by Exeter Jones Comments (38)

Venture Capital and Technology: The Movie Sequel You Have to See and Buy

Venture Capital & Technology Bubble

I watch a lot of movies, but I rarely watch the same movie twice.

For me, watching the same movie more than once feels like the strangest and most unusual self-inflicted torture imaginable.

I just have little to no interest in re-watching the outcome of a scenario that I’ve already seen play out.

But when I do have some downtime, sometimes I like to queue up movies that I deem “classics.”

These films may be categorized as “classics,” but I enjoy them because they’re action-packed, hilariously funny, inspiring, and great to watch over a few beverages of my choice.

A few of my favorite movies, in no particular order: Enter the Dragon, because Bruce Lee makes me feel invincible, Harlem Nights, because Eddie Murphy and Richard Pryor are absolutely entertaining, and Willy Wonka and the Chocolate Factory (the original, not Tim Burton’s adaptation), because it’s the children’s equivalent of It’s A Wonderful Life – don’t judge me.

And then there is a movie playing right now that we all may have seen before: The Technology Boom, Part 2.

And I’m eager to watch it unfold all over again.

Open the C Drive and Let’s Take a Trip Down Virtual Memory Lane

The Internet changed the way we live when it was introduced to the public in the 1990s.

From the late 1990s into the early part of 2000, the NASDAQ Composite Index showing no signs of slowing down as the market responded in a huge way to the technology shift made by both traditional businesses and Internet start-ups.

After the introduction of the first web browser during the early 1990s, there was a rush to migrate to the Internet platform, as it was widely believed to be the future of consumer communication and commerce.

As people began to integrate the Internet into their everyday lives during that period, Internet use went from roughly 16 million users in 1995 to almost 250 million by the end of 1999.

And, of course, there were a bevy of venture capital firms offering seemingly unlimited and inexpensive capital in exchange for equity stakes in companies that would take advantage of this magical new medium.

The goal for many companies and venture capital firms during that period was to cash out at nose-bleed stock price levels after going public.

In other words: take the money and run.

If you didn’t cash out early, well, there’s probably a virtual tombstone with your name on it somewhere on the Internet.

But the financial markets can change quickly.

Fast forward to October 9th, 2002, the day the NASDAQ hit 1,114: it had lost 80% of its value, plunging from 5,132 down to barely ~20% of that in 2.5 years.

In the year 1999 alone, about 25% of the companies that went public that year doubled their stock price on the same day as the IPO.

Two years later, out of all the IPOs issued in 2001, exactly 0 companies doubled on their first day after going public.

Metrics? Are We Talking About Metrics?

During the Internet / technology bubble of the late 1990s and early 2000s, many venture capital firms ignored the more “traditional” metrics of assessing a company’s business and valuation in favor of… a more speculative approach, to put it kindly.

Being in the “angel” phase of a company’s business model often means that the companies are pre-revenue – which makes them tough to value for anyone.

That’s when investors start looking at these more “creative” metrics and assigning value to users, page views, active registrations, and so on, to guesstimate if the business is viable and if they’ll ever see an ROI.

Anticipated growth rates also become more common, and people focus more on sales than profits.

VCs may also analyze a company’s business model in relationship to market demands or voids in the marketplace, with an experienced investor team that understands the capital and opportunity costs in the space.

But during that time period, none of the “analysis” above really played a role: it didn’t matter whether or not you were profitable, possessed a strong business model to execute on, or even had a desirable target market.

The fundamental question was how large your (potential) customer base was and what it was anticipated to be in the near to long-term.

Consumer awareness and company expansion trumped any and all quantitative analysis.

We’re Going Back to the Future

Countless articles and news reports (as of January 2014) are saying that investors have been experiencing their best year in the market in over a decade.

With over $50 billion raised in IPOs in 2013, the market has not seen capital raising efforts this successful since the technology boom of the 1990s/2000s.

While there’s definitely diversity in the IPO offerings, technology and biotechnology lead the pack by a considerable margin.

And although the number of venture capital firms has shrunk considerably from the last bubble, that hasn’t even made a dent in the amount of capital that’s flowing freely to technology start-ups.

In the third quarter of 2013 alone, more than $8 billion in capital was raised for technology companies (up close to 20% over Q3 of 2012).

In 2000, by contrast, tech start-ups received over $100 billion – so there’s quite a ways to go, but we’re clearly headed in that direction… which begs the obvious question:

Is history repeating itself?

