The most asked question of 2014: Are we in a bubble?

Any way you cut it, 2014 has been a remarkable year for the innovation economy. The pace of disruption and growth today is faster than any time I’ve seen in Silicon Valley Bank’s 30-year history.

Is it a bubble or for real?

December saw the return of a hefty investor appetite for tech IPOs, most notably Lending Club. The peer-to-peer loan company (and SVB client) saw its price spike more than 50 percent on the first day of trading, making it the largest tech IPO from the Bay Area this year.

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Overheard at every tech holiday party: Is it a bubble or for real?

We have rebounded from the dark days of 2008 and 2009. SVB’s loan portfolio has tripled from $4 billion in 2009 to $12 billion this year. But from my vantage point, I see more rainbows and unicorns than bubbles.

Valuations are relative to the opportunity

There have been 264 IPOs on U.S. markets this year through mid-December. That’s up 21 percent from the year-earlier period and marks the most IPOs since 2000, according to IPO ETF manager Renaissance Capital. The IPOs have raised $83.2 billion, up 55 percent over 2013. That includes the all-time record $25 billion raised by Alibaba in September. But this is not 1999, when there were 480 IPOs, raising $61.6 billion, an increase of 55 percent in deal volume, and 92 percent in proceeds from the year before.

After surviving the dot-com implosion of 2000 and credit crunch of 2008, most are taking to heart important lessons; in particular, stick to fundamentals and keep a cool head when things are heating up.

The pre-IPO companies in the market today generally are true innovators (five of SVB’s current clients are on Time’s list of 25 Best Inventions of 2014). They possess much stronger business models than the pre-IPO companies we saw 15 years ago. It’s true that a lot of companies are priced for perfection, but they are priced at that level because of their performance and the markets they are conquering.

Fundamentals are required for success

Today’s successful tech companies are showing value because they have a carefully targeted audience, are accurately sized for that market and have go-to-market plans. Even a fair number of the companies going public have shown they can turn a profit.

The growth of mobile, the cloud, and the on-demand economy justifies many consumer and enterprise company valuations. Marketplace companies with familiar names such as Uber and Airbnb underscore how mobile adoption is changing how we access and consume all types of services, and that will only continue. Advancements in analytics and technology translate to actionable data and real businesses that could not exist before, such as personalized medicine.

In addition, many of these companies are staying private longer, working out kinks and growing much bigger before turning to the public markets. Lending Club, founded in 2007, actually shut down in 2008 as regulators grappled with the new lending model. Since its founding, the company has generated a total of $6 billion in loans. The company had a modest profit in 2013, though posted losses for the first half of 2014, as it ramped up marketing.

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Unforeseen global events could pose the biggest threat

Of course, challenges exist to this rosy scenario. There are some overheated sectors, but I think generally most challenges ahead likely will come from external macro-economic factors and unforeseen global events. The intrinsic appetite for new technologies that create real value will not diminish.

Managing the expectations of consumers and investors around new paradigms, however, is a tricky business. Marketplace executives reported in an informal survey SVB took in October that they see balancing supply and demand as their greatest issue, and also establishing trust with their users. No small tasks.

The impact of regulations on innovators is not priced into valuations, which already are often priced for perfection now. The heavily regulated financial and healthcare sectors are considered the next in line for transformation, and no doubt regulation could impact growth and even viability.

The less risky option is to embrace disruption

Disruption by its definition is not a smooth process. Even the biggest innovation winners will do little to offset the social disruption of employment (both innovation sector and established companies) in the next five to 10 years. Companies of all types and sizes need to focus on their people and develop a culture to help people get through the bad times as well as the good ones.

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The less risky option is to embrace change rather than trying to avoid it. And, as with any market cycle, companies with sustainable business models and strong ability to execute will survive and prosper.

What’s your take?

Preliminary results are starting to come in from our annual Innovation Economy Outlook survey: While 2014 will be hard to beat, companies are reporting a consistent pace of hiring, revenue generation and optimism in the year ahead, indicating a solid position in the innovation sector. Each year we gather feedback about business conditions, hiring, funding, global expansion and public policy concerns from innovative companies around the world. There is still time to complete the survey (here). Tell us what you think.

For our part, we’d like to pass along our best wishes to all for a healthy and prosperous new year.

Greg Becker is president and chief executive of Silicon Valley Bank.

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