Valuation Inflation and More Importantly...When Will it Matter?

Valuation inflation has been a big topic of discussion amongst Venture Capitalists this week.

Here is Fred Wilson on valuation inflation in the seed, A and B stage.

It is always a topic of discussion around stocks.

I believe all markets are connected. That includes the start-up market, the venture capital markets and the stock market. You can’t look at one without all the others.

I look at four big trends/issues myself in thinking about the overall rising valuations:

1. The biggest public companies and their platforms inspire thousands of entrepreneurs to start companies that look to disrupt the market leaders or fill holes left by or created by the leaders.

2. The costs of getting a company off the ground have plummeted in the era of the cloud and the smartphone.

3. Valuing a global, social, mobile, networked business has proven impossible.

4. Since 1997, the number of stocks in the U.S. has more than halved, falling from roughly 7,000 to around 3,400.

Despite the boom in stocks, Gold (which has no cash flow) has outperformed the Dow ETF since inception in 1998:

Let’s not even get started on Bitcoin and cryptocurrencies.

In the last 18 months look at how Momemtum has trounced Value in the public markets:

I won’t argue with the numbers from Fred and SV Angel. Our own funds, Social Leverage, has invested in over 100 companies since 2006 and we see the same rise in prices. Valuations are going up.

Our job throughout is to find the best people, attacking problems that will yield huge returns, at reasonable valuations because we know that eventually ‘valuations’ matter. I personally have stopped trying to guess WHEN it will matter because it does not pay well. The best people are building things, not worried about valuations.