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Experts fear venture capital bubble

Venture capital firms in California and around the world invested $160 billion in startup companies in 2008. That figure is almost triple what it was just a decade ago, and many observers are worried that an unsustainable investment bubble is forming. The amount of money being invested has also risen sharply. Venture capital deals worth more than $100 million doubled in number between 2017 and 2018, and there is a growing feeling in the sector that many investors are ignoring business fundamentals and backing ideas merely because they promise revolutionary change.

The scramble to back nascent technology companies is expected to remain just as fierce in the year ahead. Companies including Uber, Pinterest and Airbnb are planning initial public offerings in the next 12 months, and many of the investors drawn to this segment will be looking for the next private company worth $1 billion or more. Experts refer to these companies as unicorns, and a recent report from National Bureau of Economic Research suggests that they are overvalued by 50 percent.

Some critics of the current venture capital landscape go even further and refer to the current market as a glorified Ponzi scheme. These critics say investors who back a promising idea early on are often more interested in driving up valuations quickly for a short-term profit than working with entrepreneurs to help them succeed.

Securing financial backing can be difficult for entrepreneurs with a good idea but little business experience, and many of them approach venture capitalists or other types of alternative lender when traditional banks are unwilling to extend credit. While these sources of finance may be more flexible than banks, their conditions are sometimes difficult to meet. Attorneys experienced in business formation and planning may help entrepreneurs to choose between financing offers, and they might also advocate on their behalf with lenders for more reasonable terms.

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