Even as recently as Web Summit at the beginning of November I was asked about a Bubble as part of a panel. It has since occurred to me that the problem with using that word to denote possibly overextended valuations is that is suggests a sudden correction in the form of a “popping” or “bursting” of a bubble. That’s pretty much what we experienced at the end of the actual Internet Bubble when many companies disappeared entirely and others were down 90% or more.
So I want to propose a new word: a “bulge.” We are now a decade and a half past the Internet bubble and well into what Carlota Perez calls the deployment phase. That is when bigger changes in society occur as a technology which was installed during an initial frenzy actually gets widely used. Generally this is when more value is created for society and longer lasting companies are built (or existing companies transform themselves using the technology).
It is, however, still possible during the deployment phase for valuations to get ahead of where they should be. And that’s what I would like to call a “bulge” (please feel free to propose a better word). A bulge can come and go relatively quickly but when it goes away the thing itself is still there. So valuations could fluctuate by as much as say 50% but few, if any, companies go away entirely.
Here is a great chart from a post about valuations of SaaS companies that shows a bulge in the SaaS sector around 2014
The chart also shows the prior impact of the 2008 financial crisis when valuations fell behind in what might be called a “dent.”
I suspect that similar multiple charts can be drawn for other groups of companies and that we had a bulge in public valuations that coincided with the rapid addition of many private companies to the $1B+ valuation club as can be seen on this chart
I am now quite convinced that “bulges” and “dents” can best be understood in terms of multiple expansion and contraction. When it comes to an expansion phase there can be a positive feedback loop between private and public company valuations as I previously wrote about.
Public markets will eventually correct and do so more rapidly since they are all common stock. Private transactions by contrast allow for preferred structures (such as ratchets and warrants) that often keep the headline price “sticky”. And that’s exactly what we have seen. Public market valuations have already come down substantially but private ones are lagging behind. We see that most clearly when a company such as Square goes public at a valuation substantially below its last private round.
The bulge is coming to an end and we may even wind up with a dent. This is important for investors and entrepreneurs but it won’t have nearly the same dramatic impact as a bubble as companies can and will carry on (see Square again).
Now let’s see if I can get bulge and dent to stick or if someone proposes a better alternative.
