Monthly Archives: May 2016

Big Tech Firms are Hedging Their Bets on Old Technology

Its an interesting thing to notice when you look through any popular tech blog or news source is the battle within the tech industry and their place in the future. For a long time it has been that they have been seeking supremacy of the smartphone market or the so called platform wars, however today they are concerned with a product that isn’t really a the new kid on the block. In fact it shaped the 19th century and the worlds infrastructure there after.  You are probably familiar with this technology, in facts its probably sitting out front of your house right now. What I refer to is of coarse the automobile. 

This war has been so prevalent that it is not drawing the worlds 2 largest technology companies (Apple and Alphabet) to enter the race full steam ahead. More over, the worlds most valuable privately held tech company or start up is defined by this, and I am referring to Uber Technologies. This is all not to mention the most celebrated entrepreneur on the planet at this point in history Elon Musk is hedging his bet that his Tesla Motors will change the world, not only the way it moves around but the way it powers itself, which is an exciting proclamation.

When you look around the market you can see that Musk’s Tesla Motors is leading the way to build a mass market electric car, but the auto industry establishment is hot on his tail and is coming to market with cars like the Chevy Volt or the Nissan Leaf, which is exciting but they really don’t come close to performance or popularity in this regard. Not to mention Musk’s cars are capable of driving themselves.

When we look at the ride sharing market we see that the clear leader in this arena, Uber announced last week that it has revealed its self driving car service and is available if you live in the Pittsburgh area. The CEO Travis Kalanick explains, “the reason Uber is expensive now is because you’re not just paying for the car, you’re paying for the other dude in the car.” If uber rides were a lot cheaper the idea the ride sharing could replace car ownership is a very real possibility. Uber as we know does not exist in a vacuum and their competitor Lyft is hot on their tail with their own partnership with GM and has a fleet of cars that are due some time in the next 14 months. 

So it is an interesting place for the auto industry as well as the tech industry because everyone is trying to make a play in this new disruptive medium for transportation. What many of the smarter companies are doing is partnering up to get the most out of their infrastructure in creating a truly inspired product. What remains to be seen is who is going to take the top spot, which will really tell us whose prediction for the future of travel is most accurate. This is a very exciting time to be alive.

What is the Tech Bubble?

The rise of Silicon Valley and the companies that comprise it has been well documented by economists and the media alike. However, many have come to question whether these tech powerhouses can sustain the incredible rates of growth that they have enjoyed over the past few years. There has been plenty of talk regarding a “tech bubble” that’s ready to burst, so here’s a little background information about exactly that.

tech bubbleUp until recently, talk of the tech bubble was isolated among Wall Street analysts and venture capitalists, and received little to no interest from other entities. However, recent investors have valued companies like Uber at $50 billion and Airbnb at $25 billion, and that kind of valuation is generally cause for more general attention.

There are some general concepts to keep in mind when deciding whether these valuations are indicative of a healthy economy or one on the brink of collapse. One is the definition of a bubble.

“I define a bubble as something where assets have prices that cannot be justified with any reasonable assumption,” said Jay Ritter, professor of finance at the University of Florida’s Warrington College of Business Administration. Ritter studies valuation and IPOs.

In general, bubbles tend to occur when an economic sector’s development creates a situation in which the most recent money to be inputted is extremely unlikely to realize a return that justifies the risk it has taken. This circumstance tends to be helped along by new companies with new products claiming that they should not be subjected to conventional P/E-based valuation analysis, especially if and when those companies keep their earnings a secret.

So back to Uber: Uber’s $50 billion alleged worth was only made possible by the company being valued at a multiple of 100 times its sales. Many other companies are valued at high integers of their actual sales (Airbnb is a 28x multiple, Slack is at 90x, Zipcar was at 6x during its peak, etc.). The ruling logic behind these valuations is that so many tech companies have become so large so fast, that it’s silly to set a ceiling to how valuable a company with real promise may become. Many economists have an issue with that.

tech bub3“Private valutations have become disconnected from public reality,” explained Jules Maltz, a general partner at Institutional Venture Partners. Many other higher-up partners at investment companies have seen reason to warn partenrs of an “extreme end of a cycle” due to the increasing trend of late-stage investors having “essentially abandoned traditional risk analysis” and pouring money into totally unsustainable companies.

Many believe that the question is not if, but when the bubble will pop, and how bad it will be. Some say that it shouldn’t be too bad, but others expect unpredictable results due to the fact that this bubble has been caused almost entirely by private companies backed by private money. That means the only people who stand to get hurt are those that privately invest.

However, some are pointing to the fact that when private deals get too big for VCs to underwrite, public money gets involved through direct investments from mutual funds like Fidelity, Janus, and T. Rowe Price, and indirectly through pension-backed hedge funds and private equity. These funds state that only 1 to 2 percent of their assets are going to private tech firms, so that no one’s 401(k) or IRA is overly dependent on the firms’ success, but this percentage may have increased over the past few years due to the longevity of the tech boom’s success. In fact, the give mutual funds that are the most active startup investors have made 45 tech investments in 2014 compared with 18 in 2013.