Frothy tech venture market echoes dotcom bubble

Speaking at the BVCA Summit held in London in October, Balderton Capital partner Tim Bunting looked back over his eight years of investing in the UK venture capital market and outlined important trends that highlight the resurgence of the tech space.

In 2007, smartphones were just coming onto the market, with people spending an average of 30 minutes each day on their phones and around two hours per day online, while Facebook had just raised its series-A funding round. Seven years on and around 2 billion people have smart phones, the average time spent online per day has doubled and average time spent on phones has increased sixfold - up to an average of three hours each day.

"All of these changes are permanent; there is no going back," said Bunting, who also believes these changes are accelerating in pace. "The people driving these changes are the largest companies, which continue to innovate, are hugely profitable and are deploying huge investments to keep ahead of the game."

Exciting and scary
Alongside these developments, there are plenty of other drivers pushing UK venture to the fore. Not only is the digital economy providing more capital and more jobs, but Bunting has witnessed an enormous increase in the number of organisations providing capital. "We are seeing this most obviously in early-stage investments. The total number of funds active in the market right now is unprecedented, even when compared to the last cycle. This is exciting and scary," said Bunting.

This environment is undeniably reminiscent of booms in the 2000s. For Bunting, this could mean one of two things. When looking at the speed of company formations in relation to capital deployed, the figures show that the former is far outpacing the latter: "That means we're either about to enter a serious bubble, or this is a great opportunity to make interesting investments."

Bunting highlighted that in 2007, UK venture was a lonely space to be in, especially in terms of regional players. "Today, the industry is competitive and the way to execute investments has changed. We have to chase opportunities, fight harder and track down the most interesting next generation," he added.

Bubble trouble
Bunting outlined several arguments against a new bubble: "Venture capital is really about buying an embedded option in a company. And over the past seven years we have seen a huge improvement in companies' ability to scale and use capital efficiently." Indeed, while the boom years resulted in busts, as new technologies took time to work their way into everyday life, today, there are solid digital platforms in place to support young companies growing in this new environment. For example, if you are creating a product business, you can now sell through a platform such as Amazon and immediately take it global.

For Bunting, it is this global approach that is the key difference this time around: "UK entrepreneurs think global from day one. In 2007, it was about building the company in the UK, then in Europe and then globally."

However, there remain some worrying signals that a bubble could be on its way. "Once someone has market-leading status, everyone piles in. That led to trouble last time and it's happening again," said Bunting.

And, while Europe has proven its ability to create unicorns, with the count currently standing at 35, Bunting believes we will also start to see "unichurn". To mitigate this, investors need a deeper understanding of preference stocks.

So for Balderton, the focus is on cockroaches rather than unicorns - businesses that are more stable, less public and often not in promoted or "hot" sectors. "There are some unicorns that will fall over but some will be cockroaches," said Bunting.

While the outlook might be a mixed picture of opportunity and potential trouble, Bunting advises investors to select carefully and to assume that any company being built today will likely see one, or even two, cycles.

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