If History is any Guide, You’ve Got Two Years

by Don Butler on July 19, 2011

If you look to the past as a guide to the future, or if you believe in the cycles of history, then I think you have two years.  Two years to get enough funding to last for some time beyond then.  Or, two years to get either bought or go public if you’re far enough along with your company.  What gives us the confidence to make this prediction? It’s what we’re seeing in the market and what we’ve seen by going back and looking at the tech cycle as a potential guide to where we are today.

It started for me with the taco truck…

What’s so special about the taco truck above?  It’s a taco truck offering free tacos to the employees of one of our portfolio companies.  Sponsored by a real estate firm.  For those of us that were working with startups in the late 90s, I remember these kinds of freebies.  It hasn’t reached anything like the excesses that emerged towards the end of the tech bubble – I still haven’t seen any over-the-top launch parties yet – but it’s still caused us to wonder where we are in the tech industry cycle.

Our sense is that we’re back to what in effect feels like 1998, and have at least two years of good times for entrepreneurs ahead.  To go beyond the anecdotal evidence and our own hunch, however, we wanted to see if the data on the public and private markets supported our general sense of where things were – it does.

To begin with, the number of U.S. startups receiving financing on a quarterly basis is on par with what we saw in 1998 as well as when the startup ecosystem was expanding in the 2006/7 timeframe.


U.S. Startups Receiving Financing, 1991-2011

Source:  Thomson Reuters (2Q11 figures incomplete)


The increasing number of startups getting financed has coincided with an increase again in the amount of funding going into the venture funds themselves.  Once again, we see that we’re back on par with both the 1998 and 2006/7 levels.


U.S. VC Fundraising, 1991-2011

Source: Thomson Reuters (2Q11 figures incomplete)


The increase in funding of U.S. venture funds comes at a time when we’ve seen the number of venture-backed companies going public starting to increase as well.  And here again we find the current environment looking similar to both 1998 as well as 2006/7.


VC backed IPOs – Volume and Post Offer Median Valuation

Source:  Thomson Reuters


So the current environment looks a lot like how it looked in both ’98 and ‘06/07; why does it feel more like the former than the latter time to us?  It’s a combination of what we see in the early stage venture business as well as in the public markets.  Valuations have been trending upwards, and the public market – which provides a clear signal to so many participants in the food chain – appear willing to take risks again.  The public markets now appear to have a tolerance for risk and a willingness to buy into companies that might not have been able to go public just a few years ago.  While the volume of VC-backed IPOs is on par with what we saw in 1998 as well as in 2006/7, the companies these days tend to be earlier in the path towards profitability and look on that measure more like they did in ’98 than in the late 2000s.

To get a sense for this, look at the three tables below – these show the top 10 IPOs by market cap for the first half of each of 1997, 2007, and 2011.  The largest IPOs of 1998 were typically smaller companies (by market cap) that had yet to turn profitable.

By 2007, the largest IPOs were now typically companies with two to three times larger market capitalizations that were already profitable.

Finally, as we look at today’s IPOs, the companies that have been the largest IPOs by post offer market capitalization have even larger capitalizations and yet are once again typically not yet profitable.

What this tells us is that while the companies going public today are much larger companies than in 1998, we’re back to seeing large market capitalizations assigned to companies that are still on the way towards profitability but not yet there.  Yes, the companies are definitely different and better this time – they’re larger, built on much more solid foundations, and have been around for longer periods of time – but that doesn’t change the fact that we’re back to the majority of companies going public being ones that are not yet profitable.

There are of course a number of other differences between the market in 1998 and today’s market:  unemployment is sky-high compared to back then, the economy hasn’t recovered to nearly the same levels of growth as was the case then, and so on.  But our experience tells us that we’re looking at another two or so years of expansion in the early stage tech environment.  To us, we’re expecting some of the same factors (both for the good and for the bad) to re-emerge for entrepreneurs:  easier access to funding (but also increased competitiveness as more companies targeting the same markets get funding), increased salaries for talent (and increased employee turnover as more key employees are sought by competitors), and so forth.  What’s concerned me is that we’ve already heard some of the larger VCs talking about “pushing out” as many long-held portfolio companies onto the public markets as possible.  Let’s hope that the public markets keep looking for quality over quantity – otherwise we risk seeing the IPO window close once again and seeing the entire financing ecosystem for start-ups slow down.

  • http://GrasshopperHerder.com Tristan Kromer

    Nice analysis.

    • http://twitter.com/ThomvestVC Thomvest Ventures

      Thanks Tristan!

