April 19, 2014

How a VC Views the Bubble

How a VC views the stock market bubble.


AVC’s perspective on why (high-growth) companies should be valued very highly.

Purchase Price = Annual Earnings / Yield

As long as the interest rates stay very low companies will be valued very highly. 
If you go back and apply the formula [yield = earnings/purchase price] and use zero for yield/interest rate, then one would pay an infinite amount for an earning stream. Of course that doesn’t make sense and it has not happened. But valuations are at extreme levels because you cannot get a decent return on your money doing anything else.
 At some point this will change. The yield on the 30 year treasury yield has been sub 5% since the financial crisis. If (when?) it gets back to the 6-8% range where it was for most of the 1990s, we will be in a different place. Here’s a 40 year history of the 30-year treasury yield. You can see that we have been in a very low rate environment for a while now.
  
And 
I have no idea when and if that will happen. But until it does, I believe we will continue to see eye popping EBITDA multiples for high growth tech companies. And those tech companies with eye popping EBITDA multiples will use their highly valued stock to purchase other high growth tech business and strategic assets at eye popping valuations.
 It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.
  
Startup/IPO good times to continue while ignoring all fundamentals?

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Tags: vc and stock market bubble, venture capital and stock market bubble, avc and bubble