Why This Silicon Valley Investor Believes We’re In a ‘Quasi-Bubble’

November 18, 2015, 4:41 PM UTC
Reid Hoffman at Fortune Brainstorm Tech
Courtesy Fortune

Another big Silicon Valley investor has weighed in on whether the growing cadre of startups worth more than a billion dollars on paper, the so-called “unicorns,” represents a bubble.

Reid Hoffman, who founded LinkedIn (LNKD) and who is currently an investment partner at Greylock Partners, said during an interview on Bloomberg that many of the current crop of so-called unicorns may be overvalued. “In some ways we’re in a bubble, in some ways we’re not,” Hoffman explained, adding that only a third to a half of these companies will “survive and thrive.”

According to Hoffman, the key to the current bubble is that many of the eye-popping valuations are mostly driven by private investors, instead of the public markets. There are 136 private companies currently on Fortune’s Unicorn List, and it’s inevitable that some of those companies are overvalued and public markets might not agree with their on-paper valuations.

For example, one former member of the unicorn club, Square, is selling shares in its IPO this week that will result in a lower valuation than its most recent private valuation.

Not all of the unicorns are bad bets, he says, pointing to Uber and Airbnb as globally relevant companies. But Hoffman has been worried about certain private market valuations driven by enthusiastic Silicon Valley venture capitalists for a while. “What you have to be careful of is treating non-industry transforming companies like they are disruptive and valuing them like they are,” he told Fortune’s Leena Rao in July.

MORE: Don’t Be Fooled by Unicorn Valuations

What companies does he think are overvalued? Hoffman’s not telling. “You can pinpoint specific companies, which I don’t do because that’s impolite, and say, that (valuation) seems a little crazy.”

In recent weeks, Fidelity Investments published a report that revealed that it was marking down some of its privately-held tech investments, including high-profile companies such as Dropbox, Snapchat, and Zenefits. An investigation published Tuesday by Fortune’s Dan Primack indicates other institutional investors such as The Hartford (HIG) and T. Rowe Price (TROW) have re-evaluated how much their shares of private tech companies are worth as well.

Still, Hoffman understands the thinking behind some of the sky-high valuations, and believes there’s still certain companies that can deliver big returns on investment. And he argues, if the bubble pops, it’s not going to affect the entire economy as much as the previous dot-com boom.

“The key thing is though as much as we’re in a bubble, it tends to be a private market bubble,” Hoffman said. “A private market bubble doesn’t have much public market impact. It’s not something that, harkening back to 2000 and 2001, you worry about as much.”

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