Sure, Valuations Look High. But Here’s How Today Is Different From The Last Peak

Correctly calling a market peak is a notoriously tricky endeavor.

Case in point: When tech stocks and startup funding hit their last cyclical peak four years ago, few knew it was the optimal time to cease new deals and cash in liquidatable holdings.

This time around, quite a few market watchers are wondering if the tech stock and AI boom has reached bubble territory. And, as we explored in Friday’s column, there are plenty of similarities between current conditions and the 2021 peak.

Even so, by other measures we’re also in starkly different territory. The current boom is far more concentrated in AI and a handful of hot companies. The exit environment is also much quieter. And of course, the macro conditions don’t resemble 2021, which had the combined economic effects of the COVID pandemic and historically low interest rates.

Below, we look at four of the top reasons why this time is different.

No. 1: Funding is largely going into AI, while other areas aren’t seeing a boom

Four years ago, funding to most venture-backed sectors was sharply on the rise. That’s not the case this time around. While AI megarounds accumulate, funding to startups in myriad other sectors continues to languish.

Biotech is on track to capture the smallest percentage of U.S. venture investment on record this year. Cleantech investment looks poised to hit a multiyear low. And consumer products startups also remain out of vogue, alongside quite a few other sectors that once attracted big venture checks.

The emergence of AI haves and non-AI have-nots means that if we do see a correction, it could be limited in scope. Sectors that haven’t seen a boom by definition won’t see a post-boom crash. (Though further declines are possible.)

No. 2: The IPO market is not on fire

The new offering market was on fire in 2020 and 2021, with traditional IPOs, direct listings and SPAC mergers all flooding exchanges with new ticker symbols to track.

In recent quarters, by contrast, the IPO market has been alive, but not especially lively. We’ve seen a few large offerings, with CoreWeave, Figma and Circle among the standouts.

But overall, numbers are way down.

In 2021, there were hundreds of U.S. seed or venture-backed companies that debuted on NYSE or Nasdaq, per Crunchbase data. This year, there have been less than 50.

Meanwhile, the most prominent unicorns of the AI era, like OpenAI and Anthropic, remain private companies with no buzz about an imminent IPO. As such, they don’t see the day-to-day fluctuations typical of public companies. Any drop in valuation, if it happens, could play out slowly and quietly.

No. 3: Funding is concentrated among fewer companies

That brings us to our next point: In addition to spreading their largesse across fewer sectors, startup investors are also backing fewer companies.

This year, the percentage of startup funding going to megarounds of $100 million or more reached an all-time high in the U.S. and came close to a record global level. A single deal, OpenAI’s $40 billion March financing, accounted for roughly a quarter of U.S. megaround funding.

At the same time, fewer startup financings are getting done. This past quarter, for instance, reported deal count hit the lowest level in years, even as investment rose.

No. 4: ZIRP era is long gone

The last peak occurred amid an unusual financial backdrop, with economies beginning to emerge from the depths of the COVID pandemic and ultra-low interest rates contributing to investors shouldering more risk in pursuit of returns.

This time around, the macro environment is in a far different place, with “a “low fire, low hire” U.S. job market, AI disrupting or poised to disrupt a wide array of industries and occupations, a weaker dollar and a long list of other unusual drivers.

What both periods share in common, however, is the inexorable climb of big tech valuations, which brings us to our final thought.

Actually, maybe the similarities do exceed differences

While the argument that this time it’s different is a familiar one, the usual plot lines do tend to repeat themselves. Valuations overshoot, and they come down. And then the cycle repeats.

We may not have reached the top of the current cycle. But it’s certainly looking a lot closer to peak than trough.