A debate is raging about whether we are in a technology bubble, with sky-high valuations for businesses such as Uber and Airbnb.
Are investors overpaying for businesses that aren't really worth it?
I asked a top European venture capitalist the question this week, and he acknowledged, on the condition of anonymity, that the funding market right now is completely nuts.
Money is as cheap as it has ever been, and his firm is "making hay while the sun shines," raising new money for as many of the companies it has invested in as possible. This VC has worked in the US and Europe and done deals mainly with fintech firms and other business-to-business startups.
He told me an anecdote that sums up pretty well just how mad things are right now.
A company he invested in was out to raise more money. Seven investors were at the table. Four made formal investment offers, each bidding up the others.
Then, out of nowhere, an eighth investor came to the table and doubled the highest valuation.
In other words, an investor turned up offering the same amount of cash, but saying the deal would double the value of the company. If the previous bidders had said, "I'll give you £10 million for 10% of the company," valuing the company at £100 million, for example, the eighth bidder in our hypothetical would have come in and said, "I'll give you £10 million for 5%, valuing it at £200 million."
The VC we spoke with didn't say anything about the fundamentals of this particular business or what industry it was in. But any market in which participants can have such a huge disparity in valuations is a warped one. It's a market that favours startups.
The VC blames all this on the flood of hedge fund and foreign billionaire money entering tech, skewing the numbers. These investors aren't so hot on the mechanics of tech venture capital; they simply see it as a gravy train worth hitching their wagons to.
The tech world is one of the few places in which people can find returns right now — interest rates globally are at record lows, and stock markets aren't up to much.
But while the VC acknowledges valuations are going crazy, he doesn't think we're in a bubble.
So many industries are undergoing fundamental changes because of technology right now, from the taxi industry to finance. And, the VC says, whoever gets it right in each field will be huge. I've heard this argument before, from Gerald Brady, head of relationship banking at Silicon Valley Bank in the UK.
That's why unsophisticated money is flooding into tech right now, because investors can see the opportunity and don't want to miss out before it's too late. As a result, money is easy and cheap to raise for tech companies.
