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Investors need to become more discriminating when investing in technology start-ups, following recent “over-enthusiasm” in Silicon Valley, according to Bill Gates

The Microsoft co-founder said he would bet on valuations of so-called “unicorns” — the 150 or so private companies that have been valued at more than $1bn — falling over the next two years, but that venture capital remains an attractive long-term asset class in an era of ultra-low interest rates. 

“There is some sorting out that is taking place,” Mr Gates said. “It never should be a case of closing your eyes and saying ‘Oh, it’s a tech company, just throw money at it’. That strategy worked for about two years; now you actually have to open your eyes and look at the company.” 

The valuations of unicorns have come under pressure after disappointing stock market flotations by some of their number, including payments company Square and Box, a cloud storage company. CB Insights, the research group, has identified seven unicorns that are now worth less than their peak valuation. That, plus wider concerns about the global economy, has led to a sense of a Silicon Valley boom cooling. 

“If you gave me a basket of unicorns, I wouldn’t know right now whether to go long or short,” Mr Gates said. “I might go short in the two-year timeframe, but not in the longer timeframe because all it takes is for one or two of those to join the pantheon and your short would make you go bankrupt.” 

He added: “Something that has a chance of 10 per cent-plus returns, even if it comes with a lot of variance, is very attractive in a period where the German long bond has a 1.2 per cent return.” 

Mr Gates’s comments, in an interview with the Financial Times, come as he and fellow billionaires prepare to launch a wave of investments in energy start-ups, in an effort to find solutions to climate change. At last year’s climate talks in Paris, Mr Gates, Mark Zuckerberg, Jack Ma, Mukesh Ambani, Ray Dalio and others committed to funding high-risk ventures that might otherwise fall between government funding and traditional venture capital. 

Energy start-ups, Mr Gates said, had not enjoyed the same frothiness in valuations as IT companies, largely because of the much larger sums needed before a company can prove that the technology works. 

The need for an “energy miracle” was the theme of the annual letter from Mr Gates’s charitable organisation, the Bill and Melinda Gates Foundation, released last Monday. In it, he envisioned batteries the size of swimming pools and solar power that could be used to produce fuels. The letter was aimed at teenagers, with the hope of inspiring them to pursue a career in science and to tackle the world’s biggest problems. 

“It will probably be people in their 20s that make the energy breakthrough,” he said. “It is those teenagers that will be out there at least making some of the wild-eyed suggestions and being willing to take on risky things that are often where the big breakthrough lies.”

Copyright The Financial Times Limited 2017. All rights reserved.
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