The Myth of Tech Valuation: Why Does the Market Always Swing Between Extremes?
Has tech valuation bid farewell to the era of high growth? WSJ reports point out that unicorns are under pressure and IPOs have nearly disappeared, yet venture capital fundraising has hit records. This article reflects on why the market always cycles between euphoria and pessimism, and questions the disconnect between the high-growth myth and sound business operations.
The Wall Street Journal's CFO Journal published an article on May 2, 2016, opening with the following observation:
"WSJ's Christopher Mims writes that the era of soaring tech valuations has ended. We seem to be experiencing a period of 'suspension of disbelief'—investors and entrepreneurs have yet to realize that the unicorn group is under pressure, and the urgency of profitability is increasingly prominent. Startup investment has cooled, valuations have declined, and initial public offerings (IPOs) have almost disappeared, but venture capital funds still raised record amounts of capital in the first quarter."
We are not unfamiliar with similar arguments, but why does the market always repeat the same cycle: first welcoming only a very few high flyers, then overvaluing and pushing up the next round of financing, and once double-digit growth becomes unsustainable, collectively falling into the abyss?
It is worth noting that companies that maintain moderate growth year after year often survive for decades and provide generous returns for all participants. They do not chase explosive growth, yet they build a solid business foundation.
So, where do you think the cognitive gap between Wall Street and Main Street lies?