Lou Kerner June, 2015

If you like this presentation – show it...

Slide 0

Are We In A Tech Bubble? Lou Kerner June, 2015

Slide 1

DISLCAIMER The views and opinions expressed in this presentation are those of the author and do not necessarily reflect the official policy or position of his affiliates . Assumptions made within the analysis are not reflective of the position of his affiliates.

Slide 2

Lou Kerner Background FORMER

Slide 3

What is A Stock Market Bubble? A bubble is when investors drive prices beyond any rational reflection of value, as determined by the performance of the companies. Like soap bubbles, investing bubbles look like they’ll rise forever, but they always pop, and the money invested in them dissipates into the wind Source: Investopedia

Slide 4

Why The Bubble of ‘96-’00 Happened

Slide 5

What Happened (IMHO) To Pop The Bubble In March of 2000 "For the first time in a decade, our model portfolio is no longer recommending an overweighted position in tech” - Abby Joseph Cohen Goldman Sachs Guru March 28, 2000

Slide 6

Investors Think The Stock & Bond Markets Are Overvalued Source: Survey of 145 investors by BofA Merrill Lynch, April 2015

Slide 7

“Tech Bubble” Searches Recently Surged Source: Google Trends, May, 2015

Slide 8

What Caused the Recent Surge In “Tech Bubble” Searches on Google?

Slide 9

Slide 10

Just Because Mark Cuban Says It’s A Bubble Doesn’t Mean It’s A Bubble Just Because Mark Cuban Says It’s A Bubble Doesn’t Mean It’s Not A Bubble Lot’s Of Smart People Are Saying We’re In A Bubble

Slide 11

Jet Raises at $600 Million Pre-Launch Source: Twitter, February 11, 2015

Slide 12

Smart People Have Been Saying We’re We’re In A Bubble For Awhile George Zachary (4/3/14)– Charles River Ventures “There is desperation to not miss out on what will be the next big thing.” David Einhorn (4/22/14) – Greenlight Capital “Now there is a clear consensus that we are witnessing our second tech bubble in 15 years… Indications include… huge first day IPO pops Peter Nieh (4/22/14) – Lightspeed Venture Partners “I must admit when I first saw the WhatsApp valuation I thought I needed to get bifocals. I thought I must have missed a decimal point.” Source: CB Insights, April, 2014

Slide 13

Even 24 Year Olds Think We’re In A Bubble “…. years of near-zero interest rates have created an asset bubble that has led people to make riskier investments than they otherwise would.” - Evan Spiegel CEO of Snapchat May 26, 2015

Slide 14

What’s Going On?

Slide 15

Multiple New Technologies Are Enabling The Disruption of EVERY Industry

Slide 16

Convergence Of Disruptive Technologies Is Enabling New Business Modes Borrowers get better rates, Investors get better returns Passengers get better, cheaper rides, Drivers make more money Better way to communicate, share text, images, audio, location …. Founded 2007, Valuation = $7B Founded 2009, Valuation = $40B Founded 2009, Valuation = $19B

Slide 17

Causing Unicorn Production To Soar Source: CB Insights, May, 2015

Slide 18

Unicorn Production Is Growing Even Faster Outside The U.S. Source: CB Insights, May, 2015

Slide 19

Next Wave of Emerging Technologies Are Poised To Accelerate The Disruption Wearables Virtual Reality

Slide 20

Are We In A Bubble?

Slide 21

Classic Way To Spot A Bubble Before It Bursts

Slide 22

Spotting A Bubble Is Easy… After It Bursts Source: Yahoo Finance NASDAQ Composite

Slide 23

Internet User Growth Driving The 2000 Bubble Source: ITU, a16Z

Slide 24

User Growth Driving Valuations Today

Slide 25

Usage Growth Driving Valuations Today

Slide 26

What’s Going On In The Public Markets?

