
Who Will Be Hurt Most When the Tech Bubble Bursts? - devNoise
http://techcrunch.com/2015/05/24/who-will-be-hurt-most-when-the-tech-bubble-burst-not-vcs/?ncid=rss
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birken
> But not Mark Cuban, one of the renowned moguls in the VC world.

Mark Cuban is certainly a renowned Angel investor, but not a VC.

> For instance, Uber moved from $17 billion to $40 billion between the two
> funding rounds within six months.

Amazon, a public company worth ~200B billion dollars, is up 40% in value in 5
months this year. Valuations can change very quickly in technology companies,
whether public or private.

> This bubble is bound to burst.

Ok, well I guess that settles it!

> Take Uber and Airbnb for example. Both co-founders ... wealth was calculated
> on the basis of notional post-money valuations, figures far in excess of
> what these companies could actually be sold at in the market right now.

Uh, says who? Both of these companies make tons and tons of money and have
business models that make sense. Whether or not they are good for the world,
they are certainly good businesses. What makes you so sure the valuations are
wrong? All of the late-stage investments in Facebook worked out pretty well.

> VCs will most likely walk away with their invested money, if not more.

A VC who returns the initial fund amount (or even a small gain), over 10
years, is losing their LPs tons of money to fees and inflation. LPs will not
invest in that fund again, and one bad fund has ended a lot of VC careers.
Granted this is probably good for the world, but not for that VC. Saying a VC
has liquidation preferences and thus they are immune from any negative
consequences to a bad investment is ridiculous.

~~~
pzxc
I don't disagree with anything you said, but I have a question. If liquidation
preferences have such little value, why is it so common?

Is it because founders for the most part accept whatever the VCs dictate, even
things that benefit the VCs only slightly but still get thrown in because the
VCs pretty much get their way no matter what?

~~~
birken
Liquidation preferences have value, and a lot of value, I'm saying that they
just don't make VCs immune from bad consequences. I'm sure the reason they are
so common is that a VC wants it, and it seems fair to the founder and is easy
to toss in.

Founders certainly don't accept anything the VCs dictate, and terms like this
are on the table during negotiations. This is especially why as an founder you
want competition from multiple VCs so you a little bit of leverage. But at the
end of the day the VCs are going to want some sort of preferences over the
common stock, and this is a fairly easy one to toss in.

As to why the preference might not be so great for a VC, let's imagine a
hypothetical scenario. I make a 20k personal angel investment in a company
with a 1x liquidation preference. A year later the company is tanking and
sells for less than the valuation, but enough that I get all my money back.
Great. I lost the opportunity cost of that 20k for one year, but nothing else.

But imagine the same scenario with a VC, but let's say it was 20 million of
their 100 million dollar fund. A year after they make the investment, they get
the money back. But they now _must_ return that to the LPs. The fact they got
the money back quickly makes no difference to them, because they can't re-
invest it. And now they now have only 80% of their fund left to try and
generate a big return. Yes, getting the money back is better than not getting
it back, but is wasted ammo they cannot re-use in their quest to generate a
big return.

And also lost in this is that many times when a company is tanking they will
either go completely bankrupt or not return all the money that investors put
in (see: Fab).

------
downandout
It's a pretty simple situation. Zero and negative interest rates are causing
enormous sums of capital to chase yield through non-traditional sources. Sand
Hill Road VC's have a good pitch and connections, so they wind up with a
significant portion of that capital. That capital has to go somewhere, so the
VC's basically use the Stanford admissions process as a proxy for screening,
and they give anyone that has been admitted and can get an app written huge
amounts of this money. VC's haven't suddenly gone crazy; they simply find
themselves drowning in money that they have to deploy.

Some of these companies will undoubtedly be successful, as the ability to
spread virally and scale the IT infrastructure to meet demand these days is
absolutely unprecedented. That is the primary difference between the first
"bubble" and now. It looks the same in terms of frothiness, but anything that
delivers real value to people these days will spread very fast, largely for
free, and may actually become profitable.

Whether or not the value of the successful companies that emerge from this era
will make up for the massive losses of those that fail remains to be seen. I
think it's actually possible. The real losers will be the engineers, because
when interest rates rise and people pull money out of these funds, all but the
most promising companies (in terms of actual traction) will see their funding
vanish, and millions of people (thousands of top engineers among them) will be
out of work.

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MBlume
Question from a new-comer: after the first bubble burst, was it difficult for
a solid developer to find work in the valley? How much did salaries drop?

~~~
ryanSrich
As someone that was 10 years old when the first bubble burst I second this
question. Who should be nervous? All tech companies or just those in the
Valley with no business model aside from selling ads?

~~~
Saif123
I graduated with a Bachelors in CS from Cornell in 2001. The previous summer,
I was freelancing as a Java programmer for $70/hr. By December 2002, rates had
fallen to $10/hr for Java programming (at my skill level.)

A couple of things:

1\. The first dot com crash also co-incided with the telecom crash (Lucent,
Global Crossing, etc) so you had a lot of VERY skilled technologists suddenly
hit the market

2\. The first doc com crash also co-incided with Americans' ill-fated
experiment with whole-sale outsourcing development projects to India which is
what caused the huge crash in rates. As we all know, this was not sustainable
as most off-shoring projects at those bottom rates failed. Rates eventually
stabilized once companies realized those rates were too good to be true.

