How many unicorns before the tech bubble bursts?

Signs point to an overvaluation of tech unicorns, but this is not the same as the '90s dot-com bubble

Investment money is flooding into Silicon Valley, tales of profligate spending and excess at tech startups are legion, and the Unicorn Club -- startups valued at more than $1 billion -- has welcomed 32 new members this year, swelling its rolls to 116 companies. Can you spell t-e-c-h b-u-b-b-l-e?

Research released this week by PitchBook shows that the Bay Area accounted for more than 33 percent of total capital invested globally in Q2. Investment in Silicon Valley companies increased nearly 45 percent, rising from $6.77 billion in Q1 to $9.8 billion in Q2. During that same time, median pre-money valuations of Bay Area startups in the late stage of investment more than doubled -- yes, doubled ... in one quarter.

It sounds an awful lot like everyone's out to party like it's 1999. Not so, according to venture capital firm Andreessen Horowitz, which is taking great pains to reassure us this time is different. In a recent presentation on U.S. tech funding, the VC company illustrated the reasons why we're not seeing a repeat of the '90s dot-com bubble -- you know, the one that went pop in spectacular fashion, with the Nasdaq losing 78 percent of its value.

In some respects that's true. For starters, this go-round we're not seeing a repeat of the red-hot IPOs of the '90s. (Remember and eToys?) As Andreessen Horowitz points out, the tech sector isn't taking over the stock index the way it did in the late '90s.

But that's largely because "private IPOs" -- large private financing by late-stage venture capital firms like Andreessen Horowitz -- have replaced IPOs as the driver of overvaluation. Uber is now valued at $50 billion, without having gone public. Even Marc Andreessen has warned against the excessive cash burn by startups that is spiraling valuations and vaporizing common sense.  

Yes, this time is different: Private investors will take the bloodbath when -- not if -- this bubble bursts, the sky-high valuations for many unicorns crash, and there's no exit strategy. Bill Gurley at VC firm Benchmark warns: "We're in a risk bubble ... we're taking on a level of risk that we've never taken on before in the history of Silicon Valley startups."

Evan Spiegel, CEO of unicorn startup Snapchat, blames years of near-zero interest rates for leading people to make riskier investments than they otherwise would have and creating an asset bubble. A correction is inevitable, he believes.

On a Quora forum debating whether we are in a tech bubble, Darius Lahoutifard, founder of Business Hangouts, accused VCs of being too focused on building unicorns while great seed projects are denied. "We are not building the future anymore," he writes, adding:

Unlike the 2001 bubble, this one is on late-stage private startups. These billion-dollar startups don't even want to go public because they know they'll not get the same valuations at IPO. The burst will definitely hurt these companies, leading many of them to shut down. It will also hurt the venture capital funds that have heavily invested in them.

Which is why it makes perfect sense that Andreessen Horowitz continues to exclaim over the emperor's new clothes. After all, "why would anyone catalyze a bubble burst by admitting that their investment choices may have been bad?" writes Rohit Sharma,  author of "Luck Rengineering."

Unfortunately, the ripple effects when those investments turn sour are likely to be felt throughout Silicon Valley -- and beyond.

Copyright © 2015 IDG Communications, Inc.