The hype cycle, a framework developed by Gartner, defines the model for how technologies develop over time. It describes how an idea starts as just a spark of interest among a few people, then grows into a full-fledged industry with entrepreneurs rushing to commercialize the technology. We’re experiencing this cycle with “Generative AI,” which has popped up everywhere, given the popularity of ChatGPT, Lensa, and DALL-E.
The first stage of the hype cycle is the "innovation trigger," when a new technology is discovered, before moving into the "peak of inflated expectations," where investors start pumping money into the sector to the point that it becomes wildly overvalued. The third stage, the "trough of disillusionment," is where people lose patience with a technology that fails to develop and realize that their investment expectations are unrealistic.
This same concept applies to companies. It’s essential for investors to be aware of the hype cycle and to understand the stage a company is currently in when they're considering investing.
According to Forge Global, a secondary share trading platform, the bid-ask spread in the secondary market has increased to 22%. During November of last year, Forge Capital and EquityZen observed trades occurring roughly 45% below peak valuations. While sellers expect previous valuations, buyers are unwilling to match, and the spread is exacerbated by companies simultaneously lowering valuations.
- Stripe cut its valuation to $63 billion from a high of $95 billion (40% down)
- Instacart, previously valued at $39 billion in 2021, has declined to $10 billion (74% down)
- Klarna decreased its valuation from $45.6 billion to $6.7 billion (85% down)
In summary, buy when no one is talking about a company and sell once everyone is. Most money rushes in near the top and then suffers a loss. The few who can invest at the beginning will capture serious gains.
The best opportunity to capture these gains is by investing with professional fund managers that possess sector-specific expertise, which helps them identify and access emerging companies that will have a considerable impact and define a category.
-Logan Henderson, Founder and CEO
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Beyond the Public Markets: Maximizing Returns through a Multi-Asset Portfolio
In our first member webinar of 2023, we'll discuss how you can enhance your investing strategy by moving beyond the public markets and investing in a diversified portfolio of alternative assets. During the session, you'll learn about:
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- How to achieve diversification through Thematic Portfolio funds
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