THE EFFERVESCENCE OF MONEY

Cash is pouring into tech startups from every source

How much capital is too much capital?
How much capital is too much capital?
Image: AP Photo/Ebrahim Noroozi
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When it comes to raising money, right now is one of the best times in history to start a technology company. Global initial public offerings (IPOs) for tech firms are off to their hottest start since the dot-com bubble in 2000. Venture capitalists, meanwhile, have invested more than twice that amount in the sector. The crypto craze is also fanning the flames, offering a new source of highly speculative (and legally ambiguous) capital.

A mountain of cash is available for young tech companies, following years of easy money policies from the biggest central banks. Venture capital firms have invested about $67 billion globally so far this year, on pace to exceed the record high of $87 billion in 2016, according to PitchBook data. Valuations have skyrocketed for some startups, altering the mechanics of the investing process, said Michael Jackson, a partner at Mangrove Capital Partners. Some fund managers feel pressured to join in at almost any valuation, he said.

“Indeed we live in bubbly times, but of course the use of digital devices and services is exploding,” said Jackson, who was previously Skype’s chief operating officer.

The optimism is not unfounded, as most of the global economy is growing solidly. Entrepreneurs have learned to transplant ideas from one geography to another, and the so-called gig economy is opening up new opportunities for companies and workers. But in some regions, the last downturn—a big one, granted—was about a decade ago, which suggests some complacency may also be at play. Jackson points out that 30-year-old founders and financiers may have never worked through a major plunge in valuations.

In the IPO market, tech companies have raised $27 billion, a first-half result only exceeded by the blistering $56 billion raised in the first six months of 2000, according to Dealogic. It’s not quite as impressive when adjusted for inflation: in current prices, the amount raised in the first half of 2000 was a whopping $82 billion, three times more than the same period this year.

The public market, while generous, hasn’t necessarily been an elevator to higher valuations. Dropbox’s IPO in New York valued the company at around $8.2 billion, compared with $10 billion in a round of private funding several years earlier. When Chinese smartphone maker Xiaomi made its public debut in Hong Kong, its market capitalization of roughly $50 billion was about half of what it hoped for.

Then there’s initial coin offerings (ICOs), which resemble crowdfunding souped up with crypto tokens. ICOs have already set an annual record, according to CoinDesk data, raising $13.6 billion from a combination of retail investors and trend-chasing VC firms. While it’s probably the frothiest funding market out there, the amount raised doesn’t suggest a threat to financial stability. It seems more like a symptom of the dreamy, optimistic times tech investors are living in.

But venture capital is where the big money is going to work in tech. The numbers may seem less frothy when mega-deal outliers are stripped out, but then there are still all the app-enabled scooter startups, which have raised nearly $1 billion since 2017. These, and other tech firms, may turn out to be sound investments. Right now, though, it looks like there’s too much money chasing every opportunity.