It’s tough to tell, but there are signs that it may be.

Twitter, as an example, one of the most successful IPOs in 2013, is valued at over $30 billion.

While Twitter’s revenue appears to be growing faster than Facebook’s revenue, it’s still heavily dependent on advertising revenue and, as of January 2014, it’s trading at more than 58x its past 4 quarters of revenue (Facebook, meanwhile, was at “only” ~19x revenue and LinkedIn was at “only” 15x).

As a point of context, in February 2000, Cisco, the computer technology giant and one of the largest companies during that period, was trading at more than 140x price to earnings!

Not exactly a one-to-one, but you get the idea.

In the words of Marty McFly, “Wait a minute, Doc. Ah… Are you telling me that you built a time machine… out of a DeLorean?”

It’s Like a Finger Pointing at the Moon

According to reports, there were 45 technology IPOs in 2013 and 2014 is poised to be an even stronger year.

There are almost 600 technology-based companies in the IPO pipeline for 2014 that are each valued at $100 million or more – and that mix is split almost evenly between private equity and venture capital firm investments.

Popular tech companies like Alibaba, (makers of the Candy Crush virus), and Dropbox all have valuations in the billions, with investors eager to pour money into these companies because of their expected growth potential.

And there are even 30 companies with a valuation of over $1 billion each, also in the IPO pipeline.

But you may not be aware of another fact: there have only been 45 venture capital-backed technology companies that have successfully exited with a valuation greater than $1 billion between 2004 and 2013 (source: CB Insights).

Yes, that’s right: somehow the tech industry is going to unleash almost 70% as much value in a single year as it has in the past ~10 years, combined.

Now, you might say, “But the valuations are nothing like the old tech boom. At least these companies have revenue! If companies don’t have a legitimate business model with interim revenue goals, the market will hammer them!”

With IPOs, this is somewhat true: unlike the 1990s, you really cant go public unless your business has a good $50-$100 million in revenue and some predictability and visibility into sales.

But if pre-revenue companies like Snapchat are shunning social media darling Facebook’s $3 billion dollar CASH offer…

Well, if it looks like a duck and walks like a duck, then maybe it’s the apocalypse being digitally streamed.

Don’t get me wrong: some companies will go on to be tremendous successes, just like how Google, Amazon, and eBay became huge successes out of the late 1990s.

I live in DC and I can tell you firsthand how Uber is a necessity in certain parts of this city.

Whether it prospers or fails in the long-term, it’s a real business that satisfies a real need and generates real revenue, and which has a viable growth plan.

But we never remember the big winners as much as we remember the big losers.

Does anyone remember

As fast as the company raised cash in 1999, they burned through it even more quickly by 2001. The company was such a colossal failure that it left the San Francisco Bay Area with Webvan relics, even to this day.

My bet is that when the dust settles and the market looks around to see who the winners and losers are after this technology sequel, it will be the shareholders of [FILL IN SELECT COMPANY] left holding the bag, while the start-ups and venture capital firms that cashed out upon going public will be long-forgotten but obscenely wealthy.

Today is Tomorrow; It Happened

So what’s your takeaway from all this?

If you’re going to do something outside of a pure finance role, or you’re thinking of exit opportunities out of banking, join a start-up tech company or a tech-focused VC firm.

Sure, you may not like the start-up environment… maybe you prefer something more corporate.

Or you might not want to follow the corporate finance career path or work in corporate development careers at a tech company – because you have no interest in the industry.

But if it’s true that history repeats itself, we are at the root menu of the playback sequence on a DVD of the sequel.

And you don’t even need to move to Silicon Valley or San Francisco: new tech companies and venture capital firms are littered throughout the world, and will continue to recruit top talent during this technology resurgence.

I’m not a gambling man (in public), but if I were, the next 2 to 3 years are going to be a bright green roulette table where all the numbers are the same and the color is metallic.

Technology companies are where the business growth, employment opportunities, wealth generation and overall business excitement will come from over the next few years.

There’s no guarantee that every technology company will go on to command a billion dollar valuation, or that every venture capital firm will see an exit big enough to make everyone at the firm millionaires.

And you’ll need to get the timing right: if you join one of these companies, get a generous equity or carry package, and things seem “too good to be true” at first, but then keep getting better and better… well, that’s probably your cue to exit stage left.

Take your gains, and don’t be like those traders that ignore their risk limits, stop losses, and profit-taking levels.

