(EDITOR’S NOTE: For past three years, we have asked individual fund managers in our East Tennessee region to share with us their thoughts on the year that just ended and the year ahead. This is the fifth article in a six-part series. We thank the participating individuals for their input.)
TODAY’S QUESTION: Some people are saying valuations are too high, and we’re headed for another technology bubble. What are your thoughts on this topic?
- David Belitz, Partner, Chattanooga Renaissance Fund – I think the market is split. There are some companies that have extraordinary valuations that point toward a bubble. I don’t think it is industry-wide. My concern is that if the top crumbles and investors resort to herd mentality and run from all angel/venture investing, we may have a few tough years as a result. If a repricing is isolated and really driven by a reduction in valuation to bring the private and public markets in line, I’m not sure that it will have a widespread impact.
- Eric Dobson, Chief Executive Officer, Angel Capital Group – There is a bubble, but it is in Silicon Valley. Outside of a few specific geographies, we are not seeing a bubble. We are still seeing great deals with great teams and valuations that make sense. We are seeing many unrealistic expectations of valuations, but we are still getting deals done at rational valuations across the state and Southeast.
- Kristina Montague, Managing Partner, The JumpFund – Valuations are often too high for investors – it’s how you define your company’s value that is key. I encourage all companies we meet with to clearly define their value proposition and how they came to their valuation (using any of the commonly used valuation methods) to be able to have a better conversation with investors. It is enticing to price your company in comparison to the coasts, but if you are raising money in the Southeast, you clearly need to adjust for our regional appetite.
- Geoff Robson, President, The Lighthouse Fund – There are always challenges with valuations due to the inherent “tension” between investors and entrepreneurs seeking investment. This being said, we believe the market “self corrects” over time. Companies are able to attract investment at the right valuation if they execute on the business model and achieve the milestones needed to attract capital and talent to help develop the business.
- Grady Vanderhoofven, Fund Manager, Meritus Ventures – I do believe valuations are relatively high. We have met with a couple of companies recently that we felt had entirely unrealistic valuation expectations – I mean really crazy. I know some people have an awareness of the increasing number of “unicorns” on the West Coast, which may not constitute a herd of unicorns yet but certainly represent an incredible aggregation of perceived value. Silicon Valley, however, is somewhat akin to Mars, whereas most of us live on Earth, so while much of what happens out there is interesting to us (entrepreneurs, investors, operators, etc.), it’s only marginally relevant. I have observed valuation cycles over time, and I think we are at or near a high point in the cycle, and valuations will at some point come down. Frankly, it’s safe to say valuations will come back down at some point; it’s much harder to say when that will happen.
- Ken Woody, President, Innova Memphis – I agree valuations are too high. I think many of the founders are watching Shark Tank and Silicon Valley and think they can walk in the door demanding West Coast valuations. In the end it comes down to the investor, just like it always comes down to the buyer when you’re selling your house. If the value is strong and there is high demand, then the valuation can be high. If there is no demonstration of great value, and the start-up has a lot of risk, then the valuation will necessarily be lower.