Am I Truman Burbank?

I was at a roundtable discussion last week where the principal topic of debate was valuations of tech start ups and more precisely the question was raised:
Are we in a Tech Bubble?
Inevitably comparisons were made with the internet bubble of the late 1990’s. Very few of the attendees at the roundtable (including me) were working in the early stage tech space in 2000, so there weren’t many there who could make the comparison in a meaningful way with the benefit of real experience.
The feeling of unease spread when  one of the participants at the roundtable made a statement that is widely believed to be one of the most dangerous in investing – “This time it’s different”.
But you know what, I think he was right – for the moment.
At Episode 1 we have made investments into 12 different companies in the last 13 months and have seen three of those companies raise more capital during the course of 2014  We have also seen a lot of companies that we have not funded, but which have gone on to raise capital from other investors.  We see a reasonable proportion of the UK seed rounds as they develop.
It doesn’t feel to me that capital is too easy to raise.  Entrepreneurs are having to fight and struggle to get funding, and if they do, we are finding – again, for the moment – that valuations are not drifting up during funding rounds, if anything, the reverse is true.  Pricing may be a little higher than 3-4 years ago, in part driven by SEIS and the extension of EIS funding allowances, but the vast majority of businesses we see have revenues, have developed a business model and have a clear idea how they would deploy capital carefully to create additional value and plans that show how the business might grow and develop into an entity that will make money for investors, given great execution.
Lean approaches abound among the entrepreneurs we meet and  while we only invest in a very small proportion of the startups we meet, the overall quality of companies that we meet is impressive.
So from where we sit, towards the bottom of the tech investment food chain, this doesn’t feel like a bubble, but it’s a tough one to judge,  a difficult question to answer; after all Truman Burbank spent his whole life in a giant dome and didn’t have a clue.  He went about his daily existence oblivious to his leading role in his very own TV Reality show.   Boiling frogs, and all that.
The thing about bubbles is that they are only really identifiable in the rearview mirror, in hindsight.  Come back in 2020 (cue bad joke about sight) and we’ll review how the asset class performed over a 5-6 year time frame.


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