3\. A lot of developers from Big5 firms also flooded the streets. I was at
Accenture -- we went from 60k employees to 28k. Rather Andersen went bankrupt
entirely. So you had not only the telecom talent out of work, but also Big5
integrators.

Overall, for entry-level employees, it was fine since you weren't competing
for high salaries. It was more difficult for pthose set in their career who
couldn't move around etc.

-Saif

~~~
bdcravens
I've never seen rates that low, but again, you may have been at the lower end.
I knew lots of developers who were at that end of the spectrum who were
deceived by the rates being paid in 1999 into believing they had "made it".

I think it's a positioning thing. If you're at a big consulting firm, it'll be
tough. Companies that used to pay $200+/hr for projects will find it's better
to bring in some generalists and pay them $80k/yr.

During this time I was a developer in HR in travel, 9/11 hit, and I went to
building web apps for health care. No issues whatsoever with work. During this
time I also did some smaller projects, again, in mainstream industries:
transportation/logistics, telecom, etc.

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ChuckMcM
I found the fundamental point pretty insightful, that its going to be weird if
you are a founder of some company that is saying its worth a couple of billion
and you've got a few percent of the common stock equity, that "feels" like you
are rich[1] as your "projected" net worth is millions. And then the bubble
bursts and you aren't anymore. If you have your self identity wrapped up in
that then having the bubble burst will be really hard to handle.

[1] Been there done that :-)

------
noname123
Great article. Curious if the tech bubble is gonna burst say sometime in the
future, what do you think the best options would be to weather the storm?

Obviously, VC-funded startup's with no cash-flow and only one or two years of
funding will be the first to go (dot-com comparison: pets.com, WebVan), then
next will probably be any relatively new consultancies (dot-com: Razorfish,
coding schools of the late 90's that taught people for MCSE/CNAA
certificates).

Next in line to fall is unclear, all the hardware and network infrastructure
companies suffered in dot-com (e.g., Sun, Cisco) with layoff's due to no
demand anymore to buy expensive high-end servers and routers. But today with
the cloud infrastructure, would AWS division, Azure or IBM be able to weather
the storm?

On the other hand, peeps I knew who were able to weather the storm were people
who had critical domain knowledge in a stable or booming industry at the time
(e.g., HPC specialists for defense contractors, Bioinformaticians working for
the Human Genome Project, system developers for high frequency trading right
after RegNMS). Unfortunately, cycles have also turned for these fields too and
demand has matured or waned.

Curious what you guys think are the next "unsexy" but potentially lucrative
fields that has demand for IT workers and should yield fruit in the next 10
years that you'd angle for, if you were starting anew? Farm tech, AdTech,
FinTech, personal genetics therapy, or even plain old but reliable fields like
oil & gas, healthcare or e-discovery?

~~~
TTPrograms
My preference generally tends towards medical - it's generally a "good" thing
to be working on and we're around retirement age for the baby boomers. All the
low-cost high-impact opportunities in aggregating data and personalizing
treatment based on that information make it seem attractive to me for the next
decade or so.

------
seagreen
Can't believe I'm wading into a "bubble" thread:/

Here are my thoughts. Disclaimer: I'm just some guy. epistemological
confidence: low.

There may be a bubble in consumer tech. There isn't a bubble in tech in
general.

Consumer tech is weird right now because consumers are so weak. Bob the
plumber has a laptop (good!), he's using a WIMP interface (not good!), but he
knows a little Excel (great!). All in all he's a reasonably empowered internet
citizen with a real internet presence.

He closes the lid. BLAMMO! He now has has zero internet presence under his
control. Not a single thread, not a single cron job, nothing. He's lost the
most basic information organization functions: "share", "receive", "do at this
time", "do repeatedly", etc.

Instead he has to rely on others for all those functions. These are really
basic functions. Like "baby food" level. If he's so helpless his computers
can't handle something as simple as "do something at 5:00 tomorrow" reliably,
of course he's going to get taken advantage of.

Pinterest, Dropbox, AirBNB, Slack, Evernote, Facebook, LinkedIN ... all exist
because users don't have servers. If personal servers take off, consumer tech
will pop. Of course, normal people aren't going own UNIX servers ever.
Sandstorm though . . . that's a lot easier to set up than a Linux box.

(I don't think tech in general is a bubble though. "Software is eating the
world" seems entirely accurate to me.)

~~~
Dwolb
Although a bit tangential to the article, you make a really good point. There
has to be some room in the market for plug-n-play servers with 0-maintenance
web apps that are present in the home instead of a public cloud.

It'd be really tough to compete without the massive consolidation benefits of
the big players. Moreover, it'd be tough to position the product because it's
essentially the same service, but with privacy benefits.

~~~
seagreen
> Tangential to the article

You got me. Hopefully my point is interesting regardless though -- basically
that some companies like Pinterest are vulnerable in ways that others like
Square aren't.

