The bigger story behind big valuations

The New York Times notes that big-money rounds are becoming all too routine in Techlandia, which has led some to wonder: what is the cause of this seemingly irrational exuberance? Valuation, in the end, is determined by an investor’s willingness to suspend belief — or rather how much they want to suspend that belief. There are others who are jumping in after seeing others make a killing. There is a herd-like behavior, and when that happens valuations take a leap.

But focusing on the shifting valuation and check sizes, we are missing the point: the planet as we know it is going through some seismic changes, and such changes mean opportunity — to create, disrupt and re-invent. So let’s talk about the shift.

Given my day job — an investor in early-stage startups — I have a bias towards optimism and the future. Being pessimistic doesn’t bring any solutions, and the past can’t be reinvented. And if the passage of time has taught me anything, you need to take a long view. Back in 1999, John Doerr commented: “Believe it or not, the Internet is actually underhyped.” And we didn’t believe him. But he was so right. Just as Marc Andreessen who astutely remarked: “software is eating the world.”

Those two comments actually book end my own core belief — our processors are like steam engines, and broadband (network connections) are the wheels that make those engines mobile. And just as steam-engine on wheels unleashed an industrial revolution, our increasing number of processors, plugged into a network fabric have helped jump-start another major, cyclical and fundamental societal shift.

In this 2015 column for FastCompany I wrote:

Railroads, freighters, factories, mass production—everything happened because the power of steam was made mobile. That created the Industrial Revolution and the Victorian age, and it altered the face of the entire planet.

Today, it’s the increasing mobility of “computing engines,” the marriage of microprocessors and Internet ubiquity, that is poised to reimagine our society. Networks—social, neural, physical, metaphorical—enable connectedness, and connectedness changes everything. Networks compress distance and time, that concentration speeds up life, and that, in turn, creates sociological and economic change.

Since I wrote that, our world has become faster. If things seem like they are moving too fast, they are. Fundamentally, we are experiencing the same anxiety and change, just as how our ancestors felt when industrialization started to make its presence felt in our society.

Just as industrialization redefined society, its norms and culture, and in the process creating great fortunes, we are seeing the chessboard of planet earth being rearranged. We are in a transition to post-democratic, post-Industrial, post-Internet world, which was jump-started by the iPhone and its brethren. As billions of smartphones have found their way into our lives, they have helped catalyze demand for everything from accelerometers, to visual sensors, whose prices have fallen as the demand has gone up.

These cheap processors, sensors and even cheaper and powerful processors are finding their way to everything from weather systems (Understory), security systems (Ring) to cooking machines (Brava), exercise devices (Peloton). You can hear the digital heartbeat in everything — from industrial devices (Petasense) to even our shoes and clothing. A network is akin to the arteries and software is the brain which adds intelligence to this future.

We are nowhere close to being done. The mobile revolution and its second order impact haven’t yet fully played out. Just as industrialization created this demand for mass-production of food and created iconic brands such as McDonald’s, it is not impossible to imagine DoorDash creating a new food manufacturing and delivery ecosystem befitting the on-demand world, enabled by the computers in our pockets. Is the company worth, $4 billion? I don’t know — after all, valuation is whatever someone is pay for it. I mean why do some people think it is okay to pay $250,000 for a watch, while others are thrilled with owning a $100 Timex?

Over past five years, we have seen valuations go up and then dip, and then go up again. The amount of money invested in private companies has gone up and down. What hasn’t gone down — the sheer size and scope of change. And that’s why perhaps it is time to separate the exuberance in valuation from what I believe is a societal shift of immense magnitude, and opportunities that will arise from it. As someone who wrote about the wreckage of another bubble — the telecom and fiber bubble that grew out of the dot-com bubble — there was one vital lesson: Exuberance can have its benefits.

Overfunding of fiber and telecom companies led to overbuilding of networks, that have since enabled Google, Facebook and every other company to thrive and create immense wealth and opportunities. The same networks allow us to bank with our phones, order food from Caviar and get prime deliveries from Amazon. The same networks, also create political upheaval. Same networks open us up to attacks on our privacy and our data. Yes, those are as real as the things that got better, faster and easier.

Have a great weekend everyone!

August 17, 2018, San Francisco

A letter from Om

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