I have a theory about bubbles. I am developing a theory about faux bubbles too. I think the past six months have seen the popping of a faux bubble in valuations of private companies, especially apparent in those that are venture backed.
My theory about bubbles is that they occur when there is a disconnect in how the free market operates. There are lots of folks decrying the free market and throwing up examples about how the free market didn’t prevent this or that from happening. For me the market boils down to supply, demand, price and the motivation of self-interest ala Adam Smith. A bubble happens as an unintended consequence of trying to manipulate these principles. Because manipulations sully them.
What we have in the private VC correction is a faux bubble. It’s based not in an actual manipulation or disconnect, but rather in a fluctuation of demand created by the emotions of the herd. The overcorrection is likewise caused by the herd, not by the underlying fundamentals of the market. There isn’t enough erosion in the fundamentals for these to be long-lived.
In a recent blog post by Redpoint, the case is made that the current correction in SaaS valuations is a result of an emotional market, not one that weighs the fundamental value drivers.
I agree 100%. The current landslide in SaaS valuations is a temporary correction. Ultimately companies will trade based on their fundamentals and the industry average multiples for their group. IMO we are seeing a backlash against unicorn valuations and investors are timid about being caught out investing in stocks that everyone and their dog felt were out of whack. Current conditions are driven by fear of looking dumb to your friends because you have money invested in Snapchat and Uber.