We’re not in a bubble, says Silicon Valley Bank.
On the bank’s third-quarter earnings call yesterday, President & CEO Greg Becker told investors that the bank, known for its close relationship with startups, does not view the present situation as a venture capital funding bubble, though he noted that things are a bit “frothy.”
Why are we not in a bubble? Better companies, fewer rounds, and fewer IPOs, Becker said. Here are his comments from the call:
- First, the best companies are getting more attention. They’re raising larger rounds of equity and are staying private longer. This, more than anything, is what’s behind the higher valuations, and one of the reasons VC investment is at such high levels, because they’ve been able to access healthy equity funding, these highly valued companies general have low leverage. In addition, many of them have significant customer and revenue traction, and many are disrupting industries and creating significant new market opportunities. Of course, some companies will prove to be overvalued and some will fail. Others will grow into their valuations over time, even if they’re somewhat ahead of themselves at the moment. And some will become breakout companies.
- Second, despite solid overall new company formation, backed by a growing group of sources for startup capital, there are signs that fewer venture capital rounds are being raised. Although we haven’t seen a trend yet, at some point, companies with more challenging business models, less differentiation or poor traction will have more difficulty raising funds. This is more likely given some of the market pullback we’ve seen. But let’s be clear, this is the venture capital innovation model: truly innovative companies and early movers will succeed while others will fail.
- Third, we’re watching exits. IPO slowed significantly in the third quarter. It’s too early to say whether this is the beginning of a longer IPO pullback, but volatility in the markets may be a reason for companies to stay private longer. So we’re paying attention to these potential issues and we do not see them having a material impact at this point.