Tech startups as an asset class

Early-stage technology (especially software) start-ups today are over-priced as an investment class. Over the last decade, technology development techniques have matured, the costs are well-understood, and all infrastructural problems now have commodity solutions. I argue that most technology startups created today are structurally similar to brick-and-mortar small businesses and manufacturing-based ventures, and therefore should be priced at multiples similar to those businesses.

Defenders of current valuations might argue that the technology component opens up vast scaling opportunities and capabilities that brick-and-mortar and manufactured goods companies cannot. I’m not convinced that there’s particularly more real estate for a business to conquer in the technology space than in any other domain. There will be tech startups that capture large markets very quickly, but for every technology-based business one can point to as a wild success, I can just as easily point to businesses like 5-hour energy shots and PinkBerry that have had equally if not more meteoric rises. Picking any individual winner is going to extremely unlikely in any space. So as an individual investor, I don’t think I get the returns necessary to pay the premium for picking technology startups.

To be fair, prices do tend to correct as a tech company matures and more information becomes public; the initial exuberance is superseded by fundamental analysis. This reality check will trickle back downward to early stage technology businesses as well.

From an investment perspective, I really don’t see that much of a difference between folks trying to create a new business selling software apps or tools and folks trying to create a new business selling tastier sandwiches or better shovels. Some people say there’s an early-stage technology valuation bubble. I think this is especially salient when comparing to other asset classes.

 
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