Are We In A (Fin)Tech Bubble?

Lou KernerJuly, 2015

Lou Kerner Background

FORMER

The Israel Syndicate

On AngelList

The Stock Markets Swings Between

Fear & Greed

Bear Market

Bubble

Capitalism

Amara’s Law Causes Bubble

What Happened (IMHO) To Pop The Bubble In March of 2000

"For the first time in a decade, our model portfolio is no longer

recommending an overweightedposition in tech”

- Abby Joseph Cohen

Goldman Sachs Guru

March 28, 2000

Investors Think The Stock & Bond Markets Are Overvalued

Source: Survey of 145 investors by BofA Merrill Lynch, April 2015

“Tech Bubble” Searches Recently Surged

Source: Google Trends, July, 2015G = May 2011, LinkedIn IPO Surges 109% to $9B, $28B today

Jet Raises at $600 Million Pre-Launch

Source: Twitter, February 11, 2015

New Jet.com RaiseWSJ – July 20, 2015

“Despite steep losses and looming competition with Amazon.com, online retailer is in talks for capital infusion that could value it at…….. “

$3 Billion

What’s Going On?

Multiple New Technologies Are Enabling The Disruption of EVERY Industry

Convergence Of Disruptive Technologies Is Enabling New Business Modes

Borrowers get better rates, Investors get better returns

Passengers get better, cheaper rides, Drivers make more money

Better way to communicate, share text, images, audio, location ….

Founded 2007, Valuation = $5.4B

Founded 2009, Valuation = $40B

Founded 2009, Valuation = $19B

Causing Unicorn Production To Soar

Source: CB Insights, July, 2015

Causing Investors To Invest Increasingly Ever Greater Sums In U.S. Tech Co’s

Unicorn Production Is Growing Even Faster Outside The U.S.

Source: CB Insights, July, 2015

Next Wave of Emerging Technologies Are Poised To Accelerate The Disruption

Wearables Virtual Reality

Are We In A Tech Bubble?

Spotting A Bubble Is Easy… After It Bursts

Source: Yahoo FinanceNASDAQ Composite

Internet User Growth Driving The 2000 Bubble

Source: ITU, a16Z

User Growth Driving Valuations Today

Usage Growth Driving Valuations Today

What’s Going On In The Public Markets?

Sustained Outsized Market Gains = Bubble

Source: Google Finance

Source: Google Finance

Current 10 year CAGR is below the 45 year historical NASDAQ CAGR of 9.5%

S&P Composite Is Above Long-Term Trend

The Buffet Indicator Is Above Long-Term Trend

2015

Tech Co Market Value A % of S&P 500 Is In Line W/ Long Term Trend

Source: KPCB, Morgan Stanley, Bloomberg, CapIQ, LK Estimate

Massive Day 1 IPO Pops = Bubble

Source: Renaissance Capital

Quote From Theglobe.com CEO

Filmed as part of a CNN Documentary in 1999, in a Manhattan Club, dancing on a table in leather pants with his model

girlfriend…

"Got the girl. Got the money. Now I'm ready to live a disgusting, frivolous life.”

- Stephen Paternot

Eventually ….Bubble’s Burst

Source: Renaissance Capital

IPO Pops Today Are Incomparable To 2000

Source: Renaissance Capital, Yahoo Finance

Largest IPO Pops Now Are Less Then 1/5 of Circa ‘99-’00

Peak Growth Stock ValuationsThen & Now

Source: Renaissance Capital, Yahoo Finance

FinTech In The Public Markets

PayPal’s Market Cap Soars Past Ebay

What’s Going On In The Private Markets?

# of Deals Is Down But $’s Is Up

Source: Pitchbook, July 2015

Source: Pando Daily, January, 2015

Because # Of Large Deals Is Soaring

# Of $100M Financings Continue to Soar

As Participation From Non-VCs In VC Deals Is Ramping Dramatically

Source: CB Insights, April 2015, Includes Corporations, Hedge Funds, Mutual Funds, Sovereign Wealth Funds, and PE Funds

Most Active Investors In 2013 In$100M+ Rounds

Source: Mattermark, June 2015

China’s BATs (Baidu, Alibaba, & Tencent)

Are Ramping Their Investments In Unicorns

(See Slide on Next Page)

Private Fintech Investments By Wall Street2009-2015

Top Corporate Fintech Investors

Source CB Insights, 2010-2015YTD , May 2015

As Fintech Investing Soars

Dollars In (Raised) Is Going Up…. But Dollars

Out (M&A, IPOs)….. Not So Much

Source: Pando Daily, January, 2015

While IPO Volume Was Trending Up

2015 IPO Volume Is Off 40%+

Source: CB Insights, NVCA July 2015

Companies Are Taking Longer to IPO

More Mature Companies At IPO Is Sign of A Healthy Market Source: NVCA Stats for Software Companies, 2015

Companies Are Taking Longer to IPO Because….

• Being public is increasingly painful

– Oppressive Compliance (Sarbanes Oxley since 2002)

– “The 90 Day Shot Clock” (Term coined by Michael Dell)

– Minimal sell side coverage if not a multi-billion co

• More Difficult For Public Co’s to Attract Talent

• Companies that are IPO candidates can get ALLthe capital they want in the private markets

Tech Funding (IPO and Private)As A % of GDP

Source: Andreessen Horowitz, June 2015

U.S. Tech Private & IPO Funding

# 0f VC Backed M&As Is Falling

Source: NVCA, July 2015

$1B+ M&A Is Plummeting

Many Billion Dollar Companies Continue to Appreciate In Value Rapidly

Public and Private Market Valuations Inform Each Other…..

I think tech sector is making a huge mistake in thinking that they know their

companies and how to value them better than Wall Street. That kind of

thinking is arrogance and pride comes before the fall.

Fred Wilson, July 2 2015

All Else Equal… Public Companies Should Trade At A Premium to Private Companies Due To

Liquidity & Other Factors

Est. Revenue Multiples For Many Unicorns Are Higher Than Multiples For Rapidly Growing Public Companies

Source: CB Insights, April 2015, Yahoo May 2015

Companies Going Public Below the Last Private Round Is A Sign of A Bubble

But actual private market “valuation” can be more complex than the price reported in the press. Take Box, for example. Box’s last round had a ratchet provision, enabling the

investors the right to additional shares, bringing their price paid to 10% less than the IPO price.

Source: Bloomberg Business Week, Yahoo Finance

Are VCs Making Bad Bets In Late Stage Companies?

You only find out who is swimming naked when the tide goes out

- Warren Buffet

Beware of confusing donkeys in party hats with unicorns

- Bryce Roberts OATV

It’s hard to stop dancing when the music’s still playing- Chuck Prince, CEO of Citibank, 2007

My Conclusions From The Data• Broad stock market valuation metrics indicate valuations are

stretched • Public market tech valuations appear reasonable within the

context of the broader public market• We are clearly NOT in a tech bubble comparable to ‘99-’00• Private market financings are far outpacing liquidity events, a

trend that can’t last ad infinitum, raising the risk of an investing crunch if liquidity events don’t pick up

• The increase in private market investors other than VCs is happening concurrently with a dramatic growth in unicorn creation and high revenue multiples relative to public markets, raising the risk that valuations are getting stretched

• The current opportunities for value creation from disruptive tech companies remains at all time highs