Mr. Andreessen: In my opinion, there's nothing broad-based that's happening. There's no bubble, per se. Bubbles are a very specific phenomenon where you've got mass psychology and you've got every mom and pop investor and every cabdriver and every shoe-shine boy buying stock in whatever it is—going all the way back to the South Sea Bubble all the way through to the dot-com bubble.
The 1990's were a retail/buy side bubble. The current bubble is a sell-side one, driven by the Fed. They are completely different. Disproving a retail bubble does not exist (correctly) does not speak to a liquidity driven bubble existing / or not. The people funding VC firms...have too much cash. That's good for VC firms...and the reason you won't seem them point out this fact.
It would be more interesting to hear marc's view on the amount of money chasing deals. Perhaps he will chime in.
You say the Fed is driving a bubble. To me, that assertion seems more opinion than fact. Bubbles are notoriously hard to identify. Can you offer some more support for the idea that the Fed is creating bubbles? I note that inflation has been low for years and that interest rates are not a reliable indicator of monetary policy (since interest rates reflect the low demand for money as much as its high supply).
This is a good question about the macro US economy. In general I agree with GP.
Fact:
The Fed has injected large amounts of cash into the asset markets using http://en.wikipedia.org/wiki/Quantitative_easing . I've never added up the cash as a percentage of GDP or one of the Ms, but it always seemed significant (i.e. 5-10% of GDP, but this is debatable). I should caveat by saying that this cash never entered general circulation, which has meant treating it as part of the monetary supply is tricky.
Now, based on this fact of Fed intervention there are a few opinions:
1. While the Fed directly isn't buying equities (i.e. stocks, but this is as far as we know), its presence means that all the other cash holders have to seek out other investments to get inflation-beating rates of returns. There isn't hard data to support this, but it is the conventional wisdom of both people in the game and macro economists.
2. The magnitude of the impact on the asset markets is up for debate. I've seen numbers as low as -5% and has high as 60% of last year's stock market returns can be attributed to the Fed intervention. Some of the difficulty is that there was large federal fiscal stimulus impacting during this time, and counter-intuitively there is some argument that the Fed neutralized the fiscal stimulus to hold inflation rates constant. The important part is that there was a stock market surge, and it is not a result of retail investors pouring in money: It is a result of institutions balancing away from bonds to stocks (this is what the GP means by "supply-side"). It's just not clear if the institutions did it because they have confidence in the economy or if they were "forced" by the Fed. The "why" is opinion, and many people believe the fed is the "why."
3. On the micro side, seeing 20-something kids get 150k budgets to screw around for a year is maddening. "It's ok, VCs play the numbers game... we just need one tulip to pay 100x." There is too much money chasing "talent" right now, and should the correction to the asset market happen this year (as I predict from the fed's cessation) then we will see the startup bubble unwind.
"On the micro side, seeing 20-something kids get 150k budgets to screw around for a year is maddening"
Nonsense. This is but an externality.
What is maddening is the current state of the financial system as a whole. Though its intellectual underpinnings should have been completely shaken by the events around 2008 and the subsequent rescue of its champions, vested interests would prefer to pretend the emperor still has clothing -- and thus the externalities of QA, of which startup money is actually among the most palatable.
When interest rates are as low as they currently are, inflation generally outstrips gains without taking on some level of risk. If interest rates are lower, more risk must be taken on to ensure a chance at equal gains.
Well, another reason that this may not be a bubble is that Goldman Sachs aka the vampire squid (look for the Matt Taibbi piece about it) is not heavily investing in VCs or startups.
Well, sure; if you want to define it that narrowly. "Blue is only Pantone™ 292. The sky is not Pantone™ 292. Therefore the sky is not blue."
It's awfully self-serving for pmarca to deny the existence of a bubble. Leaving aside the question of whether or not there is a bubble, how much does he — personally, nevermind a16z — stand to lose if people were to start behaving like there's one?
I would go on a limb and argue that a16z stands to gain if people start behaving like there is a bubble. Much less competition from angels and other VCs. Much better valuations for them.
