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The State Of Startups (No, It’s Not A Bubble)
May 3, 2012
Henry Blodget CEO, Business Insider
Henry Blodget Founder, CEO & Editor-in-Chief, Business Insider
Pascal-Emmanuel Gobry, Senior Analyst
Alex Cocotas, Analyst
We’ve launched a new industry intelligence service for executives and investors. More info at intelligence.businessinsider.com/
For startups, money is oxygen…
So here’s a quick look at the money flows…
Overall VC fundings still trending down…
Most VC money still going to “software”
Today, “software” means “the Internet”
VC Internet investments are still increasing
And VC fundraising is ticking up, which means they’ll have more to invest…
Angels like Internet, too, but they really love… healthcare!
And how about “exits”?
The tech IPO market is open, but still only for mature companies*
* The JOBS Act could begin to change this. Fingers crossed…
VC-backed IPOs have recovered from crash, but still far from robust…
The M&A market has recovered, but also still meh
(By the way, there’s a good reason to sell your
company now…)
TAXMAGEDDON!
(Big capital gains tax hike Jan. 1)*
* Unless Romney wins.
So, how’s New York doing?
New York VC is increasing!
New York is the third largest VC region
New York overtook Boston in deals last quarter
And New York is No. 2 in Internet deals
NYC now has a full financing ecosystem
And a boatload of startups…
So, is it a bubble?
NO.
In fact, calling today’s market a bubble is an insult to real bubbles!
THIS is a bubble…
NASDAQ, 1991-2004
THIS is a bubble… House Prices: 1976-2012
Do you see a parabolic pattern now? NASDAQ: 1971-2012
How about VCs? Are they going hog wild as in the 1990s? (Nope)
Total VC Investments By Quarter, 1995-2012
Two important characteristics of ACTUAL bubbles…
• Sky-high valuations relative to fundamentals…
• Everyone justifying those prices by saying “It’s different this time.”
Is everyone justifying today’s prices by saying:
“It’s different this
time?”
No.
They’re saying:
“Duh, what a bunch of morons, this is so
obviously a bubble.”
And how about prices relative to
fundamentals?
HOUSING BUBBLE: Price ratios spiked off the charts…
Price-To-Rent: 1983-2012
STOCK BUBBLES: Price ratios (blue) spiked off the charts…
S&P PE: 1885-2012
“But, but…
What about tech companies?”
Let’s look at the hottest tech company
in the world…
Apple’s PE ratio is ~15X and has been declining for years
“But, but…
What about those RIDICULOUS IPOs?”
You mean these IPOs?—they’re miles from “bubble”
4X Revenue
3X 2012E Revenue
5X Revenue
12X Revenue
Yes, many thought Groupon and Zynga IPO prices too high… but
that’s what makes a market.
“But, but…
What about…
INSTAGRAM???”
$1 Billion for a company with 13
employees and NO REVENUE?!?!
Well, let’s think about that….
Last year something profound happened.
Sales of smartphones blew past sales of PCs…
The “dumbphone conversion cycle” is still in early phase
In the future, the number of smartphones and tablets will DWARF the number of PCs
The only “stupid” conclusion about mobile revolution is to dismiss it
as silly.
Turns out Instagram is the perfect native smartphone app…
Instagram to 50 million users in 1.5 years
“But, but…
Instagram has NO REVENUE!!”
Here’s what to say to people who say that…
Really?
Really???
What about these other startups that initially had “NO REVENUE”?...
• Google • Facebook • Twitter • Every biotech company • Every car company • Every real-estate project • Every exploration company • And so on…
To say a startup is worthless because it has “no revenue” is
moronic.
Some other Facebook-Instagram considerations…
• Facebook sucks at mobile
• Instagram threatens a core Facebook service • Twitter, Google, et al, might buy Instagram
• Facebook is valued at $100 billion
So, what was Mr. Zuckerberg’s logic?
“I can spend 1% of my company to buy the hottest startup in a massive sector that threatens my core business, eliminate a competitor, and make sure my competitors don’t get it first?”
“Where do I sign?”
The bottom line…
This opportunity is MASSIVE.
It’s not a bubble. It’s rational exuberance.
But remember!
Everything is cyclical
All booms turn to busts
(Mobile will someday, too)
Building great products and companies is hard
Most ideas don’t work
So don’t forget the golden rules of
financing…
No one ever went broke because they
raised too much money
Raise money when you can, not when you
have to
Thank you!