THE BLOG
05/02/2015 11:00 GMT | Updated 06/04/2015 06:59 BST

Technology: Bubble or Boom?

Alan Greenspan used to call it "irrational exuberance" where prices are inflated and defy logical analysis. One of the favourite questions we are asked when speaking to our investors or the media is whether we are concerned about a new "tech bubble".

Personally I am not a big fan of trying to fit the past into the present - times change, we progress and so do markets. In 1998 there were 55 million Internet users versus 2.5 billion today - these are not just users but consumers at the same time.

Back in the nineties companies were founded based on just an idea with no revenue stream - today technology has improved the lives of all of us from getting a taxi, renting a holiday home or sharing your favourite moments with anyone in the world. We have witnessed a tectonic shift that impacts billions of people instead of millions.

This justifies the existence of new technological solutions but doesn't say anything about the price. Are tech companies overvalued? We need to narrow that down and split it into post and pre-IPO valuations. Let's first look at listed companies.

Comparing the Price Earnings Ratio's (P/E) of the S&P Information Technology Index to the height of the dot-com bubble you can see we are still far off the peak levels with a P/E ratio of around 18 compared to 75 at the height. On an individual stock level there may be exceptions within the social media space as the current price is discounting their probability to make revenue on advertising on their total user base. In this context you need to estimate whether they can deliver on their promise.

I am a big believer that technology can double existing markets - in a matter of fact Uber's revenue from San Francisco is over 3 times larger than the total city's taxi market. Efficiency gains are the name of the current game - what can we achieve at a fraction of the cost and at 100 times the speed. The NASDAQ is currently trading 17% higher than in 1998 but it is also addressing a market that is 45 times larger. I guess we can conclude that valuation can be frothy at best but with tech companies sitting on huge cash reserves a bit of deflation can easily be absorbed. (Apple just posted a whopping $18bn profit in it's fiscal first quarter- the biggest quarterly profit in history of any company).

Now let's look at the venture space - the pre-IPO market.

We do have to make a distinction in location. US early stage ventures are valued at 57% higher than their European peers - indicating that money - not surprisingly - is flowing more easily into start-ups on US soil. This difference is expected to grow even further with easing US legislation for crowd funding through the US JOBS Act (Jumpstart Our Business Start-up) and generic growth differences between the US and still struggling continental Europe. Whether we see the same level of participation of non-institutional investors as seen prior to the bursting of the bubble is hard to say. But let's look at our own market - the place where we do have visibility - Europe. What we have seen over the last two years is that early stage companies have to fight to receive funding and rounds get priced very sharply. In my view that falls closer to the definition of a credit crunch rather than a bubble. The fact that Force Over Mass Capital is the first company doing a diversified portfolio approach, open to high-net worth investors re-enforces that conclusion. Tech Bubble? From our perspective we see an undervalued asset class with huge potential. Timing is everything. F/m=a