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Are We In The Midst of a Startup Bubble?

Revenue & Finances

Isadora Teich wrote this article

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2021 was the biggest year in history for U.S. startups. It was so big, in fact, that some experts are starting to wonder if we are in the midst of a startup bubble.

Let’s take a look at the numbers and more.

Capital is Flooding into Startups

According to data from financial data company Pitchbook, the median valuation of seed and early-stage startups in 2021 soared in America. In 2020, this number was $16 million. In 2021, it was $26 million. Last year, the median valuation was over double the median valuation of startups five years prior.

Interestingly, this money is flooding into young companies. Many of these companies are so young that they haven’t even moved past the concept stage, according to a Wall Street Journal Report.

Investors are so set on finding the next big thing that nearly $100 billion went into early-stage startups. Investors are being unusually bullish, as there is a lot of collective anxiety around the possibility of missing out on large returns.

What Exactly Is A Bubble?

Before we take a look at why some experts are ringing the bubble alarm bells, let’s take a quick look at what bubble actually means in this context.

A bubble occurs when an asset or commodity is priced at a historic high compared to its actual worth. When this happens, a backslide is inevitable. If something is wildly overpriced, the market figures this out eventually. This can occur with anything from tulip bulbs to homes.

If you want to learn more about some of history’s most famous bubbles, including the infamous Dotcom crash that tanked the stock market, check out our blog post on the subject.

In this case, experts are saying that startups are currently way overvalued and overhyped. They are warning that some kind of inevitable backslide may be on the horizon.

According To Experts

Some say that it has become a trend to overvalue startups and this may have some unpleasant consequences for investors and the market in general. Some say that while investors are expecting this decade to yield the same astronomical returns of the last decades, so far, we are not seeing proof of this.

In fact, this year, several venture-backed IPOs have already underperformed according to PitchBook. Many experts are not as optimistic as venture capitalists. They think that returns will be much lower this decade than during the last.

For example, we have seen a number of high-profile failures lately. This includes failed streaming service Quibi, which got more than $1 billion in funding only to collapse in less than 6 months. A lot of other startups end up failing after being plagued with a variety of legal and other issues.

San Francisco biotechnology company uBiome came to a dramatic end after raising more than $100 million.

The company’s cofounders have resigned, it faces law enforcement scrutiny over its billing practices, it’s currently in bankruptcy proceedings, and it filed a motion Tuesday to move from Chapter 11 to Chapter 7 bankruptcy, which would mean liquidating its assets and shutting down.

More Than Failure

Of course, not every startup fails. When it comes to any kind of business, there is a lot of competition and risk. We have all probably heard some pessimistic sayings about opening and running businesses. However, the numbers are quite stark.

Data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.

The main thing that has experts wondering if we are in a startup bubble is this:

Some hyped-up venture-backed IPOs seem to be underperforming in the market. Many of these companies enter the stock market with a big splash, only to sharply fall in value.

Lacking Performance

For example, cryptocurrency exchange platform Coinbase went public last year with a splash. Experts spent weeks speculating what its worth would be. Valuations ranged from $19 billion to more than $200 billion.

Since its release, the stock routinely makes headlines for sharp drops in value. The stock slid 20% in December of 2021.

Coupang is another company that started big and has struggled since. In March 2021 it went public with a valuation of $4.6 billion. Over the course of 2021, it fell more than 40%.

Numerous other companies have tried to navigate around the complexities of going public by forming or merging with SPACs, but these have not done overwhelmingly well either. One such company is Buzzfeed. Its shares fell more than 11% on its first day of trading after a SPAC merger.

Buzzfeed co-founder and chief Jonah Peretti talked about the SPAC market running hot and then hype quickly going cold.

“We entered a SPAC market that was very hot. Even companies that were not very good companies were raising at very high valuations and raising a lot of cash. In the midst of our process, we definitely saw the SPAC market get ice cold.”

What’s Coming In 2022

Some experts say that low-interest rates have contributed to the mad rush to invest in startups. There has been a lot of talk around the Fed raising interest rates in 2022. If they do so, it may reverse or dampen this trend.

It is important to keep in mind that the world of startup funding used to be quite different. In general, it was common practice for investors to wait at least 9 months for a startup to prove its concept before investing.

Startups would also usually wait for 9 to 18 months between funding rounds. Some say that it is possible that we could return to these calmer waters over the course of the year.

So, Are We In A Start Up Bubble?

It’s difficult to say. While it is easy to focus only on the negative, it remains true that many startups are still wildly successful. In total, there are more than 800 unicorn startups globally, or startups with more than $1 billion.

On top of this, there are over 2 dozen startups considered decacorns, because they are worth more than $10 billion. This includes companies like Bytedance, SpaceX, Instacart, Canva, and Epic Games.

While there is a lot of hype around startups, it is not for no reason at all. However, it is undeniable that investors have been playing it a bit fast and loose with capital as of late.

Regardless, it’s impossible to say exactly what will happen. As these things tend to ebb and flow, it would not be shocking if eventually, things do cool off.

What do you think? Comment below!

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