The tech sector in general is undervalued with a few select companies unfortunately having absurdly high valuation and getting all the press.
While I do not fear a tech sector crash I do worry about how far down those who get all the attention will drag everyone else.
That's why the fact that there are real revenues and profits driving everything this time matters. Most companies show promise to bring in cold hard cash, if they're not doing so already.
That is in no way diversification. And the correlation of investments within the tech world, when shit hits the fan, will be 1.
>real revenues and profits
Which of the companies are making profits?
Look, I'm not calling for Tech Crash 2.0 either, but some people seem oblivious to how these things go down when they....go down.
Hence the "in a way." And your argument makes the assumption that tech, as a category, will collapse.
> Which of the companies are making profits?
"Tech" is a very big thing, but if we're picking random companies there are a few divisions:
Public: Google makes money hand over fist, Amazon tries not to make profits (and almost accidentally brought in $20m last quarter) while their revenues grow exponentially. Facebook brings in billions, Twitter, the dark horse of this category, is still bringing in >$1B/yr in revenue.
Ok, but those are the titans. Let's look at the YC companies: Airbnb, Dropbox and Stripe alone would make up for every dollar YC ever spent investing.
But even locally, almost every company I talk to is choosing to raise money. Meaning, they have enough revenue to stay afloat, but elect to raise money to grow more quickly. These are companies raising little $2m rounds but are either profitable or could be if they needed to, but elect to grow quickly instead of become cashflow positive. (Admittedly, my company does not fall within that category).
There may be overvaluation, especially at later stages, but the investments being made assume there is. They assume that some (or most) will fail, but that the others will make a multiple.
Some money will be lost, but as long as the entire category of "technology" doesn't collapse altogether, it's not like 1999 again. And given the amount of real profits and revenues in the category of "technology," my contention is that there won't be, as Marc Andreessen puts it, an "earth-shattering kaboom."
AirBnb...maybe? I don't know, it's extremely popular, but faces interesting regulatory risk. I think it'll do okay.
DropBox and Stripe? Competitive spaces. Maybe they make it, maybe they don't. I can't see them being "moated" (in the parlance of Buffet) leaders in their respective businesses. But I've been wrong many times.
>"but as long as the entire category of "technology" doesn't collapse altogether"
I guess that's our point of contention: I think it does go down together, rational or not. We just witnessed something similar in the oil industry. Everyone collapsed, whether they were big, small, hedged or otherwise not directly affected by the collapse in oil price. That happens in a panic because nobody can tell the extent of the risk.
>And given the amount of real profits
I agree that, as oposed to DotCom 1.0, companies are generating revenues. But, again, where are the "real" profits? Google, sure, but they are transitioning from growth to value. Facebook's are minimal. I don't think any other company you have named is making money. Granted, it doesn't necessarily matter for "early stage" behemoths like Uber or AirBnB, but that doesn't make the profit claim true.
As long as a private company can getting to the next round of funding it doesn't matter if it's actually even close to becoming a sustainable business. So you can basically keep extending a "false" business in that all you need is convince someone to believe you can become even bigger than you already are, but without showing it through your actual revenue.
As a publicly traded company this wouldn't ever work. Amazon isn't making a profit but it keeps growing revenue wise (for now) if that somehow stops then it will get hit too.
At least thats my take on it.
http://www.forbes.com/sites/timworstall/2014/09/07/the-inter...
My point is that the latency that exist in privately funded unicorns can end up creating a bubble exactly because the feedback loop is too slow.
What I am saying is that on the current private market you can keep a company with a fundamentally unsound business in suspended animation for a long time and keep enjoying growing valuation as long as you can convince investors that they will be able to raise the next round. I.e. without it actually having proven that's it's a sustainable business.
Most of the unicorns happens to be from the valley and as far as I can see have more or less the same investors behind them indicating at least to me that it's not purely based on being better at betting on the right companies.
This is a very different feedback-loop than the public market where your ability to make a profit at market expectations often is is king and where this ability is measured every quarter.
Maybe I am paranoid but thats what I see. And yes I haven't gotten my head around a proper way to formulate his intuition yet.
Private valuations aren't unique in this aspect. All prices are based on expectations of claims on future cash flows.