A Bubble in Valuations?

A Valuation Bubble? Maybe Not

If you want to find evidence for a start-up valuation bubble, it’s not hard to find examples that support allegations now rampant in the blogosphere. But do examples make a bubble?

The poster child for a valuation bubble is the photo-sharing smart phone app, Color, started by Silicon Valley serial entrepreneur Bill Nguyen. Color pulled down a cool $41M Series A before it had a product in the market, much less any revenue. When it did launch it “landed with a thud,” according to the New York Times. It has garnered few users and lousy reviews. $41M is a high Series A, which normally goes for between $2M and $6M. Such a Series A investment is especially stratospheric for a start-up with no market traction.

Some bloggers point to the whopper $135M and $200M Series A rounds for OSIsoft and Coupon.

Even more whistles are heard about Peter Thiel’s giving every start-up in Y-Combinator $125k, irrespective of team, technology or market, as an example of a valuation bubble.

But now take a closer look. Two start-ups in the same photo-sharing space as Color — Instagram and PicPlz — started with $200k and $350k respectively.  Both companies started small, built products, refined them and can subsequently raise more money. This is the classic method.

There’s more to the story about OSIsoft and Coupons too. Each has more than 100 employees and multiple reference customers. OSI has Agfa, Genentech, Alcan, BASF, Brooklyn Naval Yard, Ciba, Con Ed, Dow Corning, etc. and Coupons has General Mills, J&J, Kimberly Clark, Pfizer, Radio Shack, Walt Disney, etc. OSI was started in 1980 and Coupons in 1998 – they have been bootstrapping up to now. While their initial round of investments may be high, they don’t really seem totally out of reason.

Personally, I think in any market you can find examples of investors who over-bid on dumb start-ups (or dumbly bid on start-ups). Furthermore, very narrow sectors, like Y-Combinator, and a few investors (like ones that invested in Color) don’t define a market, and don’t create a bubble. They simply over-pay for common goods.

To find a more definitive answer to the bubble debate, I looked at all the Silicon Valley start-ups that have received a Series A investment so far this year — a total of 159 when I looked last week. The average of all of them, including the two outliers OSIsoft and Coupons, was $8.1M. Removing those two produced an average Series A of $6.0M, about where it has been for the last few years. And the real killer was that the median value of all the Series A rounds was $3.1M.

I see no evidence for a valuation bubble.

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Dates of Posts

November 2014
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