Bubble talk: VC valuations

The primary criticism is that direct comparisons are fundamentally flawed. If the dotcom bubble was inflated by internet hype, the businesses now commanding high valuations are benefiting from an environment in which the internet is delivering on its promise. There are more internet users, faster connections, more mobile devices and better e-commerce.

And then the VC industry itself is arguably wiser. According to Preqin, in 2000, a total of 463 funds raised $77 billion. So far this year, $38 billion has gone into 220 funds. Fewer funds are backing start-ups that tend to be less capital-intensive than before. The lower cost of starting a business - and the increased capacity to do it from anywhere in the world - has also opened the door to more angel investors.

Certain companies are spending longer building scale under private ownership. Scott Kupor, managing partner with Andreessen Horowitz, told the AVCJ Forum there are two major trends at work in this context: the significant entry of new players into the private capital markets; and the fact that 90% of the largest venture capital rounds in history have happened in the last five years. Public market players feature ever more prominently in these.

China-focused VCs would add that their investments are still on steroids thanks to the combination of a rising middle class and the disruption effect of the mobile economy. Only half of the country's 600 million internet users are currently online shoppers. The converts will increasingly buy via mobile devices.

"It is only a bubble if everyone is chasing the same trend, and I think as an industry we are staying ahead of the curve," Thomas Tsao, managing partner at Gobi Partners, told the forum.

China VC fundraising stands at $6.4 billion so far this year, the most since 2011. The surge is driven by an uptick in exits in recent years as US IPOs resumed for Chinese companies and the likes of Baidu, Alibaba Group and Tencent Holdings went on the acquisition trail.

It is a similar story globally, with LP sentiment buoyed by improving returns. Preqin data on VC performance show a spike in performance for funds from the 2007-2010 vintages. Median IRR for the 2010 vintage is 14.5%; between 2000 and 2006, no vintage surpassed 5%.

This is all very encouraging but it does not remove the bubble debate, merely put it in a proper context.

Valuations have spiraled upwards and - from a China perspective - when VCs talk about not having time to conduct as much due diligence as they would like and companies receiving funding that don't deserve it (both issues came up at the AVCJ Forum), you don't expect them to stay there. But at the same time, predictions of a brutal, dotcom bubble-style fallout might be wide of the mark.

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