I don’t even know if this technology run we are on will end in 2014, evolve into 2015, last for the next decade, or come crashing down somewhere in between. I also don’t know who the winners or losers will be in the near-term or long-term.

I just know a good sequel when I see one, and this looks like a good sequel.

The suspense is terrible… I hope it’ll last.


About the Author

Exeter Jones is a philosopher trapped inside the body of a writer, trapped inside the body of an alternative investment analyst. He's worked in investment banking, alternative investments, and corporate finance, and his favorite breakfast food is ESPN.

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  1. Hi Brian,

    Can you comment on the pros and cons of working at a late stage startup like Gigya or Dropbox vs. IB as a new graduate? I want to either work in VC or start my own business down the road. I think I’d learn more at the startup but IB pays more. However, as this article stated, this is the age of tech, not finance.

    1. Avatar
      M&I - Nicole

      I think you’d find this article useful, we have another article coming up on working at a startup in the next few months so stay tuned.

  2. Do you agree with the thinking that silicon valley today is wall street in the 1980s?

    1. There are some parallels, but one key difference is that very, very few people in Silicon Valley make a lot of money from start-ups… it’s concentrated in a few highly successful companies / VCs and lots of others work crazy hours for equity that turns out to be worthless.

  3. Hi,

    Is CAIA charter useful to break-in at entry level position in Hedge Funds?


  4. Hi,

    Are SAS skills required to be a buy-side analyst?

    If not, what are the other technical and soft skills are needed for the entry level position?


    1. Avatar
      M&I - Nicole

      No I don’t believe so.

      Ability to communicate, present ideas, and value investments. Ability to identify sound investments. Ability to work in teams and lead at the same time.

  5. Hello Brian,

    I am a graduating senior with no offers still. I have 2 finance internships in the past and was recently dinged at 2 superdays with name brand banks for IB. I’m not exactly sure what type of work best fits me. However, after reading this article and talking with others I have been looking into tech startups which could actually be an even better option even if I got the banking offers. Do you have any suggestions on what I should do?

    1. Avatar
      M&I - Nicole

      Yes, I agree. Perhaps you can do more research on tech startups, and start applying to roles there. See if something comes up. If you can get an internship experience at one of the startups you’ll have a better idea.

  6. Hi Brian,

    I know Exeter wrote this, but what do you think about joining a tech startup these days in a business/finance role? Would it outweigh even investment banking? What do you think of the tech startups vs. banking debate?

    1. I think you should decide based on what you are actually interested in doing as opposed to criteria like hours/pay/% probability of becoming a deca-millionaire.

      If you are actually interested in building products people use and a more laid-back work environment, start-ups are better. I certainly don’t buy the “Oh, all tech start-ups change the world, but finance is evil and destroys things!” line of thinking because most start-ups are derivative and are started by people looking to make a quick buck. So choose carefully…

  7. I already have an MA in Econ, does that count?

    1. Depends when you earned the degree… a Master’s degree is only helpful to the extent that it positions you to speak with recruiters. So a degree you already earned isn’t necessarily helpful for that.

  8. My past experience was in back office ops, now I’m working in IT as a Database Admin, I kind of fell off with trying to network. I guess my best option to breaking in, is Technology Banking or Prop Trading/Quant/Financial Engineering?

    1. Yes, or go back to school, rebrand yourself with an MSF or MBA and leverage that to break in.

  9. Hi Brian,

    I have a modeling interview with a healthcare focused Growth Equity firm coming up and wanted your insight on how best to prepare. They do not do LBOs so I imagine I should, at a minimum, review building out 3 statement models and perhaps DCF analyses. I have your BIWS course so if you could refer to anything specific in there, that would be great.


    1. Yes, they will likely ask about 3-statement modeling and valuation. I would take a look at the bonus case studies and specifically the write-ups / presentations for Mylan, Dell, and Best Buy because the same framework applies even to growth equity investment recommendations. Good luck!

  10. Avatar
    James Immordino

    Thanks for the closing Gene Wilder quote!

    1. The most important part…

  11. Brian, I am very surprised that Wolf of Wall St is not on your list. Did you write this article before you saw the movie?

