Keep dancing while the music’s playing

This week we saw two back to back blockbuster IPO’s in DoorDash and Airbnb. The valuations, already sky high at the listing price, reached celestial limits with the first day pops.

The NYTimes published a nice piece on the euphoria we’re witnessing in 2020. Not just in public markets, VC’s and private market investors are chasing anything ‘tech’, or ‘subscription’ to get in before someone else does. And then there’s SPAC’s or Special Purpose Acquisition Vehicles. This year has seen a record amount of funds raised for SPAC’s ($78bn YTD vs $13bn in 2019).

Europe is not far behind either. 2020 is on track to be a record fundraising year for the region. Fund sizes are growing, number of deals is ticking up and some companies are raising back to back rounds without showing any growth in between!

To put this in context, here’s how first day trading for IPO’s have fared this year:

To me, this feels like to much capital chasing too few deals and companies. Additionally, capital, for the sake of being deployed, is being deployed at the same sub-sector or sub-sub-sector of the investable universe. The word ‘cloud’, ‘connectivity’, ‘SaaS’ and ‘disruption’ are being thrown around like commodities. Doesn’t it feel like there are too many cloud and SaaS companies chasing the same TAM’s? And thats just one example.

Some of these companies did facilitate critical economic activities without a doubt. The pandemic also accelerated some secular trends that would clearly benefit these upstarts. But even if you factor all that in, you cannot see these companies growing at the rates they are being asked to (implied by the monstrous valuations), especially when things go back to normal next year.

Some people are already calling it the 2020 dot-com bubble. It remains to be seen how it turns out like. I see a lot greed out there, a lot of capital being sloshed around and a lot of money being made, reinforcing the greed and so on. What is it that Buffett (and Howard Marks) said? “To be fearful when others are greedy, and greedy when others are fearful”.

See you next week.

The Atomic Investor

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