On Thursday, the tech-heavy Nasdaq Composite Index reached heights that many thought would never again be possible in the post-dotcom crash era. The Nasdaq reached 5056.06, besting the index's record level set in March 2000. Since it wasn't actually that long ago, many of today's stock-market investors remember well the dotcom boom and bust—as do their bank accounts.
Regionally, the D.C. tech ecosystem has grown due to the red-hot tech investment atmosphere of recent years. But the question is, if the tech bubble were to burst again, what would that crash mean for D.C.’s local startup scene and its hopeful entrepreneurs?
A generous national monetary policy led by low interest rates has helped underpin the booming tech market expansion, though many have recently argued that the rising investment wave will inevitably crash.
In reality, there has been quite a lot of talk about our “new” tech bubble in recent years, though few VCs have directly called it as such. Recently, billionaire Dallas Mavericks owner and prolific startup investor Mark Cuban issued a warning about excessive valuations for start-up companies. Elsewhere, hedge-fund mogul David Einhorn presented a qualitative case for the crash.
Sir Michael Moritz, chairman of Sequoia Capital and an early investor in Google, told the New York Times in late March that the value of many "unicorn" technology companies would implode in the coming months. "There are a whole bunch of crazy little companies that will disappear," he said. Moritz ended the interview by saying that the capital invested in Silicon Valley would be better spent in China's rich, emergent tech sector.
Leesburg, Va.-based Militello Capital invested early into several up-and-coming local startups, including Social Tables, Hinge, Distil Networks and Venga. DC Inno sat down with Matt Brady, co-founder and COO of the prominent investment firm, to discuss the implications of a local tech bubble.
Brady is currently a member of the boards at Social Tables and Venga, and comes with an understanding of the local tech and real estate scene as well as a diverse investment background spanning several decades. I asked Brady about his opinion regarding the tech bubble theory and what it may mean for D.C. startups in the future.
The D.C. tech/startup scene has come a long way in the past few years, but Brady said that five years ago may have been a better time to invest early into tech companies — “we’re at an all time high right now, making it a tough ground for deals,” he said.
This environment is especially critical to the growth of an angel investment class, who Brady said should be very cautious moving forward with investments right now. Important to note is that most private tech companies are remaining private for much longer, because of 1.) the access to capital and 2.) the regulatory burden. Brady went on to say that potential volatility in the overall stock market would cause large “pauses” in funding/investment flow for startups — influenced significantly by local angels. As a result of these “pauses,” early-stage ventures will be the first hit by the wave created via a market “correction.”
Here is our interview:
Q (Bing): Simply put, are we currently experiencing a tech bubble and if so how would you define it?
A (Matt Brady): Due to an accommodative monetary policy over the last six years, we have seen a general inflation of asset values across the board. This is bound to happen with interest rates at all-time lows and the stock market approaching all-time highs. Insofar as a tech bubble is concerned, we think there’s a difference between early stage—those companies that have raised an angel or seed round—and later stage companies. We felt a lot more bullish about making early stage investments three years ago than we do today because we are obviously farther along in the business cycle. As a private equity firm whose investors are clients of independent registered investment advisers (RIAs), we look to make investments based on where we believe we are in the business cycle.
"If we do experience a bubble bursting, we believe there is a high likelihood that those late entrants will exit the market, which will likely impact the local tech scene."
Q: How do you believe the DC tech scene will stand up to such a bubble bursting in the apparent future? Would it move the bar for attracting investors?
A: Downturns tend to shake out fringe players and late entrants. We believe investors should consider entrepreneurs and technology as a part of their portfolio, and should allocate accordingly. The lifeblood of any business - especially a startup - is capital. Over the last several years we have seen a lot of less sophisticated investors enter the market, but as of yet have not seen exits. If we do experience a bubble bursting, we believe there is a high likelihood that those late entrants will exit the market, which will likely impact the local tech scene.
Q: What do you think of the recent CB Insights report, which claims that D.C. is experiencing less total deals yet more money is being invested? Could this be part of a larger trend?
A: I would suppose it is a function of investors having a greater appetite for companies that can be self-sustaining during a downturn versus an earlier stage company.
Q: What does the tech bubble conversation mean to you, and how do you interpret what’s going on in the market with the growth of “unicorns” and less exits?
A: The simple reason for the proliferation of unicorns is that companies are staying private longer, which is due to both the availability of private capital and a prohibitive regulatory burden placed on newly public companies. Given the structures of some of the investments being made in these late-stage companies—for example, multiple liquidation preferences on preferred equity—you could also argue that the billion dollar plus valuations we’re seeing in these companies are not true valuations.