Slide 27

Sustained Outsized Market Gains = Bubble Source: Google Finance

Slide 28

Source: Google Finance Current 10 year CAGR in line with the 40 year historical NASDAQ CAGR of 10.8%

Slide 29

S&P Composite Is Above Long-Term Trend

Slide 30

The Buffet Indicator Is Above Long-Term Trend

Slide 31

2015 Tech Co Market Value A % of S&P 500 Is In Line W/ Long Term Trend Source: KPCB, Morgan Stanley, Bloomberg, CapIQ, LK Estimate

Slide 32

Massive Day 1 IPO Pops = Bubble Source: Renaissance Capital

Slide 33

Eventually ….Bubble’s Burst Source: Renaissance Capital

Slide 34

IPO Pops Today Are Incomparable To 2000 Source: Renaissance Capital, Yahoo Finance Largest IPO Pops Now Are Less Then 1/5 of Circa ‘99-’00

Slide 35

Peak Growth Stock Valuations Then & Now Source: Renaissance Capital, Yahoo Finance

Slide 36

What’s Going On In The Private Markets?

Slide 37

# of Deals Is Down But $’s Is Up

Slide 38

Source: Pando Daily, January, 2015 Because # Of Large Deals Is Soaring

Slide 39

The Growth of Large Deals Is Continuing in ’15 Large ($100 Million+) U.S. Private Financings Source: CB Insights, May 2015

Slide 40

As Participation From Non-VCs In VC Deals Is Ramping Dramatically Source: CB Insights, April 2015, Includes Corporations, Hedge Funds, Mutual Funds, Sovereign Wealth Funds, and PE Funds

Slide 41

China’s BATs (Baidu, Alibaba, & Tencent) Are Ramping Their Investments In Unicorns (See Slide on Next Page)

Slide 42

Slide 43

Dollars In (Raised) Is Going Up…. But Dollars Out (M&A, IPOs)….. Not So Much

Slide 44

Source: Pando Daily, January, 2015 While IPO Volume Was Trending Up

Slide 45

Q1 2015 IPO Volume Was Abysmal Source: CB Insights, April2015

Slide 46

# 0f VC Backed M&As Is Falling Source: NVCA, May 2015

Slide 47

$1B+ M&A Is Plummeting

Slide 48

Companies Are Taking Longer to IPO More Mature Companies At IPO Is Sign of A Healthy Market Source: NVCA Stats for Software Companies, 2015

Slide 49

Companies Are Taking Longer to IPO Because….? Being public is increasingly painful Oppressive Compliance (Sarbanes Oxley since 2002) “The 90 Day Shot Clock” (Term coined by Michael Dell) Minimal sell side coverage if not a multi-billion co Electronic trading has dramatically decreased trading spreads More Difficult For Public Co’s to Attract Talent Options in a private company can be given at a significant discount to a preferred financing

Slide 50

Companies Are Taking Longer to IPO Because….? Companies that are IPO candidates can get ALL the capital they want n the private markets

Slide 51

Years To $1B Valuation Is Decreasing

Slide 52

Many Billion Dollar Companies Continue to Appreciate In Value Rapidly

Slide 53

While Public and Private Market Valuations Inform Each Other…..

Slide 54

All Else Equal… Public Companies Should Trade At A Premium to Private Companies Due To Liquidity & Other Factors

Slide 55

Est. Revenue Multiples For Many Unicorns Are Higher Than Multiples For Rapidly Growing Public Companies Source: CB Insights, April 2015, Yahoo May 2015

Slide 56

Companies Going Public Below the Last Private Round Is A Sign of A Bubble But actual private market “valuation” can be more complex than the price reported in the press. Take Box, for example. Box’s last round had a ratchet provision, enabling the investors the right to additional shares, bringing their price paid to 10% less than the IPO price. Source: Bloomberg Business Week, Yahoo Finance

Slide 57

My Conclusions From The Data Broad stock market valuation metrics indicate valuations are stretched Public market tech valuations appear reasonable within the context of the broader public market We are clearly NOT in a tech bubble comparable to ‘99-’00 Private market financings are far outpacing liquidity events, a trend that can’t last ad infinitum, raising the risk of an investing crunch if liquidity events don’t pick up The increase in private market investors other than VCs is happening concurrently with a dramatic growth in unicorn creation and high revenue multiples relative to public markets, raising the risk that valuations are getting stretched The current opportunities for value creation from disruptive tech companies remains at all time highs