Way back in 2008, we experienced, researched and tried to understand the subprime mortgage crisis. Probably not every one of us had any interest in the real estate business of the US. More so, none of us were interested in how much loans were being taken by customers in the US.
Just then, the world’s fourth largest investment bank Lehmann brothers filed for bankruptcy. It initiated a series of falls across the globe for a long time. Depression was a global phenomenon.
It’s been seven years since that financial meltdown, and investments have preferred startups. Since the world has emerged back from the last meltdown, start-ups have flourished. More so, tech startups.
These start-ups have seen early success with valuations upwards of $1 billion. And that’s given them a name – unicorns. Among the popular companies that qualify as unicorns since the last bubble, are Uber, Xiaomi, airbnb, Snapchat, Flipkart, Pinterest, Dropbox, Spotify, Square, Jawbone, Slack, Snapdeal, Lyft, Olacabs, Evernote, GitHub, Quikr, Zomato and a list of several more.
The list of billion-dollar plus companies is a long one. And to avoid missing out of the rush, investors have heavily invested funds in emerging tech startups. Turns out, not all is really well with this arrangement. In India, we saw a huge wave of investments into Housing.com. Then for various reasons, the company was the most sought after news. Today, there seems to be an uncertain calm. In August, it was reported that Housing would complete the layoff of about 600 employees within 3 months, due November.
According to the report, the move was a part of a restructuring plan with a three-fold rationale.
Earlier in May, Snapchat CEO Evan Spiegel, acknowledged that the tech bubble is in fact real and it would burst.
Recently, we read reports around Zomato’s plans to layoff 300 employees, or nearly 10 percent of its staff. According to reports, the company will be focussing on enterprise and full stack.
In the background of many similar announcements, we spoke to Bharat Ramnani, Associate Vice President– Valuation & Advisory Services at Aranca, a global research and analytics firm.
How real is the tech bubble?
I think the tech bubble is very much real and many of the funding deals we see today are at valuations that defy logic. There are close to 142 companies in the ‘Unicorn Club’, nearly 50 percent of which are 2015 entrants only, making it a new normal in the VC space. While many of these companies have great ideas and potential, the euphoria has surged their valuations to unsustainable levels and the ‘Fear of Missing Out (FOMO)’ syndrome has led investors to play along.
A large part of the problem is also the over-simplified way in which outside world looks at some of the deals that happen in this space. The post money valuations of various funding deals that we hear off have to be looked at quite differently. The actual money invested is usually a fraction of such valuations and is backed by much superior rights. The tendency to consider these valuations as proxy for actual worth of the business further adds fuel to the fire.
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