    1. To clarify, this was Exeter’s article – see the byline and his bio at the bottom – so they’re his personal favorites. I thought Wolf of Wall Street was OK but not great:

  12. Great story Exeter, being unknown but wealthy would be paradise. Thanks Brian, I’ve started hunting down IB Firms in Lagos, Nigeria. 2 down, 25 or so more to go. Speaking of a Tech Bubble…Africa is really keying into the Tech uprising. Nigeria and Kenya to my mind are paving the way. I’m still keen on banking but would love to invest in and advise on tech companies as a way to cash in on the boom. I plan on equiping myself with an IT certification (so as, along with aquiring knowledge and some knowhow, not to get lost in and indeed appear competent in Tech Talk) and bulking up on reading material…How else can I fortify myself to properly and successfully take advantage of the African/global Tech inndustry? P.S M&I is my mirror mirror on the wall for all things IB entry. Thanks.

    1. I don’t know much about tech in Africa but I imagine plenty of companies there are looking for capital… so it’s likely a matter of networking in the big cities, going to start-up/tech events, and so on (I’m also assuming that it’s easier for individuals there to invest in private companies).

      1. Thanks for the advice Brian. I have another question. During my internship hunt I’ve come across a possible Corporate Finance Internship with a big bank here in Nigeria. My question is whether there’s a distinction btw Corporate Finance and IB? If it came down to making a choice btw the two, I’d take IB. But if Corporate Finance is all that comes my way will it impress IB firms? I snuck in another question there. Thanks.

        1. Avatar
          M&I - Nicole

          Yes corporate finance can impress IB firms because some skills overlap. If you don’t have other alternatives, I’d take that option even though it isn’t directly relevant to IB. You may find this article useful:

  13. Yes, I agree. The regulations etc will anyway take the lure away from HF’s and PE’s. Prop trading is dead anyway. Tech focused VC seems like a good exit right now with good work/life balance as a pro. What do you think about trading? If history indeed repeats itself, are we headed for another $10m+ bonus for equity analysts or HF traders in future?

    1. It is, but one issue with tech VC is that very few firms outside the top 10 or so ever see good returns, plus as a junior you won’t get carry anyway.

      I really doubt we’ll see $10 million bonuses for equity research analysts again unless something comes along that surpasses the 90’s tech boom.

      HF traders can still earn a lot, but pay at large banks will be severely limited due to regulations. Eventually buy-side firms will become more regulated but that will take time.

  14. Great post! However the question I have is what kind of entry jobs are available for an undergraduate majoring in finance in silicon valley?

    1. Hmm, maybe the corporate finance rotational programs offered by big companies there? Start-ups are always hiring for business development / sales roles as well if you’re willing to get your hands dirty (it is mostly grunt work and chasing down people / partners / random projects).

  15. Great Post Exeter ! Thanks for backing your statements with Data. Maybe it’s time to create a vertical called “How to break in the Valley” – just kidding – but in a way, if the tech-bubble pops the financial industry it’s also going to be affected specially in SF. Yes, the story always repeats itself (but always in different ways). Keep up the good work!

    1. Thanks for reading! Yes, interview guide for Silicon Valley coming up soon…

  16. Hey Brian. I would like to firstly say thank you for taking the time to reply to all questions asked on here and by email.
    Secondly my question: I got put into contact with a trader through my high school career service. After two/three minutes of chit chat, he repeatedly said he will refer me to hr and tell them what a good candidate I am and so on..
    Also on the application page it says to state if you were refereed to this position and to give the name and email of the employee. I have done that.
    This was about three weeks ago. Two weeks ago I emailed the guy asking him if he has a chance to refer me to hr? He did not reply. shall I email him again or shall I ask hr if I have been refereed by anyone?
    Do I have to do anything as he repeatedly reassured me he would refer me (without me even bringing the topic of an internship up)?

    1. Just call him back and ask if he has had a chance to do that. People get busy and you are usually last on their priority list so you have to follow-up several times and ask about it or you won’t get anywhere. And yes, do bring up the internship because people forget about these things or get busy with work and won’t go out of their way to help you.

      1. Thanks Brian.
        If I declared at the bottom of the application page the name and email of the person who refereed me, doesn’t that person get automatically get told?
        By following the network advice on here, I am starting to find it doesn’t matter what University you go to if you network.
        How much do your grades and uni matter for the interview?

        1. Not necessarily – banks are disorganized. Your university and grades do still matter and interviewers will ask about them, though they matter more for getting the interview in the first place.

          1. Ok Thanks. I emailed him and he has assured me he has put himself has a reference on my application form. Hopefully should be ok for an interview…

        2. Avatar
          M&I - Nicole

          Yes this may happen though unlikely. Your grades and university matter, though networking can potentially compensate for lower grades and less credible universities

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