“When the market turns, and it will… Many high burn rate companies will VAPORIZE.”
That’s a tweet from Netscape founder Mark Andreessen. Web browser Netscape was how most folks “surfed the Web” in the modern Internet’s early days. Andreessen’s ominous comment refers to the amount of “high burn rate” startup companies enjoying valuations in the stratosphere right now. Many of these companies—like “disappearing” image mobile messenger Snapchat—don’t even have revenues yet. That hasn’t stopped Snapchat from receiving a current valuation of around $10 billion thanks to its 100 million projected users. And Snapchat isn’t alone…
The Wall Street Journal reports there are at least 49 startup companies with a minimum valuation of $1 billion right now. That’s the highest number in history. The previous high was 28 companies last year (At the top of the last tech boom in 2000, there were only 10). Number one on the list now is revolutionary taxi-replacement company Uber. The company—born in 2009—is now valued at $41.2 billion.
Andreessen’s position from which to view the current boom is significant…
In the mid-1990s, Netscape enjoyed a 90% market share of all Internet browsers. In 1999—near the peak of the last great tech bubble—America Online (AOL) bought the company for $10 billion. But by 2006, the number of Netscape users had dwindled to less than 1% of total Web surfers. It was a catastrophic misstep for AOL.
AOL got caught up in Netscape’s great story—and its sheer amount of users. But the reality was Netscape’s browser had bugs. It couldn’t compete with Microsoft’s brand-new Internet Explorer browser. Before long, the hype came crashing down in a hurry.
Today’s extreme valuations of so many new startups reflect a similar break with reality. The protective “moats” (i.e., barriers to competition) around some of these startups are so narrow… you could trip and land on the other side without getting wet. And when enough venture capital (VC) investors recognize this… the show will be over. Valuations for most of these companies will return to the ground, fast.
Bottom line: Just like in the late 1990s, inflated valuations always arise near a market top. The problem is… there’s no way of knowing if we’re there yet. And we don’t want to exit a market that still has the potential to rocket much higher.
The only way we stay safe and remain “in the game” is by adhering to our risk-management protocol: The Palm Beach Three-Legged Stool of Safety. Regular Daily readers know the “legs” represent appropriate position sizing, trailing stop losses, and diversified asset allocation. They’ll keep us insulated from ever sustaining a catastrophic loss. If you’ve not done so yet, please review and implement these steps right now.
(To view an interactive list of the 49 billion-dollar startup companies, for free, click here.)