The Risk Of Overvaluation

We have been talking about the possibility of a tech bubble for couple of years already as the valuation of several startups have reached unprecedented levels. Those companies which valuation are above $1bn are usually referred as unicorns. 

The discussions regarding the existence of a tech bubble remain broader than just the limited number of companies we hear most often about in the media. The large startups are just an example of what is happening at every level and at every stage of the VC industry.

Funding in the last couple of years has rapidly increased and access to capital has been easier than in the past. One of the reasons for that change is the large amount of liquidity available in the marketplace. Another reason is that large pensions funds have started investing in startups as a way to diversify asset classes and find more attractive returns. With interest rates at their lower level for a record number of years, the attractiveness of the technology industry has increased many folds.

In the last couple of weeks and for what appears to be the very first time, pension funds have started to decrease the valuation of the shares they own in several startups. Fidelity for example reduced significantly the value it gives to the share of Snapchat in its books. Those valuations are sometimes lower than the value at which these investors got in. Another sign that time might be changing.