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Even Venture Capitalists Agree That Tech Stocks Are Overvalued

As established, ‘old’ tech and media firms pursue new partnerships, some VCs see more opportunity in companies like Google and Facebook than the next wave of disruptive startups.

The future of technology will be dominated by a handful of enterprising, disruptive young companies. And their names are Google, Facebook, Apple, Alibaba and Amazon. “I believe in the internet of things, but I don’t necessarily believe that startups are the winners,” said Jim Breyer, a partner at Silicon Valley-based venture capital firm Accel Partners, at Delivering Alpha, the annual investment conference co-hosted by Institutional Investor and CNBC, today. “Apple, Google, Facebook will continue to dominate the sector.”

Much of the early talk at Delivering Alpha centered on the topic of froth: frothy liquidity created by unprecedented low-for-long monetary policy in the U.S. and other advanced economies; the prospect of assetflation and bubble formation; and the frothiness, especially, of valuations in the technology sector. Stanley Druckenmiller, founder of Duquesne Capital Management, declared that 80 percent of companies that had recently pursued a public offering had no earnings, with much of his at times withering criticism falling on the technology sector. Jim Cramer, a return moderator on several panels, repeatedly asked: Are tech stocks overvalued?

Skepticism about the tech bubble was rampant at Delivering Alpha — the only surprise is that early stage investors in the sector, on the evidence presented here, share much of the reluctance to embrace the frothiness surrounding Silicon Valley. “Consumer internet companies without business models that aren’t being bought by Google or Facebook don’t stand a chance,” declared Breyer, a mild tonic to the received wisdom that paints venture capitalists as headless speculators willing to take a gamble at all costs.

In his view, the future of technology and media is all about more of what already exists: the big players will just get bigger. The last few days have illustrated the point, to a degree: on Tuesday Apple and IBM, old stagers of the tech scene and once fierce rivals, announced a partnership to sell Apple products and apps to IBM’s corporate customers, and Time Warner today rejected an $80 billion takeover offer from Rupert Murdoch’s 21st Century Fox. But it’s not yet clear what the motivations and implications of these latest moves are; Shana Fisher, managing partner at High Line Venture Partners, presented the Fox bid as a defensive play. “It’s just one media company buying another media company,” she said. Breyer disagreed. “There’s a class of big entrepreneur-leader that never does anything defensive,” he said, placing Murdoch and Mark Zuckerberg in that category and setting the mooted Fox-Time Warner deal in the context of a broader shift towards an increasing “intersection of technology and the media,” in which analytics is “changing the fundamentals of the entertainment industry.”

Disruption or consolidation of the established players? Technology has faced this fork in the road countless times before, of course, and on most occasions it’s been the forces of disruption that have triumphed. “Anywhere there’s a centralized identity system — whether it’s Facebook or Google or whatever — the idea and theme of decentralization plays out in lots of little different areas,” said Fisher, arguing that consumers’ receptiveness to disruptive technologies remains as strong as ever. “If you’ve been around for long enough, you’ve seen these cycles.”

But Breyer feels that things will be different this time, partly because the startup ethos of many of the now-behemoths formed at the dawn of the internet age has yet to fade; Google and Amazon and the rest have managed to avoid the corporate institutionalization that did in companies such as Kodak and Xerox, and they’ve preserved their entrepreneurial impetus in the process. “Jeff Bezos, Larry Page, Mark Zuckerberg — these are extremely driven characters,” said Breyer. “I don’t think there’s any less intensity at the senior level of these big companies compared to the rough startups. That’s different from the way things were 15 years ago — with the exception of Steve Jobs and a few others.”

Disruption, in a sense, may be dead; in Breyer’s view, the froth is just a distraction from the looming invincibility of the newly-established titans of tech. “There’s froth out there, but there [are] also some companies where if you could hold for five to 10 years — Alibaba being one, Tencent, Google — these are companies that stand a chance,” he told the conference. “Google will have a potential trillion dollar market cap within 10 years.” When venture capital is betting most strongly on the status quo, that’s perhaps a sign that many more traditional investors’ concern over the inflated value of technology stocks has some justification.

Follow Aaron Timms on Twitter at @aarontimms.

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