Oddly enough, that's exactly what people were saying last time there was a tech bubble. "This isn't a bubble, it's a paradigm shift!" See http://www.wired.com/wired/archive/7.09/zeros.html for kk's version of this post from Sept. 99, only months before the bubble burst. Also about when I stopped reading Wired.
Of course that's what people were saying during the bubble. That's what people say during every bubble. If people weren't saying "this is not a bubble" then there wouldn't be rampant buying and it wouldn't be a bubble. Denial is a necessary component.
However. That does not mean that denial implies there's a bubble. We must evaluate each case on its merit. Every bubble will be surrounded by lots of people saying "it's not a bubble". But so will every non-bubble. That statement alone tells us nothing.
Haha Wired was crazy. There were a handful of other ones which were just as bad (Fast Company is another one that comes to mind).
It's also not just tech bubbles. The recent US housing bubble (when housing prices would never go down, because shut up that's why), and China's real estate bubble are great examples.
Andresson didn't say anything close to "you'll be a millionaire soon [and] so will everybody else." He just said the technology market isn't going to implode again. There's a difference. I think his basic point is valid: that computer technology provides a real and highly valuable service, unlike, say, tulip bulbs. Therefore, while it may be overvalued, there is nevertheless something solid there. Unless you think people are going to stop using the internet soon.
That is the exact same argument that KK was making in that Wired piece.
Quote:
How many times in the history of mankind have we wired the planet to create a single marketplace? How often have entirely new channels of commerce been created by digital technology? When has money itself been transformed into thousands of instruments of investment? It may be that at this particular moment in our history, the convergence of a demographic peak, a new global marketplace, vast technological opportunities, and financial revolution will unleash two uninterrupted decades of growth.
Style note - embedding a few spaces causes most of the text to scroll off into the right - for long quotes like that, better to put them in emphasis asterisks to set them out.
I don't think it's exactly the same. The tone in the Wired piece is way over the top, "hyperaffluence" and what have you. Can you see the difference between saying "Everyone's going to be rich! All our problems are solved! Utopia is here!" and saying "the technology market will continue to be a reasonably sound investment" ?
seems like more or less the same message. We are in a new era now, the fundamentals of economics have shifted because we say so and everyone should donate their life savings to our cause!
How does one get from Snapchat to Tencent? Just because Bob down in the van by the river is making soda pop in his wheelbarrow doesn't mean he's going to be the next Coca-Cola. Even the mere suggestion takes so much credibility away from Andreessen. How many thousands of messaging programs have come along already? ICQ, MSN, AIM, etc. etc. Why weren't any of them the next Tencent? Perhaps, because China is not the US. Last time I was in Japan, kids were still shelling out $40 for CDs from their favorite pop singers. Different markets are different.
Snapchat is a one-trick pony and about as special as a snowflake in an avalanche.
Venture capital (excluding private-equity-esque VC) is not in the business of making bets on sure-things. If Snapchat was for sure guaranteed to become Tencent, then they would be raising at a $100B valuation instead of a $2B valuation. If investors were even confidently sure they would become the next Tencent, they would be raising at $10-$20B. But they're not. But if they had a 2% chance of becoming the next Tencent, that $2B valuation is justified.
Of course not. VCs are in the business of inflating bubbles. That's how they make money. Andreessen has every reason to claim that we are not seeing a bubble situation here.
But to pull Tencent out of your ass and compare it to Snapchat? There is no basis on planet Earth for the comparison. None. You're just tossing out random names at that point. Tencent is literally as old as Google is. They had $7B USD in revenue last year. They have 21 thousand employees. They run the China equivalent of PayPal. Their messaging service, QQ, has 798 million accounts and has seen peak usage of 176 million users at a single time. It is here that I remind you that the entire population of the US is only 313 million. Mathematically speaking, Snapchat doesn't stand a chance. No one "plans" to become Tencent. No one. I don't care how good the prospects are for Snapchat. You tell me you want to become Tencent and all you have is a sexting app? That's when I laugh at you. Then I pull up the App Store and flip through all your competitors. Then I remind you that your entire value is derived from fickle teenagers, that won't be there a year from today.
