll, China entering a potentially long slow-down, HK protests, and general fatigue in the economy following 10 years of expansion.


Comments (9)

Aug 30, 2019 - 7:01am

Agreed that valuations are quite frothy lately, but as a counterpoint, this data you're showing is largely being driven by companies going public later.

Also, if you look at new Unicorns versus cummulative unicorns in the chart, there isn't significant growth in new Unicorns lately either.

I'm more scared by public market pricing to be honest. If you look at ARR based valuations, things have run up SIGNIFICANTLY since the start of the year for SAAS companies across the board. 10x ARR isn't unusual now. Undoubtedly it's got to be a great company to deserve that valuation, but if growth slows or there is less runway than expected, the returns are going to disappoint.

Also SoftBank is fucking ridiculous as mentioned above. Once that blows up, things will probably fall back to "normal".

Aug 30, 2019 - 2:48pm

I think what happened in VC specifically is:

  1. VC started with a few firms chasing unicorns.
  2. Those firms did well, and naturally scaled their fund. Number of VC firms naturally increased too.
  3. The number of unicorns available/in existence has not increased at the same rate capital chasing unicorns has.

Now IRR is fucking garbage for VC as an asset class. (Kaufman report)
4. Valuations are now way way up, and everyone is playing hot potato.

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Aug 31, 2019 - 4:08pm

Here are the main reasons why valuations are absurd right now in both the public and private markets:

  • Too much dry powder. PE has done very well recently relative to HFs, so a ton of money has been thrown into this sector.

  • Massive inflow into passive investing from advent of roboadvisors and misperception that putting your money in the index and leaving it forever is the best way to invest.

  • Strong US economy relative to international economies - Relative macro performance has driven inflows into US equities and companies from international investors

  • Massive / unheard of quantitative easing program and easy fiscal policy by the fed has caused interest rates to decline to lowest level EVER

  • Lack of ability to get good returns through bonds given treasury yields are close to the lowest level ever

  • Tailwind from tax reform in 2018 increased company earnings signficantly

Aug 31, 2019 - 11:36pm

Dot com bubble two. venture capitalists get paid on management fee who gives a crap how the company does. Pension funds want to invest to pretend they will get good returns so they can hide how under funded they are. No one wants the music to stop until the bubble pops

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