- Scarcity - private companies are harder to access than public companies, so when a private company raises money, "fierce competition ensues for these scarce slots" in the best companies.
- Momentum - the strategy of paying high valuations in private rounds has paid off, which attracts more capital to the system, and creates momentum for the strategy to continue.
- Fear of Missing Out (FOMO) - VCs want to be associated with winning companies. While the ultimate metric to judge a fund is the long-term return, in the shorter term, VCs can claim success by investing in companies that are perceived as "winners."
- Gains - a critical question is how much of the returns from these healthy valuations are paper returns and how much are from true realizations. Solomon does not answer this question.
I generally agree with the points raised in this article, but would add a few more:
- Public valuations. The Nasdaq 100 Technology Index (NDXT) is up over 17% in the past year. The stock price for Box, Inc., the cloud-based file sharing company, is up nearly 50% from its IPO price. Frothy public valuations also add to the private, late-stage valuation frenzy.
- Results and the Halo effect. Many of these later-stage private companies are posting remarkable results, such as hyper-revenue growth. It is these stars that lead the pack in valuation, and other later-stage companies benefit from the halo effect.