Will These 2 Stocks Pop With a Silicon Valley Bubble?

Is this the top for venture capital-backed startups? Two portfolio managers make their case.

Mar 11, 2014 at 7:00AM

Bubble

Photo by: Rhett Maxwell

Is Silicon Valley in a bubble?

Could 2014 come to be the next 1999?

Investors who listened to recent conference calls from Fifth Street Finance (NASDAQ:FSC) and Hercules Technology Growth Capital (NYSE:HTGC) enjoyed two very different perspectives on Silicon Valley's hottest start-ups.

Have investors gone mad?
Manuel Henriquez isn't new to the venture capital space. As the CEO of Hercules Technology Growth Capital, he oversees a balance sheet that towers over $1.2 billion.

His company was one of the leaders in venture capital debt financing, and he's worried. On a conference call, he shared his concerns about "frothy" valuations in the technology sector.

"Maybe in your world this is a normal for you, it isn't for me. But when I see WhatsApp being acquired for $19 billion when I see a Dropbox raising money at $10 billion, when I see Palantir claiming valuations north of $9 billion and I can keep on going through a list of companies now that are deemed to be the billion-dollar club, that makes me a little alarmed."

And it's not just venture capitalists he's worried about. He also added that banks were getting their hands dirty in start-ups.

"We continue to see very frothiness in the market. We're seeing banks being overly aggressive on transactions and we're beginning to see some signs of yield compression in the marketplace. "

"We are purposely -- we are the most under invested in technology that we've been in the history of Hercules."

Fifth Street chimes in
Len Tannenbaum of Fifth Street Finance couldn't have a more different opinion on venture lending. Fifth Street Finance recently opened new offices dedicated to start-up financing. And, on Monday, it announced a three deals worth $55 million in venture capital finance.

Historically, Fifth Street Finance financed private-equity buyouts of slow-growing, American companies. High yields tempted Fifth Street to participate in venture capital investments.

"We believe venture loans are attractive because they generally -- they are generally senior in the capital structure, have higher yields than our core portfolio, and may include warrants which could contribute to NAV growth over time, and help offset existing capital loss carry-forwards."

"In fact, one of the more interesting things I found about venture is, a number of the venture companies that we lend to actually have positive [earnings before interest, taxes, depreciation and amortization]."

Are lower returns on the way?
It's hard not to argue that venture capital-backed companies may be enjoying stretched valuations. And when valuations surge, future returns dwindle.

It's interesting to see two competitors have very different perspectives on one market. While Fifth Street Finance is only modestly exposed to venture capital companies, it's Hercules' bread and butter.

How this plays out is something that only time will reveal. But for now, I'm siding with Mr. Henriquez. The premise of billion-dollar IPOs in 2014, and a recent $19 billion buyout of WhatsApp seem to indicate we're closer to a top than a bottom. 

Take the safer dividend option
Dividend stocks have long outperformed their peers. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers