Research

Bubble Jeopardy 2.0: Leading Indicators That The Private Tech Market May Be Topping

Abhey Lamba, Neil A. Doshi, San Q. Phan, Vijay Rakesh and Richard Anderson
January 21, 2016

MIZUHO SECURITIES USA INC.  |  US EQUITY RESEARCH

Summary

We’re in a bubble for private companies, and the bubble is in trouble. MSUSA’s Technology & REITs teams collaborated to come up with insights about today’s technology market. We combed through 20 years of VC data and recent technology IPO and M&A data, and the trends are staggering. In 2015, VC investments reached the highest level since 2000, and recent tech IPOs have gone out at valuations below their last private rounds. This is unsustainable, and as capital becomes harder to come by, these could act as negative catalysts for the overall technology spending environment.

Key Points

Analysis of venture capital investment data makes us concerned, on the margin. We analyzed 20 years of VC investment data, and we came away more concerned: 1) VC investments in 2015 reached the highest level since 2000; 2) In the last tech bubble, we saw a sharp acceleration in investment growth in 1999, followed by a sharp deceleration in 2000, and then the bust. 2014 and 2015 venture investment growth appears to be following a similar pattern; 3) There is a significant concentration in Software and Biotech investments, accounting for nearly 60% of all investments in 2015.

Recent Tech IPO exits have come at discounts to private market valuations. We analyzed key technology hardware and software IPOs, and majority of the more recent high flying IPOs were completed at valuations below their last private round. Based on what we have seen with recent IPOs, most of the private companies are likely looking at a down round in their next capital raise. Such events could act as negative catalysts for the overall spending environment.

We expect Tech M&A activity to increase. With private company valuations coming down, we expect cash rich firms to be the biggest beneficiaries. We’ve seen an uptick in the number and value of Technology M&A transactions in 2014 and 2015, and we expect that trend to continue.

Bay Area real estate trends also point to frothiness from the Tech Bubble. We take some comfort from the fact that the pace of rent change lacks the hysteria of the circa 2000 time frame, and office rents remain below peak levels. However, we worry about what happens to REITs of all property types that are invested in the Bay Area, if/when the issue of a tech slowdown pivots from sentiment to reality.

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