Also, you clearly didn't read my response carefully enough.
I never said Snapchat had a 2% chance of becoming another Tencent. I said that if Snapchat had a 2% chance, the valuation is justified. Clearly, some investors think that chance holds. Some investors think that chance does not hold, and they did not participate in the deal!
I'm also not tossing out random names. Did you even read your own post, which mentions Tencent? I was addressing your argument in the context of your post.
I would also argue that a16z would benefit if investors thought there was a bubble. They would get tremendously better valuations and there would be so much less competition for the best deals.
Also, anyone who says Snapchat is just a sexting app for teenagers clearly doesn't understand their product, speaking as someone in college who sees Snapchat used all the time (by lower and upper year college students alike). It's already moving upstream.
Snapchat has mindshare, and is one of maybe 10 possible contenders in North America for a next major messaging platform.
Once a VC gets involved, they also reserve the right to fire "Bob" and replace him with a CEO/Management team of their choosing. Also, don't underestimate the ability of 10s of millions of dollars and some hi-powered talent (plus the VC team pushing hard) in changing a "one-trick-pony" into a category competitor.
The bull case on Snapchat is that there's a company in China called Tencent that's worth $100 billion. And Tencent is worth $100 billion because it takes its messaging services on a smartphone and then wraps them in a wide range of services—things like gaming and social networking and emojis, and video chat—and then charges for all these add-on services. And it has been one of the most successful technology companies of all time and is worth literally $100 billion on the Hong Kong Stock Exchange. Maybe that's [CEO Evan Spiegel's] plan. Maybe Evan's plan is to transplant the Tencent business model into the U.S., which nobody has actually been able to do yet.
This explains why Snapchat walked away from $3 billion dollars. If you have a VCs mindset and even have a 10% belief in that bull market, then the offer was too low.
Tencent faces a markedly different environment in China than Snapchat faces in the United States.
First, gaming consoles are illegal in China. Second, Chinese people prefer to pirate rather than to buy software. Third, Facebook is blocked by the Great Firewall of China.
This means that Tencent faces no competition from console games, from packaged PC games, or from Zynga and clones. Thus, Tencent gets to collect a large percentage of the total gaming dollars (or rather, yuan) spent in China.
What's the likelihood of Snapchat getting game consoles and Facebook banned in the United States?
Does Snapchat really have a 10% chance of turning into the next Tencent? Or is it more like 1%? Or 0.1%?
Officially, game consoles are banned in China to protect children from their pernicious influence.
Unofficially, who knows what the real reason is? It certainly hasn't hurt Tencent, whose market cap is now greater than that of Sony + Nintendo combined.
The problem with logic like that is that even suspending disbelief and accepting the 10% chance, a discount rate needs to be applied. Risk-adjusted returns are getting entirely ignored.
If they have a 10% to turn into Tencent tomorrow, at 10% chance there is some value. If we are talking about 5-10 years down the line, a reasonable discount rate like 25% puts the $100B of future value at something like $10-30B. Suddenly a 10% isn't even close to good enough.
This ignores the extremely unlikelihood that consumers in the US monetize the same way as in China to even reach a similar market cap (Tencent has higher top-line than Facebook).
Somehow I think we overcomplicate stock market analysis. I live by the rule what goes up must come down. Eventually the market is going to crash. I absolutely guarantee that fact. I think it is a fairly well proven fact that economies cycle. It is just a matter of time before it crashes again. Are we in a bubble? The honest answer is that it doesn't matter.
All you need to know is that in 2008 the stock market crashed. More than likely within the next few years, before 2015 is out (~7 years later), all the investors who will the increasingly expect a crash, will get one. Oddly enough, I think that human greed, expectation and fears of loss drive the cycle.
