Is There Another Tech Bubble in Silicon Valley?

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May 16 (Bloomberg) -- GSV Asset Management Founder and Chief Investment Officer Michael Moe and University of Florida Finance Professor Jay Ritter discuss tech valuations on Bloomberg Television’s “Bloomberg West.” (Source: Bloomberg)

Billion for uber.

Are those their numbers?

If the company realizes the numbers.

The reason why people are so excited is they have so much network effect, you have tremendous engagement.

In the case of uber, you have fanatical support from the ecosystem.

If you look at growth potential, that is why investors have but that type of valuation on them.

J, i know you have done a lot of research on these companies.

What do you think of their valuations going up so much in such a short window of time?

I would echo michael's opinions, that some of these companies have network effects.

Valuations are based upon optimistic assumptions, but google has demonstrated just how profitable targeted search advertising can be.

Pinterest has the potential to make a lot of money with that targeted search advertising.

Cory, why do these venture capitalists want to put so much money into these companies at such high-value?

Pinterest is just going to make money.

We know that uber makes money.

We do not know if they are close to turning a profit or even thinking about that.

What is interesting is, one of the dynamics that i noticed, you see different kinds of investors in these mezzanine e and f rounds.

You see investor that you would not think about, fidelity, t. rowe price.

I think you see a lot of these investor that would have gotten him in the public markets, getting involved now.

You have an interesting business that plays in this as well.

What the fidelity is an t. rowe price and black rocks of the world, what they are doing is getting involved in these companies where, in the good old days, these countries would have already gone public.

Tiger has done a fantastic job of investing in emerging growth companies.

You have seen the public mutual funds and hedge funds stepped into the void.

This is a way to get a toehold in great this is his earlier.

That is filling up a gap in the marketplace.

A company like pinterest will be competing for ad dollars with google, facebook, twitter.

Jon erlichman, how do we know for sure that they will be able to win those dollars?

They are in a great position because people go to pinterest with intent.

One other things and makes google so valuable is because people go there and search for something specific.

That is why, in some ways, there is a certain amount of pinterest envy over at google.

That is also why this is not necessarily a conversation about valuation being multibillion dollars for pinterest or uber, are we in a bubble?

It is more about venture capitalists who are hungry to invest because they have money to put to work.

There are only a few companies that look like pinterest and uber.

If they do not invest, somebody else will.

A lot of talk recently, are we in a bubble?

Jay, what makes what is happening now different from what happened a decade ago?

Several things.

One thing that is a bit similar.

As we mentioned, the fact that we have a lot of growth capital, investors with money to spend, has been pushing up the valuations on some of these companies.

I would make a distinction between companies like pinterest and uber, that have a niche, network effect, where potentially they can be very profitable without competitors coming in and severely eroding profit margins.

On the other hand, i have more concerned about cloud storage companies, where the barriers to entry are not there.

If you go back to the late 1990's, actually before the tech bubble reached its height, in 1996 and thereabouts, there were a number of telemarketing companies that went public.

At the time, a lot of companies were outsourcing telemarketing and a number of them went public at very high valuations, reflecting very high future profits, but the barriers to entry just were not there, and in every single case, public market investors about the burning negative returns.

I remember them well.

You were a banking analyst then.

You helped to start an investment bank.

Why are companies that can do round the size going public, what has changed since the 1990's? it is not as much fun to be a public company as in the 1990's. all sorts of issues that you do with as a public company that frankly has nothing to do with business.

Like audits?

Sarbox has definitely added some regulation.

The time and money you spend on being public is an enormous commitment.

Particularly with the fast-growing dynamic business where you need to spend all your time growing the business and executing, taking that resource and doing something else with it , these companies say, who needs it?

Particularly when capital is available to fund their growth private.

Uber could raise up to a billion dollars.

If they can get that on the private markets, why would they want to go public?

You look at other companies and all of them have been getting slammed.

In the case of twitter, it is because maybe people were comfortable with where the public -- company went public at, but when you talk about a $50 billion company size, all of a sudden, you look at the math behind the numbers.

There is a group of technology stocks, last couple of years, you have seen a lot of these companies grow, some have been acquired.

While you are highlighting company that could avoid going public, there are some that went public over the last couple of years because they did not want to be the last one standing.

Sometimes you go public because you want to survive.

Part of the story is also agreed.

That story, for the most part, has not worked out well for public market investors.

Talk about what is different about companies going public today, versus bubble times?

One big difference is the maturity of the companies going public.

In general, other than biotech, they have revenue, usually not profits, but much more than a business plan.

I think tom is in addition to sarbanes-oxley, there is an enormous reason why we are not seeing more small tech companies going public.

Most of them are never going to go public.

They will sell out in the trade sales.

Getting big fast is more important than it used to be and there are some companies, as a stand-alone business, have very legitimate strategies.

Especially for a lot of technology companies, selling out to a big tech player like oracle or google or cisco systems is the value maximizing strategy and they are not being built to go public, they are being built to be sold.

Michael you have the last word.

Just to add to those comments, if you look at the median companies in public today, $100 million in revenue.

During the bubble, $10 million.

It is a different environment today.

More revenue, bigger cache files.

A longer runway.

And better businesses.

This text has been automatically generated. It may not be 100% accurate.


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