Economic Analysis: Why High Valuations are Not Bad for High Tech

We are seeing startups, the high flying ones, like Uber, that are creating a lot of buzz and have been disrupting their respective industries. They are lining their pockets with super high valuations that go into into the billions. This is not a bad thing, especially judging by consumer experience.

Here is why.

Last time I traveled, I was in New York City. Did I hail a cab? Did I stand on the sidewalk with my hand up? No. I whipped out my smart phone and ordered one on Uber. This made me feel great and could make the high valuation of the company worth it. All Uber does, is allow people to order taxis with a touch of a button. They  recently got $1.2 billion in funding from private investors and venture capital (VC). They also announced a second round coming soon and have no plans for an IPO anytime soon. Their company’s value stands around $18.2 billion.

Overall, VC funding soared higher, quarterly, to $13.9 billion over some 975 new deals. These are levels not seen since 2001. Are these valuations certainly mind boggling? Yes but are not off the mark.

A startup has one primary goal. That is to get their venture rolling and off the ground. They can lose focus and sometimes forget that building a great product as well as consumer experience can lead to brand loyalty. They also count on fast feedback to create a good buzz around their brand. The one thing successful companies, like Uber, are doing or have done, they correctly get consumers to give good and accurate feedback as they design their product. They do this through the launch process and as they get funding. They then are able to create, through a lot of capital investment, a good, user friendly interface (UX).

Right away, they are off to a good start.

In Come the Venture Capital Firms

VCs are starting to change their approach. They are leaving what is deemed the personal approach and looking more at numbers. It is about the math formulas, algorithms to create better portfolios that have better performance. While putting all this money in high tech startups might sound crazy, VCs with a lot of money are doing just that. They are putting money into these companies based on user experience and those that are founded by experienced designers. This further lends support to our user interface theory.

VCs are recognizing that startups who value consumer experience will reflect this in hiring of designers and management as well as good decisions made by the board to help attract more investors and more money. Venture capital firms are prioritizing designer led companies over the others and sinking more cash into those. They are overhauling their way of thinking and looking at startups that have a strong UX focus.