  • http://www.facebook.com/jasonbradfield Jason Bradfield

    Great analysis, it really clarifies and supports some of the intuitions I have.

    • http://twitter.com/ThomvestVC Thomvest Ventures

      Thanks Jason, appreciate your positive comments.

  • http://www.suburbanhype.com Michael Scott

    Great article. I often thought the exact same thing, but didn’t have the stats to back it up. 

    • http://twitter.com/ThomvestVC Thomvest Ventures

      Thanks Michael, appreciate your kinds word and we are happy to provide some additional data and context.

  • Anonymous

    Do you think you would have been able to relate the two periods if you weren’t looking. For example, in ‘U.S. VC Fundraising, 1991-2011′, the complimenting trends you show, could be said about 2003 or 2005. I just don’t think the data shows a strong enough trend to say the periods are the same. 

    • http://twitter.com/ThomvestVC Thomvest Ventures

      Hi Barton,

      Thank you for your comment. We actually asked ourselves the same question and for a while debated the graphs because 2007 also looks similar for the fundraising/investment data. This was the main reason for doing the research on net income numbers associated with IPOs and the results gave us more confidence that the current environment feels like 1998.

      We don’t believe both periods are the same. As we said at the end of the post, there are a number of differences this time around and we do think that companies today are of a higher caliber than the prior cycle. However, we wanted to focus on taking the qualitative examples we see as a VC, add macro data around the public markets and fundraising ecosystem, compare them in years past, and decide which period it seems most similar too and give our opinion on how long the current trend lasts.

      In that case we think you have two years.

  • Anonymous

    Do you think you would have been able to relate the two periods if you weren’t looking. For example, in ‘U.S. VC Fundraising, 1991-2011′, the complimenting trends you show, could be said about 2003 or 2005. I just don’t think the data shows a strong enough trend to say the periods are the same. 

  • http://neekolas.tumblr.com neekolas

    I was a teenager in the ’90s, but SXSW is a lot like I imagined it being. You say you haven’t seen outrageous launch parties, but there were a bunch at SXSW. The one that comes to mind was the week-long open bar at a swank lounge that Blue Calypso used to hype their launch.

    • ronmac

      So that’s where venture funding is heading these days. If anyone hda any brains they will go out and invest in beer stocks.

  • http://neekolas.tumblr.com neekolas

    I was a teenager in the ’90s, but SXSW is a lot like I imagined it being. You say you haven’t seen outrageous launch parties, but there were a bunch at SXSW. The one that comes to mind was the week-long open bar at a swank lounge that Blue Calypso used to hype their launch.

  • Jon Staenberg

    Zillow just priced above its range….hmmmm.

  • http://lucisferre.net Chris Nicola

    “Past performance is not necessarily an indication of future performance”

    • http://twitter.com/ThomvestVC Thomvest Ventures

      “Those who fail to learn from history are doomed to repeat it”

  • http://twitter.com/pitdesi Sheel Mohnot

    Nice analysis. More data here: http://feefighters.com/blog/ff_infographic/tech-boom-or-bubble-lets-look-at-the-data/

  • Robfrank47

    i think your data set is much too small to draw a conclusion on a timeline.

  • Nick Campbell

    I see a lot of flaws in the analysis. You’re considering too few variables. You’re misreading variables. You’re not using enough observations. Things change drastically when you look at monthly data and consider percentages of companies receiving financing from VCs versus companies being established. You’re using the variables to build the argument you see versus having it reveal the reality to you. You’re basing trending analysis on a short time period when proper forecasting uses much more to develop the analysis. You haven’t adjusted the price of the dollar in 1998 to 2008 dollars and while comparing 1998 to 2006/7 levels, you’d have to conclude that the collapse should have happened in 2009/2010. It didn’t. 

    A new IPO boom is happening and the companies could be overvalued, but the indicators are not in the number of companies getting funding or even startups. That indicates that there is an abundance of money that is available for investment and that lots of people are going the startup route because the job availability isn’t there. People need to create those jobs these days. 

    There is so much more here, but I really hope you don’t put weight into this idea without doing further research into it, because there are too many indicators that you aren’t looking at and your error is too wide based on this analysis. 

    • http://twitter.com/ThomvestVC Thomvest Ventures

      Hi Nick,

      Appreciate your comments.  We would be curious to see the dramatic changes you think would occur when you consider monthly versus quarterly data and are happy to have other viewpoints (feel free to link to any analysis you have done).  We agree that using multiple observations is important and thus the 20 years of quarterly data as the time horizon for our analysis.  We
      find it difficult to see how analyzing companies receiving VC versus
      those being established would be a better proxy for understanding the technology funding cycle we are in.  Many companies that are being established
      don’t require VC funding and our post is relevant to those that are considering institutional investment.