All it needs is a trigger to start the mass sell off. Then Facebook shares won't be worth diddly squat. That's when you buy again.
A tiny minority of investors can read the signs of impending doom. Lucky investors, including some Wall Street traders get lucky and sell before the crash. The vast majority of investors miss the boat and lose out big time.
The trick is knowing when to buy and when to sell. I think the whole thing is smoke and mirrors. 99% of it is probably luck.
In the long term, the stock market trends upwards. In other words, what goes down, almost definitely will go back up again. The ups-and-downs of the short and medium term are can be mostly ignored by those who aren't day trading.
> The trick is knowing when to buy and when to sell.
A bit understated, don't you think? Finding a peak is hard enough, when you're in it -- many were crying 'bubble' and moving out of their positions at the beginning of 2013... what suckers they are! And having the courage to pour your money into a fear-driven market when you've determined it's in a valley is even more difficult - if it wasn't, everyone would be doing it.
Smart investors don't try to time the market. They put their savings in carefully, consistently, and sometimes buy what's on sale.
Bubbles are a very specific phenomenon where you've got mass psychology and you've got every mom and pop investor and every cabdriver and every shoe-shine boy buying stock in whatever it is...[t]here's nothing like that. We're talking about a fairly small number of companies. And then, we're talking almost entirely on the private side. It hasn't really affected the public market that much.
I could not have come up with a better way to express it. It seems like every time I look at HN, someone is crying "bubble." If pressed to explain what constitutes a bubble, and why they're crying it now, the answers usually involve citing some company (e.g. SnapChat, Twitter) or small number of companies with an insane valuation or financial transaction. "That's a bubble!" they cry.
I'll point out that this is nothing, nothing like the actual bubble of the late '90s/early-2000s, where the public was buying large amounts of stock in brand new, unproven (but public!) companies. Few or none of these companies had turned a profit. Many were disasters of execution (witness WebVan, which has become Steve Blank's prime example of how not to run a startup). VC investment was at a peak. Founders actually expected that their business plans could be executed without modification.
The mindset has completely changed since the crash. Yes, sometimes you have to wonder what the heck the VCs are thinking, or why the SnapChat guy would turn down a multi-billion-dollar buyout offer. Twitter's stock price seems unjustified, and Facebook's did, too, at least at first.
None of that constitutes a "bubble." As MA points out, "bubble" was short for stock market bubble. This is all private stuff, for the most part; few companies dare to IPO these days, compared to the '90s.
The cost of infrastructure has dropped massively, as well; no longer are you required to buy scores of servers just to host your website. One might even be able to host the whole thing on Wordpress. Servers are virtualized and therefore far more cost-effective. You don't need to own the physical hardware. Bandwidth is far cheaper. There are free CDNs.
So: VCs have learned lessons from their '90s mistakes. So have founders. The price of entry has dropped dramatically, requiring far little investment; meanwhile, business model development has learned from software development so that companies learn to grow and change in order to find their audiences.
The problem is that there are two types of bubbles, and those that say there is no bubble are only looking at one type. The real bubble is on the other side: not the individuals, but the banks and funds
The Federal Reserve pumps hundreds of billions of dollars every month into the economy in various ways. The traditionally safe investments (like treasuries) aren't performing well because interest rates have been suppressed for years. As a result, all this cash is being thrown at anything that has a hope of yielding a return.
The bubble here is that, at least in the view of many observers, the current situation is unsustainable. At one point, something will happen (in recent days, the suggestion is that the fed may slightly trim asset purchases). Once that liquidity is sopped up, what happens? Most likely, a bunch of investors will end up suffering losses in the face of "down rounds", early stage investors will tighten in the face of concerns regarding the late stage investors, and the bubble will burst.
Nitpick: Bubble's really short for speculative bubble.
Stock market bubbles might be the most common kind of speculative bubble, but they're not the only kind. Tulips and houses come to mind as clear counter-examples.
Facebook's stock price still seems unjustified. They're losing momentum, and not picking up the new generation of kids, which severely mitigates the relevance of their platform going forward. How, exactly does that justify their price being > 200% of what it was six months ago?
