Friday 20 April 2018

Dylan Collins: Tech bubble or opportunity knocking?

Another Angle

Dylan Collins
Dylan Collins

Dylan Collins

Is it a bubble or isn't it? I had meetings with three sets of investment bankers last week, two in LA and one in London. While I wouldn't say they were actually rubbing their hands gleefully together as they walked into the room, they certainly stepped with something resembling a slight spring. At the same time, there's an equal amount of caution (whatever the opposite of hand-rubbing is) being expressed from various quarters across the start-up and investment community.

So what's the deal?

Firstly, deals like Facebook/Whatsapp and Google/Nest aren't really symptomatic of a tech bubble. It's actually about a stock market bubble.

The public markets are unquestionably frothy and share prices are broadly up across the board. So companies can afford to pay more (in stock) for big deals. This gives Google and Facebook massive purchasing power and they're clearly not afraid to use it. Deals like WhatsApp and Nest are outliers and aren't really useful as a reference point, as excited as everyone gets about them.

Secondly, there's more big-cheque venture capital money going to work. I don't know about you, but there are days when I feel I'm the only one of my friends who hasn't raised at least $10m for their latest venture.

Series A deals are possibly up as much as 35pc over each of the last five years, suggests Tom Tunguz at Redpoint Ventures. Big funds need to deploy capital efficiently, and investing lots of small amounts really isn't a way to do it.

Thirdly, we're seeing more categories opening up. 'Category-definer' is one of those phrases which will make a lot of investors stop everything they're doing to buy you dinner and a movie. Essentially, this is a product/service which is creating an entirely new market. VCs love category definers because, although we could still lose our investment, the upside is potentially huge.

Even with a relatively slim chance of success, it can still represent (relatively) good investment odds. So if there's a great founding team plus a category-defining opportunity, you're damn right we're going to get excited.

This is what has driven a lot of the mega-rounds into companies like Github, Uber, Box and Oculus. Reading through Box's S-1 (the document they filed this week to go public), it's pretty staggering the level of losses investors were willing to accept in order to chase a new storage category.

Fourth, believe it or not, venture capital is a shrinking market. Today you've got an industry which is essentially a large number of small funds and small number of very large funds.

And if you think raising money for a start-up is hard, you should ask first-time VC-funds how long it's taken them to secure investment.

Finally, there's a lot of over-reporting going on about exits and investment events. Any time we see a large deal, there's a huge amount of coverage about the number but very little about (i) the validity of the number (a lot of rumour is reported as fact) and (ii) the configuration of the deal (eg cash versus stock versus earnout). This tends to fuel the 'feel' of a bubble.

If I was starting another company tomorrow (a quick glance at my schedule makes this unlikely), I'd be thinking;

* Home automation: Nest, iRobot are just the beginning

*  Services which ameliorate personal income (Airbnb etc)

* Dietary restrictions: gluten and nut intolerances are soaring

* Food in general: egg and meat substitutes

* Kids' education and content: a new generation with new expectations

* Technical education: for all levels of kids and adult.

These are all multi-billion dollar categories and which have many opportunities for re-definition (remember, a category definer can also be a re-definer).

Because of my slightly unusual perspective as both operator and investor, I tend to have fairly sober view on things. So is it a bubble? I think that's the wrong question; after all capitalism is really just a successive series of bubbles. I suspect we're actually seeing a finan- cing market which is reconfiguring itself to chase after these really big category opportunities. Founders take note.

Dylan Collins (@MrDylanCollins) is a technology and media investor. He is CEO of SuperAwesome, Europe's largest youth-focused digital marketing platform and Venture Partner with Hoxton Ventures, an early-stage venture capital fund based in London. He also sits on the boards of Potato (a leading marketing engineering agency) and Brown Bag Films (the renowned animation studio).

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