Tech Bubble 2.0

Good morning! Hope you had an excellent weekend.

As we spend each day at PrivCo looking at fundings and deals, patterns inevitably begin to emerge. Two quarters into 2021, those patterns are trending skyward. More investors with deep pockets, funding round sizes ticking upwards, and valuations 100x of LTM (Last Twelve Months) revenue tell a story. Today, we’re looking at what that story says about where we are and where we’re going.

By the Numbers

PrivCo data reveals that 2021 funding rounds are beating the records set in 2019 and during the late 2020 recovery.

• Seed/Pre-Series A funding rounds averaged about $3.9MM in 2019 and are up to a $5MM median average so far this year. 

• Series A post-money valuations have reached a $60MM median average, compared to $45MM in 2020.

• Companies are now regularly receiving valuations of 40 to 50x of the companies’ annual recurring revenue. In fact, it is becoming increasingly common for startups to raise at 100x their expected annual revenue for next year.

Investment FOMO

What’s with all the cash? According to reporting by protocol.com, the trend is driven by “low-interest rates, exuberance over unusually strong exits last year… and high valuation for late-stage companies, such as gaming company Roblox.”  Where we used to see big-name start-up exits under $5BN, these disruptors are now generating outcomes in the tens of billions. For bonkers valuations, just look at Ramp, the two-year-old company that had $10MM in revenue in 2020 and raised at a valuation of $3.8BN.

Non-Traditional Venture Investors

A recent article by the Wall Street Journal showed that for every high-dollar funding deal made, nearly 50% of those deals are generated by a non-traditional venture investor, such as BlackRock, Ontario Teachers Pension Plan, and Baillie Gifford. These firms are cash-rich and often make fewer demands for decision-making capacities than traditional VCs.

The New Normal
The financial returns and competition in the investment space translate into a shift in power for founders and investors. In many cases, founders are so flush with interest that they show up to meetings without even a pitch deck to accompany their brazen ambition. Investors are now getting asked for favors and freebies ahead of the big checks. Funding rounds that used to take weeks, or months, are now completed within 24-48 hours, and due diligence is suffering for it.

Exits justify the means

What we’ve just described could generate PTSD for those who were around during the dot.com bubble, which ultimately burst. But experts aren’t so sure it’s deja-vu. While valuations based on 100x revenues seem like a recipe for disaster, who holds the bubble when it bursts matters. Whereas the 2000’s recession negatively impacted the public markets and the novice investors putting money into newly-opened mutual funds, this bubble is expanding in private markets with private capital.