      We believe that good companies will be able to last even through the worst times, but the vast majority of early stage startups are still trying to find their business model.  In that regard, it seems to make sense to think about raising in the next year or so if they are still going through that process, since otherwise potentially good companies that hadn’t yet found their model could find funding in short supply when the current cycle ends.  For the later stage companies that have found their model, it also seems that they will have perhaps two years to, for instance, strike an OEM deal with a partner, see it gain some traction, and get acquired before the cycle starts downward again.  We’ve seen corporates actively ramping up their M&A groups as well as set aside funding to do acquisitions, and we don’t think that this will last beyond the next two years.

  • http://twitter.com/jeffreymcmanus Jeffrey McManus

    If the markets moved in perfectly regular cycles like you imply, anybody who owned a calendar would be a trillionaire.

  • http://twitter.com/antonioY antonioY

    I hardly ever post comments… but man… this is some REALLY flawed analysis you got here. Your premise might be true, but your arguments geez.. be glad you dont work in finance !

    • http://twitter.com/cordial david carter

      Would that be the finance that funded the first dot.com?

    • http://twitter.com/ThomvestVC Thomvest Ventures


      Thanks for your comments, we would appreciate any constructive feedback you might have.

  • http://twitter.com/JessiDarko Jessica Darko

    The differences you’re seeing– hig unemplyoment, and a generally weak economy– are due to the core difference between the 1990s boom and now, which is the engine that is driving it. 

    In the 1990s, the boom was caused by a major boost in productivity in the economy, namely the PC revolution, the software revolution, and the beginning of the internet revolution.  These genuinely improved productivity for businesses across the board.

    After the dotcom crash, we saw the government force interest rates below the rate of inflation, and allow massive monetary expansion by reducing reserve requirements at banks.  In short, they caused a huge amount of money to go sloshing around the economy, looking for somewhere to land.  Not surprisingly it landed in Real Estate, producing the RE boom that crashed in 2008.  This was completely predictable.  It doesn’t address the core problems with the economy (namely the decline in manufacturing due to over-regulation).

    The crash for 2008 served just as an excuse to open the money spigots even further, only this time, not only are interest rates still nearly zero (while real, monetary inflation is soaring, well over %20, please not CPI doesn’t measure real inflation) — but they are directly buying “troubled” assets, and directly engaging in “bailouts” (even bailing out companies like Wells Fargo that didn’t need it but were told they’d be shut down if they didn’t take the money!). 

    This means there’s a whole lot of financing sloshing around the economy, still… only there’s not much of an economy to fund.  It isn’t going to go into new manufacturing plants, and so about the only area of potential growth is Venture Capital. 

    In the end, I think you’re right— we’re going to have a repeat of 1998-2001 in the tech sector.  It will be different, but I expect some hysteria.

    But you’re also missing the real issue, which is that 1990-2015 is the major bubble in the US Dollar, and at the end of this, eventually, all the inflation that we’ve been able to export since 1915 due to Bretton Woods (and being the “reserve currency” of the world, and the currency major commodities like oil are denominated in) will come home to roost.  When the US no longer is being fiscally responsible (eg: printing money like mad) and the rest of the world doesn’t need dollars in order to buy goods on the international market, eventually they will realize this and move out of the dollar. 

    They’ve been moving out of the dollar in an orderly fashion for about the past 5 years.  Everyone recognizes the dollar is no longer needed the way it once was.

    It is all just waiting for a big bump to put it over the tipping point, at which point the exit will no longer be orderly.  We’ll have a dollar crash, and it will lose half its value in the course of a few weeks, putting gold at $3k an ounce.  Then the US government will start printing like crazy because all of its prices doubled over night and suddenly we find ourselves in a hyper inflationary scenario. 

    I believe this second “tech bubble” is going to be the thing that puts us over the tipping point. 

    • http://twitter.com/ThomvestVC Thomvest Ventures

      Hi Jessica,

      Thank you for your well thought out response. It will be interesting to see how the relationship between the economy and tech plays out.

  • http://twitter.com/boilingice Patrick Kedziora

    Be the first out the IPO door before it shuts! Yep, it’s deja vu all over again.

  • ScottRobinett

    I am going to agree with your assertions, but it will take a paradigm shift to push the next bubble. Certainly, one of these tech companies could provide that push. I’m betting on space, where the real opportunities lie.