Technology-based companies have always been valued differently by public and private capital markets. 2016 has seen aggressive pre-IPO valuations of tech companies reminiscent of the dot-com bubble of 2000. There are concerns that they may be too aggressive and cause the market to fall back into a position similar to that of the turn of the century
Pre-IPO companies today are more diverse, geographically, compared to the year 2000. It will be very interesting to see in which regions unicorns will remain dominant post-IPO. India and China appear to have an advantage with their combined consumer base triple that of the United States. It would also be important to note that their e-commerce markets are growing much faster. What has always favored American companies and continues to this day is their ability to reach a global audience.
Valuations of public technology companies have remained fairly consistent.
In 2000, public technology companies were valued 165% higher than the general market. The valuation of public technology companies averaged 80 times their earnings in 2000. By contrast, today’s public technology companies are valued, on average, at 20 times their earnings. We can also see that they are only valued, on average, 10% above the general market. Among public companies, there does not appear to be any significant bubble risk. Public companies seem to be much more consistent compared to private companies.
Valuations of private technology companies have been on the rise.
• The number of pre-IPO financing rounds has increased
• The average size of venture investments more than doubled between 2013 and 2015
• The market experienced unprecedented average trade sizes
• 2015 saw the highest number of trades ever recorded in a year
• Unprecedented increases between funding rounds
• Funds committed globally increased from $110 billion in 2012 to $150 billion in 2015 (the highest level in history).
Tech companies also stay private on average 3 times longer. They are trying to avoid going public until accounting profits are made and bases are acquired. This means that at the IPO, the companies are bigger, more mature, established and more prepared than ever.
Since 2000, it seems that the market has taken a more conservative view of the valuation of public technology companies. It is also possible that the new companies are much stronger and deserve their high pre-IPO valuations. Any correction now, if needed, is likely to look milder than the correction from the last tech bubble.