"Markets can remain irrational longer than you can remain solvent."
They have over a billion users. Growth tends to slow once you've approached 20% of the entire human population.
But to answer your question: The stock was undervalued in June.
FWIW, I bought FB stock at $28 and recently sold once I doubled my money. I sold because I think FB has found its value and I don't personally think it will see much growth. This $50-60 range feels right to me. So I took profit.
But still, Facebook is priced for growth. Which is problematic for a company that's starting to see its userbase decline.
That, and it's easy to look good playing tech stocks in a year when the NASDAQ goes up by 34%. In another few years, I'm not so certain that a P/E of 140 for a company that seems to have hit its plateau will still look like such a fair valuation.
I get it, you're bearish on FB. But your comments suggest that you think the stock market should work like an algorithm. You input growth and users and past stock price and out comes the perfect number. Momentum investing isn't anymore BS than value investing. You act like there needs to be some verifiable reason FB is worth "over 200% more" than it was 6 months ago. Well, there is: There's a lot more people today that have faith in Facebook's ability to grow and create wealth than there was 6 months ago.
Like I mentioned elsewhere, I sold FB. I'm not a true believer who thinks this will be the first $1 Trillion company. But I think objectively, you're bearish on FB and I think it clouds your judgment.
This is a company with a reputation for high quality engineering. They have 20% of humanity as users. It's grown to staggering proportions. I'm reminded of the people who called it a house of cards when it hit 100 Million. And it's grown from that insanely amazing number by a magnitude.
Over the last 4 quarters, Facebook has increased revenue and profit by nearly 30%. Net income? Up over 600%. It made a billion dollars in 2013 and should double that in 2014.
I'm not trying to sell you. I'm just suggesting that possibly you are letting preconceptions cloud your judgment. It's growing slower? It has some issues with teenagers? Facebook's history gives me no reason to believe their future growth depends on hooking users at a young age. I'm not sure how you reach that conclusion.
Anyway, feel free to have the last word, I'm not one for internet debates.
I didn't say they were dead, or even dying. But they certainly aren't growing at a rate that warrants a literal doubling in their stock price over a six-month period.
And, yes; I meant "mitigates." "v.tr To moderate (a quality or condition) in force or intensity; alleviate."
You can have a private bubble - it's just a smaller market.
There's certainly a trend, that software companies add value. There may also be a bubble atop that - it's hard to tell.
But I do hesitate over all these social startups; they seem close to fads to me. But this may just be my personal preference for tangible concrete usefulness, as opposed to communications (which admittedly has a history of success).
Note: amazon has never made a profit (partly because they reinvest). No profit from glorified mail-order doesn't surprise me - though AWS is a perfect online business.
As you suggest part of the confusion is a lack of an agreed-upon definition of "bubble." Another part is poorly defining what constitutes the bubble. Is the bubble technology in general? Obviously not -- people aren't going to stop using computers like they stopped buying tulip bulbs. So it's easy to point to that, say "look, 5 billion smartphones!" and conclude that there cannot be a bubble, unless you expect everything to stop using smartphones.
On the other hand, there may well be some bubble-esque things going on in the VC/startup area. It's a bit of sleight of hand to try to disprove that by looking at smartphone sales, because those are generally all sold by big established companies like Apple and Samsung, not by startups.
Personally, I don't expect the startup scene to come crashing to the ground any time soon, but at the same time it helps to be more precise in defining what exactly the bubble is supposed to be. The fact that Apple and Samsung continue to turn a profit doesn't necessarily have anything to do with startups like Snapchat.
With all the recent insane valuations by VC's, you'd assume that there'd at least be a tech bubble in the private investment market. However, VCs aren't even close to investing as much as they did in 1999 and 2000 (less than half). In fact, they even invested a little more in 2007-2008 than they did in 2011-2012 [0].
I think that the argument about lack of participation of general public is a red herring. Quote Wikipedia:
'An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values". It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.'