> Moreover, it'd be tough to position the product because it's essentially the
> same service, but with privacy benefits.

Oh man, I'm glad you brought this up. I think one of the only interesting
insights I have here is that _the personal server stuff is totally tangential
to privacy_. Personal servers are cool because they're useful and technically
sweet -- I can move from querying my friend's review of a software product, to
looking at his code using that software, to reading his blog posts about it,
all without leaving the same datastore (on his side) or the same UI (on mine).
Right now that would involve searching Acme Software Co's website, then
GitHub, then Blogger, which is a plain worse process.

EDIT: spelling

~~~
walterbell
Have you looked at the Synology NAS+mobile app ecosystem or the OSS clone
XPenology?

~~~
seagreen
Not very much, know of a good "beginner's guide to NASes"?

Honestly though, while I'm sure they're cool, I'm not sure NASes will do much
good here. Most people need something as simple to use and set up as Evernote
or Gmail.

~~~
walterbell
This review claims the setup is reasonable and even mobile app acccess works,
[http://9to5mac.com/2014/03/10/synology-gets-even-better-w-
ve...](http://9to5mac.com/2014/03/10/synology-gets-even-better-w-
version-5-0-why-every-mac-ios-user-should-have-a-diskstation/)

------
pesenti
The article does not separate VCs themselves from the investors in VC funds.
The picture is even better for VCs than the actual investors. Whatever
happens, they are currently collecting their 2 to 2.5% management fees. Huge
valuations are advantageous to them as they allow much more capital to be
invested and more fees to be collected.

~~~
birken
If all startups are over-priced, and we are in a bubble, that would mean it is
a _terrible_ time to be a VC. Talk to a VC, and they'll tell you they hate the
world right now. More competition for deals and inflated valuations help
companies, not VCs. It means VCs get less of their "top" deals and they have
to pay more money from them, both bad things from a VCs perspective.

And consider a VC that makes most of their money from management fees. This
means LPs are literally paying the VC to lose their money. The LPs will figure
it out eventually and stop investing, at which point the VC needs to find a
new career. Maybe the cycle takes 5 years, but it will happen. VCs want to
make good investments as much as LPs want them to.

------
shalmanese
More specifically, it's departed employees.

Current employees have had it drummed into them enough times that the EV of
their equity stake isn't likely to be significant and they should negotiate
for cash over equity. Worst comes to worst, their options go underwater but
they're still highly compensated professionals with in demand talents.

Founders knew the risks when they negotiated the terms of the funding round
and they have nobody to blame but themselves if they got too greedy with
spending.

Departed employees though, have to face the choice of whether to exercise
options before they expire or forego them and potentially lose out on a huge
payday. They're the ones who have to put up real cash into the system for
paper gains.

------
morgante
This is a very lazy article. It makes a lot of broad and sweeping claims, but
doesn't have any evidence to back it up.

Most importantly: why is this bubble worse than the last one for employees?
Employees all had stock in the dot-com bubble as well, and were equally wiped
out when it burst.

Personally, I think this argument is much less feverish than the last one.
Unicorns might not be profitable, but they're generating substantial revenue.
Uber has a crazy valuation, yes, but they're also making $10 billion a year in
revenue. [1]

[1] [http://www.businessinsider.com/uber-revenue-rides-drivers-
an...](http://www.businessinsider.com/uber-revenue-rides-drivers-and-
fares-2014-11)

~~~
bdcravens
I think (unsubstantiated as well) that less parachutes are being given out to
employees this time around, and VCs have gotten smarter. Many VCs were around
then, whereas I'd bet that better than 50% of those reading this thread
weren't of working age when the last bubble burst.

------
leeleelee
Glad to see articles like this, I've had the same point of view for awhile
now.

At least uber has revenue though. Lots of companies are getting funded with
zero revenue (nevermind _profit_ for now) and no clear revenue model. Crazy in
my opinion.

------
beniaminmincu
There's been a lot of talk lately about a possible tech bubble. Does the HN
community think we're in one? I wanted to create a poll but keep receiving
error 504. Maybe someone else could create one. I think the results would be
interesting. - Update: Fixed that.

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analog31
It's probably technically wrong, but still, I can't escape from the thought
that someone selling a zero revenue idea to an investor for a few million
dollars is no different than someone selling a stock short. When a bubble
bursts, the short sellers make out.

------
beniaminmincu
Update: Please vote on this poll if you think we're in a tech bubble:
[https://news.ycombinator.com/item?id=9597656](https://news.ycombinator.com/item?id=9597656)

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jacquesm
Shouldn't that be 'bursts'?

And does this mean that TC feels that we are in a bubble?

And if so why?

~~~
Diamons
"Uber moved from $17 billion to $40 billion between the two funding rounds
within six months"

That's about as open and shut as it gets as to why we're in a bubble.

~~~
oldmanjay
I take that to mean you are arguing that we are not in a bubble? your wording
is ambiguous and your example is equally (not at all) compelling either way.

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GFK_of_xmaspast
I notice the "Not VCs" portion of the original title has been removed here.

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gjvc
the appalling grammar in this article displays zero editorial effort

