Andreesen Horowitz: The Case Against A Tech Bubble

Andreeson Horowitz, the rock star name in Venture Capital (VC) funding in Silicon Valley, put together the following slide show presentation this week showing why the tech sector today does not compare to the bubble years of 1999-2000.

I agree there is no true bubble in technology today but there is certainly excessive froth. The main argument you hear for technology (included in the presentation) is that technology stocks make up a much smaller percentage of the overall stock market capitalization than they did in 2000. This is true, but it's because the entire market today is ultra expensive; the median P/E ratio within the S&P 500 today is higher than it was at the peak of the mania in 2000.

In other words, there is not one sector (like technology) in a mega bubble skewing the total P/E ratio of the U.S. stock market higher, all the sectors are expensive together.

The big difference with today's technology market and the one in 2000 is the lack of participation in the IPO market. Due to regulations that were put in place following the 2000 collapse it is much harder today to take a company public. Since there are oceans of capital in the private market looking to enter the VC space, companies can name their price on funding rounds and don't need to bother with the public markets.

In other words, the majority of the excessive froth is in the private tech sector this time around instead of the public sector. Andreeson Horowitz admits this (vaguely) in the presentation, and this topic went center stage a few months ago when Mark Cuban discussed it in his blog, see Mark Cuban On The Lack Of Liquidity In Technology & Real Estate Funds.

With those disclaimers out of the way I'll leave you to the presentation, which is excellent. You can click the full screen button on the top right to enlarge.