Highly addictive time-wasting mobile game Candy Crush, one of Facebook’s most successful games, was last week sold for an eye-watering $US5.9 billion to American video game juggernaut Activision. And while it makes a lot of sense for a game publisher looking to bolster its mobile presence, you could hear drinks being spa as the news broke.
“Why would a company want to buy Candy Crush for so much money?” demanded Michael Wade, professor of innovation and strategic information management at Swiss business school IMD.
“This is just one of a number of valuations that are increasingly unrealistically high. Today, unicorns, companies valued at $US1bn or more are not hard to find. There are now 142 of them to be precise.
“This is unsustainable.”
Wade went on to say that too many new companies with little revenue and “dubious business models” are receiving enormous valuations and getting funded – indicating, he says, that a crash is imminent.
“I have exactly the same feeling as I did in 1999 before the dotcom crash,” he says. “However, on my frequent trips to Silicon Valley, the people who I talk to there are denying the similarities. They say the investors are smarter this time around. They say that the new unicorns have strong business ideas and solid fundamentals.
“Some of them may be strong, but a lot of them aren’t. Buckle up, because in my view we will see a crash in the next fourteen months.”
Wade’s pronouncements certainly press all the buttons for great copy, but how close is he to the mark? Could our current confidence in tech’s bright young things be misplaced? Are these IPOs under-cooked, over-hyped and over-priced? Or are things really different this time?
Idealog decided to find out. We contacted four key New Zealand influencers and posed the question: Are we in a tech bubble and is that bubble about to burst?
Franceska Banga, CEO, New Zealand Venture Investment Fund
It’s not a bubble and it’s the internet that’s fuelling growth
“In the New Zealand context, we are not seeing a bubble, nor unrealistic valuations,” says New Zealand Venture Investment Fund’s chief executive officer, Franceska Banga.
“In the international context, a big differing factor between the late 1990s and now is the huge growth in access to the internet.
“In the 1990s, it was a few hundred million people browsing the web. Now billions of people are using the internet on computers, tablets and phones in a much more commercially sophisticated way. Technology and innovation do go through economic cycles, like other parts of the economy, and we are in a positive part of the cycle, but it is not a bubble and it reflects this massive shift in the way the internet and related technology has enabled changes across many sectors, in the way we do business.”
Image: Franceska Banga, CEO, New Zealand Venture Investment Fund
Banga says that global interest in technology start-ups continues to be high, driven by trend and massive global potential, with digitally-based companies continuing to disrupt a range of traditional industries.
“In New Zealand we are seeing the same interest – not just from local investors but also from offshore,” she says.
“The quality and track record of New Zealand technology companies, particularly in the software sector, is attracting a lot of international interest, as are the food and beverage, agricultural and health sectors.
“This is good news for New Zealand entrepreneurs and early investors, who recognise the importance of attracting significant follow-on capital to fuel future growth. We have seen the difference it makes for companies – Xero, Lanzatech, Orion Healthcare, Mesynthes, PowerbyProxi being standout examples – being able to raise a significant war chest to fund multiple year, rapid growth.”
Rod Drury, CEO, Xero
It’s not a bubble and it’s all about the cloud
“It’s not a bubble,” says technology entrepreneur and Xero CEO, Rod Drury. “You’re seeing disruption absolutely happening. We’re seeing globalisation. Uber did it for taxis. Netflix globalised TV. Xero globalised accounting. You’re seeing these companies getting scale, becoming platforms and doing a good job in markets that are massive. That’s not a bubble.”
Drury says that investors have long memories – many were stung when the dotcom bubble burst in 2000 – and the companies now raising vast sums are doing so based on their genuine potential, a potential facilitated by the power of the cloud.
Image: Rod Drury, CEO, Xero
“The change is coming from the cloud,” he says. “You can build something once and your marketplace is the world. The cloud is globalising everything. Things that were regional are becoming global. They’re getting big fast.
“The companies that have raised the money to actually build a platform are few and far between. These businesses are starting to emerge with very strong revenues and it’s all based on underlying shifts in the tech world, which is making things global.
“People aren’t throwing ‘crazy’ money, because they’ve seen it all before. If you get funded these days it’s because you’ve got a good business model. That capital is savvy and was burnt in the early 2000s. There’s a shortage of companies to invest in, which is why you’re seeing these crazy valuations.”
Eric Crampton, head of research with the New Zealand Initiative
Activision’s purchase makes sense, but as for the bubble, it’s too hard to tell
“There’s an old quip about stock market bubbles,” says Crampton. “You know you’re in one when the guy who shines your shoes starts offering you stock tips. But New Zealand sadly doesn’t have shoe shines stands, so it isn’t really that easy to tell when you’re in a bubble.”
Crampton says that though Activision’s new purchase makes a lot of sense (Activision currently has no particular strength in mobile gaming and Candy Crush generated about $US1.46bn in revenue in 2013), the question of whether we are, or are not, in a bubble is just too difficult to call.
Image: Eric Crampton, head of research with the New Zealand Initiative
“Does that $US5.9 billion bid represent Tech Bubble 2.0? Or is it a reasonable valuation for a company that has previously generated annual revenues entirely consistent with valuations higher than $5.9 billion and part of a strategic play by a gaming company wanting to build strength in a growing mobile gaming market?”
“I’d lean towards the latter, but I also know that I’m not well placed to make that call. I’d be armchair quarterbacking as compared to the folks with $US5.9 billion on the line.”
Lance Wiggs, Punakaiki Fund
Good investments are still good investments, but people will still invest in turkeys
Early stage investor, advisor and company director Lance Wiggs says it’s a case of horses for courses, and whether we’re in a tech bubble or not, good investments are still good investments and bad are bad.
“Like the 2001 dotcom bust, there are some valuations that might seem completely insane. But while the numbers might be large, there are many high-growth businesses that are worthy investments. And yet there are many that are not. Candy Crush is big today, but is there any hold, like Xero has with its customers, that means the Candy Crush customers will still be paying to play in two years’ time?”
Image: Lance Wiggs, Punakaiki Fund
“Theranos, a much-hyped blood-testing company that has raised over $US400 million and valued at $US9 billion last round is apparently full of product and revenue holes. The investors were not very experienced in high-growth investing – were they taken for a ride?
“Closer to home the fundamental numbers and business model of GeoOp in no way justified its successful fundraising and subsequent IPO, though smart investors who sold on the subsequent pop did very well. A couple of CEOs and some major senior management team changes later GeoOP is seemingly on track, albeit at a valuation of 40% under the IPO price. They were lucky – raising money after the price goes down is very tough.
“So overall, there are good businesses and bad businesses, and high valuations and low valuations. The key to high-growth investing is to invest in good business, ones that have recurring revenues that are very unlikely to go away in a recession, ones where the growth rates for those revenues are high, and where the company can manage the profitability and growth by varying the rate of investment. Investment means holding for a long time as well, something we do at Punakaiki Fund, as it’s far easier to make money by holding the stock of a company that is growing at 100% per year than by short term trading.”
So there you have it. According to our panel, it’s highly unlikely we’re in a bubble.
But then again, that’s what everyone says…when you’re in a bubble.
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