Startups and Valuations
Entrepreneurs around the world took notice when recent investment rounds boosted valuations of several U.S. startups, including Snapchat Inc., now valued at around $10 billion.
More than 50 startups in the U.S., Europe and China are valued at $1 billion or more as venture capitalists put large sums of capital into promising companies.
Yet that trend has sparked a broad debate about whether some startups may be raising too much money.
Thursday on The Accelerators, a Wall Street Journal blog on entrepreneurship, Niklas Zennström, managing partner at London’s Atomico Partners LLP and co-founder of Skype, shares his views on valuation. Edited excerpts:
Whenever the tech bubble question comes up, it sparks a debate about the definition of a bubble, or what qualifies as overvaluation. I focus less on the word “bubble” and more on the word “we.” Are we talking about the full sweep of the global technology industry, or about an important but highly specific subsection in Silicon Valley?
Helping companies outside Silicon Valley to scale, I have always felt that more attention should be paid to entrepreneurs from places like Stockholm, Shanghai and São Paulo, who are taking on and disrupting huge global industries. Leaving my personal feelings aside, it’s also a serious point that has ramifications across the world for entrepreneurs, investors and governments alike. In contrast to the debate about overvaluation in Silicon Valley, until the past few years the problem elsewhere has been undervaluation.
Ten years ago, many investors held the view that you could only build a viable tech company in Silicon Valley and that anything built in the rest of the world was a long-shot bet. We certainly faced this perception when starting Skype, with one potential investor insisting we move to California if we wanted his capital.
You might imagine that, for investors, a historic and systemic undervaluation would have been a dream come true, offering opportunities unmatched in Silicon Valley. But this would be a short-term view. Valuation is a major criterion in any investment decision, but the biggest factor in the potential return is the level of success a company can reach, and whether it can become a global category winner.
Undervaluation has historically hurt companies’ ability to reach this level, impacting whether they could raise the right amount of money to scale and invest in their team, technology and marketing. Forcing entrepreneurs to trade huge equity stakes in return for modest sums of capital is in nobody’s long-term interest—not for entrepreneur’s, and certainly not for investors who want to support a motivated, ambitious and committed founding team.
Which Startups Are Overvalued?
This systemic undervaluation is now changing. For years, there were many real advantages enjoyed by Silicon Valley startups, not least the fact that information and computing power were inaccessible to large parts of the rest of the world. Thanks to the Internet, open-source software and cloud computing, ambitious entrepreneurs have the same ability to start an Internet business wherever they are.
Many companies have become global leaders and valued in the billions—from Sweden’s Spotify, Finland’s Rovio and Supercell, Israel’s Waze and New York’s Tumblr, plus a whole generation of Chinese titans such as Alibaba and Tencent. (Atomico has stakes in Rovio and Supercell)
The availability of capital has dramatically increased around the world, with capital increasingly available at later stages, too. As entrepreneurs and fund managers outside Silicon Valley prove themselves, institutional investors are increasingly keen to get on board.
Today, with technology touching almost every area of the economy, and amazing entrepreneurs active across every continent, we are living through a remarkable time that makes it a thankless task to put an overall label on valuations. As someone who has spent many years working with remarkable founders in Europe, Asia and Latin America, as well as the U.S., I’d have to say that this is not a bad thing.