4. The winner-take-all nature of network-effects businesses in which the dominant business can be an order of magnitude more valuable than other competitors.
So it is entirely rational given the Internet environment to see a dramatic stretching of the valuations for market leaders with network effects. It does, however, not bode well for aggregate returns for the venture capital asset class:
1. In a race to pick the winners ever earlier, valuations get stretched even for companies that have not yet proven that they really have strong network effects and that they will be the leader in their respective market.
2. These stretched early stage valuations will lead to depressed returns in a large number of companies and will also make many of these companies harder to fund. There will be more of these companies and more capital invested in them (in aggregate) than in the winners.
4. The winner-take-all nature of network-effects businesses in which the dominant business can be an order of magnitude more valuable than other competitors.
So it is entirely rational given the Internet environment to see a dramatic stretching of the valuations for market leaders with network effects. It does, however, not bode well for aggregate returns for the venture capital asset class:
1. In a race to pick the winners ever earlier, valuations get stretched even for companies that have not yet proven that they really have strong network effects and that they will be the leader in their respective market.
2. These stretched early stage valuations will lead to depressed returns in a large number of companies and will also make many of these companies harder to fund. There will be more of these companies and more capital invested in them (in aggregate) than in the winners.