Make a solid argument about whether this is or is not the case but "no cab drivers on the buying side" is a crappy argument.
"There are the ones where everybody thinks they don't know how they're going to make money but they actually know. There's this kind of Kabuki dance that sometimes these companies put on where we're just a bunch of kids and we're just farting around and I don't know how we're going to make money. It's an act. They do it because they can. They don't let anyone else realize they have it figured out because that would just draw more competition."
In addition to the other example that Mark gave ("they don't know how they will make money") another way to keep the competition at bay is by the use of red herrings and by spreading disinformation that is believable.
It's an interesting point, but you have to set that in the context of all the startups that Kabuki-dance themselves towards acqui-hires and product shutdown without ever revealing their secret money-generating sauce.
There are also investors who don't know how a consumer startup is ever going to make significant revenue from it's impressive user base that have to do the "this is an Adwords-type revolution away from being the next Google" speeches whilst gearing up to offload their stock in a pre-significant revenue IPO.
I've never understood why people debate this so much. It seems to me, if you think we are in a bubble and everyone else is bullish, you would bet against the market and keep quiet about it.
My only theory so far is people like Andreessen are taking the game even further- i.e. he believes we are in a bubble, bets accordingly, and publicly says we are not in a bubble to help increase his profits in some fashion.
Basically I assume some commentators don't know what they are talking about, and the rest (the ones who know what they are talking about) actively give bad advice on purpose, so I do my best to ignore all this stuff. If we know the speaker is either stupid or malicious, best not to listen.
The old adage remains true, that the market can remain irrational longer than you can remain solvent. If I took out a short position on Facebook, what's the likelihood that it would pay out before I'd burned through my life savings?
We're all thinking about it because right now it's a very good time to be a coder, and pretty much every time that's been true, something awful has happened pretty quickly. We're all just invested enough to get burned by it, but not well-heeled enough to put our money where our mouths are.
Maybe there's an advertising bubble (I still see a lot of ads for ad-supported services), maybe it's something else, or maybe these toys we've made actually do create a trillion dollars of value to society. Either way, we're along for the ride, and there's little we can do to hedge against it besides being better than the people around us, and hoping to survive the next round of layoffs.
While we may or may not be a bubble, its hard to pay much credence to statements like "there is no bubble!" by someone heavily invested in the potential bubble.
Really? I would argue that somebody who has put millions of dollars behind his views has more authority than somebody who has put zero dollars behind them. He has a lot of money on the line. I'm pretty sure he's thought this through thoroughly.
No, he's an investor, who understands the concept of risk. He's made a bet that the value of companies he's invested in will increase, and it may or may not come to pass. His opinions on his investment however, maybe largely biased.
This is coming from a man who says Snapchat is worth a $100 billion dollars...
Irrational exuberance causes bubbles guys, it doesn't have to be mom or pops, it can be the naive exuberance from those that make up the market, as for as I know most of the market players share the same exuberance.
Once the notion of value from future profitability is crushed for the second time around, the entire models for valuing startups will fail. We saw the exact irrational exuberance during the dot com era, that we are now in a new economic landscape, the old companies have no future, it's basically people with a large equity in such companies spreading garbage. Supply and demand never changes. Inflation never goes away. Cash flow today is more than potential cash flow years from now. It's a giant ponzi scheme, pump and dump, whatever you wanna call it.
If Warren Buffet calls you out on something, I listen, the man knows what he's doing.
The real value of software based business comes from scale. The marginal cost to serve one more customer is close to zero. That is the main reason for big bets and valuation.
The 1990's were a retail/buy side bubble. The current bubble is a sell-side one, driven by the Fed. They are completely different. Disproving a retail bubble does not exist (correctly) does not speak to a liquidity driven bubble existing / or not. The people funding VC firms...have too much cash. That's good for VC firms...and the reason you won't seem them point out this fact.
It would be more interesting to hear marc's view on the amount of money chasing deals. Perhaps he will chime in.