A bubble? No way, we're in a bust, says rich VC living in alternate reality

Silicon Valley has lost its mind. Episode 22: Marc Andreessen

Analysis Those concerned that Silicon Valley is inside a tech bubble fit to burst, have no fear – because according to true disruptive thinking, the opposite is true.

Speaking at a conference on Wednesday, tech investor and entrepreneur Marc Andreessen batted back a question from Fortune editor Alan Murray about the over-the-top valuations of so-called "unicorn" companies in recent months and the fear we are in a tech bubble.

What did Andreessen think? "The opposite. I think technology has been undervalued since 2000 and is still undervalued."

"Really?" responded Murray. "Yeah," said Andreessen.

This response comes despite the maker of the Candy Crush mobile game being "sold" for $5.9 billion this week; the company behind a technology that recent revelations have shown does not work, Theranos, being valued at $9 billion; and the taxi app company that has still yet to make a profit, Uber, being valued at $40 billion.

Did Andreessen really believe these valuations? He demurred. "The nature of venture capital is that some companies are going to work and some companies are not. As a basket it's almost certainly too low. The entire basket of unicorns is worth like half of Microsoft."

The basket of unicorns.

Interestingly, Andreessen's comments mirror almost exactly those of another VC cheerleader: Sam Altman of Y Combinator.

In a blog post earlier this week, Altman said: "Maybe instead of a tech bubble, we're in a tech bust. No one seems to fervently believe tech valuations are cheap, so it'd be somewhat surprising if we were in a bubble. In many parts of the market, valuations seem too cheap. In the part where they seem too high, maybe they aren't really valuations at all, because the deal structure has changed to become more like debt."

Death of the IPO

So what is going on here? Why are VCs telling us the opposite of a pretty clear reality: that the tech market is in a dangerous boom that shows no signs of stopping and threatens to blow up?

The answer came later on in the discussion with Andreessen when he talked about why so few of these tech companies are going public with share offerings.

The classic venture capitalist model has always been that you invest in a company early, grab a large percentage of the shares and then cash out soon after the company goes public, making a very tidy profit.

In the last bubble and bust – the dotcom boom of 2000 – the sudden collapse in share prices meant that the VCs never got their money back. Worse, many invested in companies after they had gone public by buying shares, whose value then evaporated.

The key thing about the 2015 tech bubble is that these IPOs just aren't happening. The valuations we see and that are endlessly written about are happening purely within the confines of those who want them to be true.

The small world of San Francisco down to San Jose acts as its own bubble. Silicon Valley is full of wildly optimistic people who believe they can change the world through an app – and make billions doing so. The fact that every now and again a very small number of them manage to do that only drives the delusion.

But reality holds: you can't buy shares on the open market in any of the companies that are currently massively overvalued. You have to climb into the Silicon Valley bubble to get a piece of the action.

Andreessen unwittingly highlighted this when he was asked about the "unicorn" valuations. He noted: "Well people are excited. In the Valley, people are excited. People outside the Valley, including in the stock market, are still depressed."

He went on: "The narrative thread that gets told right now is that these smarty-pants VCs are not going to be able to exit and realize their value. I think something else is happening: with the exception of a handful of companies like Facebook and Google, most public tech companies right now have shareholder bases that do not want them to do new things. And instead want them to give back cash.

"A very large percentage of incumbent tech companies are not able to do new things. They're not able to make acquisitions, they're not able to make investments, they're not able to launch new projects. As a consequence, if big public companies are not going to be able to be innovating into the future, then the innovation is going to have to come from the private side."

According to Andreessen, who does not believe in the bubble, the reason there are so few IPOs is because public companies are constrained from doing really innovative things. And that's because Wall Street and everyone else doesn't realize the good times have already come.

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Meanwhile, on the other side of the VC argument lies Mark Cuban who does believe there is a bubble – and a dangerous one – but blames the lack of IPOs on the fact that new rules were brought in following the dotcom bust and the 2010 "flash crash."

"All those Angel investments in all those apps and startups. All that crowdfunded equity," Cuban raved in a blog post earlier this year. "All in search of their unicorn because the only real salvation right now is an exit or cash payout from operations. The SEC made sure that there is no market for any of these companies to go public and create liquidity for their Angels. The market for sub-25m dollar raises is effectively dead. DOA. Gone. Thanks SEC."

We don't do rules

The dotcom bust led to new rules by the US Securities and Exchange Commission (SEC) to prevent so-called IPO "spinning," where Wall Street companies used upcoming IPOs as a way to win banking business.

With shares in companies skyrocketing as soon as they went public, everyone wanted in on the easy money. And so companies with access to shares at the launch price would offer them to executives at companies whose business they wanted as a way to win those contracts. The SEC has put a stop to that.

The SEC also introduced a number of new rules around share prices in response to the "flash crash" of 2010, when the Dow Jones plummeted nearly 10 per cent in just five minutes. It was hard to pinpoint the exact reason for the crash, but the greatly expanded use of automated software in share price buying and selling had a big role in it. So the SEC stepped in to make the market behave in a more stable way – in particular limiting the amount a stock can rise or fall in a short timeframe.

The end result of these changes is that the classic VC cash-out exit plan has been cut off. There is simply no way for the exuberance of Silicon Valley to play out on the stock market, and any IPOs that do happen are much more likely to reflect a tech company's real worth.

Which is a good thing for the country, but a bad thing for people whose entire culture is built around making that billion-dollar deal.

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