Valuation Hype?

Will cloud computing rain on the investor’s parade like it’s 1999? Surging valuations of Cloud software companies – and investor fears at missing out on the next Zoom – mean companies with valuations in the billions based on meagre revenue streams.

Zoom’s valuation has soared by 464% this year – driven by stay-at-home workers – leading to sky high valuations for cloud computing start-ups.

Miles Clements, a partner at the venture capital firm Accel, says valuations have been pushed to their extremes.

He added there was little room for error and “the risk is that you’re getting into these situations where it’s priced to perfection, and you have good companies raising at untenable valuations.”

ClickUp, a workplace productivity start-up raised two rounds of funding in the span of seven months this year.

Derek Zanutto, a general partner at Google’s investment fund CapitalG said: “Many investors will take the mentality that they don’t care if they invest at 100 times revenue, so long as they are getting in at a valuation below $200m, $500m or even $1bn.’

Alan Patrick, co-founder of analytics firm DataSwarm, has seen his share of tech bubbles and, while he sees plenty of “froth” at the moment, he doesn’t yet consider this is a bubble about to pop. Even today, with tech stock prices still so high, he said, we may only be at the “foothill of bubble phase”. “The rise has mainly been from companies that stand to profit hugely from a world that has a ‘phase shift’ to a more digital, less physical world – Zoom, Amazon, Microsoft, Netflix, Apple all benefit hugely, as do the Covid drug and healthcare companies whose shares have rocketed,” Patrick said.

All this valuation is placed precariously on the basis of a narrow revenue stream may lead to a crash as newly capitalised firms fail to gain the revenue to justify their unicorn status and collapse into themselves. Leading to the possibility of a tech sector crash like we saw at the turn of the millennium.