
Is it a tech bubble? - sethbannon
http://cdixon.org/2012/04/29/is-it-a-tech-bubble/
======
moocow01
"Apple (14 P/E), Google (18 P/E), eBay (16 P/E), Yahoo (17 P/E)"

Those are some nicely cherry picked examples of mature companies that have
been around for a Silicon Valley century. But I don't think the bubble
involves mature tech companies but rather is in the private markets for
emerging tech companies. The recent IPOs are certainly indicators of this...

Linkedin - P/E: 940

Zynga - P/E: No earnings (6B mkt. cap.)

Groupon - P/E: No earnings (7.5B mkt. cap.)

Pandora - P/E: No earnings (1.5B mkt. cap.)

~~~
pdeuchler
Playing devil's advocate I'd say P/E ratio is a flawed metric to use when
talking about what some of these new startups are worth. A lot of the newer
IPO's represent companies that have significant assets in new areas that we
haven't necessarily found the most efficient monetization scheme for yet.
Pandora, for example, may not have any earnings, but the value of controlling
the source of 100 million users music is no doubt quite valuable. Similarly,
one might even argue that some of these companies are undervalued. Facebook's
mindshare and ubiquitousness among the upcoming generation is without a doubt
a new phenomenon, and so one could say that their current valuation
approaching 100 Billion is small considering it's only based on the current
monetization scheme of advertising (you would also have to argue at the same
time that more efficient monetization ideas exist).

tl;dr- It could be unwise to measure new age technology companies with old age
metrics when discerning value

Obviously, there are some outliers like Groupon that do create large
valuations with little value (arguably)

~~~
incongruity
I feel like I heard this same thing before... just over a decade ago.

Here's the deal, economic value is all about returns on capital.

User value or some other sort of "value" may well fit with what you're
arguing, but fundamentally, economic value is all about return on investment.
That means how much is my investment growing? Growth, therefore, must be
measured in real dollars. If it's not able to be converted into a liquid
asset, it's not real, it's speculative. So, until such time as you can
actually, demonstrably monetize the "value" you're asserting exists in a
company like Pandora, is, in fact, speculation and nothing more.

Bubbles are driven by speculation en masse. Some people get rich in them
(because they sell before the crash). Every time there's a bubble, people
start talking about how the old rules don't apply. Thus far, every time,
they've been wrong... and it's because to increase value, you need to be able
to monetize the offering. If not, you're creating user value, but no economic
value.

Over anything but short-runs, investors want returns on capital – because you
can find them elsewhere... so if your capital is tied up in an investment that
isn't actually producing monetizable products, it's not producing capital
gains. Therefore, there's a clear opportunity cost associated with putting
capital some place that it's not growing in any sort of real (i.e.:
liquefiable way within some predictable timeline) – and if the investment
stays like that for too long, investors will go elsewhere, for greener
pastures.

------
incongruity
The problem I have with this is that there's a lot of conflating what "should
be" with what _is_ – he talks a lot about "intelligent investors" and "good
investors" – but that says nothing about what is (or isn't) actually
happening.

It's precisely when bad investments get made quickly, at irrationally
exuberant levels that we get bubbles – and the claim is that there is exactly
that sort of irrational exuberance going on with many startups/or in VC
funding in the tech sector. The only thing that the author offers to refute
that specific claim are his own assessments of valuations, but no hard
numbers.

Further, he tries to argue that the Instagram purchase is justifiable because
it's only 1% of FB's value – but that's just it – that sort of thinking is
begging the question (in the old sense of the term) or circular. Based on what
I've read, a 100 Billion valuation of FB would put its P/E ratio at around 100
– that's high. Really high.

So, what if it trades closer to a 20 P/E ratio (where many other tech
companies are) – that means the Instagram purchase was nearly 5% of FB's worth
– for a 13 person startup with no revenue – made only as a defensive play,
according to some. To me, that's excessive.

Details aside, the whole point is that you can't use numbers from within the
suspected bubble to support the argument that other numbers are rational and
thus reflect the lack of a bubble.

Those sorts of short-sighted arguments are on my list of warning signs for a
bubble. When we get enough of those, the idea of convergent evidences should
lead objective observers to bet on it being a bubble...

~~~
j_baker
Really? I would argue that a bubble is a psychological bug that causes
investors to ignore the numbers. They're usually right there in front of you,
but the bubble effect short-circuits the rational thought process that tells
you not to invest without checking the data.

Now, I will be willing to grant that perhaps we're about to be in a bubble,
but now we're venturing into the land of speculation, aren't we? If gathering
data to tell us what the markets are _going to do_ were easy, bubbles wouldn't
ever begin in the first place, would they?

~~~
incongruity
How, exactly, do you see me as arguing that anything but numeric foolishness
is going on here? Investors, in bubbles, frequently find ways to justify the
numbers – often with talk of how the old rules don't apply, etc., etc.

In this specific post's case, however, the author fails to see the lack of
quality in the numbers which he (barely) uses.

Trusting bad numbers without really digging into them is little different than
"ignoring the numbers", as you put it. They're two sides of the same coin –
sloppiness because of excitement or other failed thinking.

As for your last argument – I'm not sure what to make of it. On the one hand,
just a few lines above you argue that the numbers are usually "right in front"
of investors and that bubbles are caused by ignoring them... but then you
argue exactly counter to that and say that seeing bubbles isn't easy and that
data can't tell you when there's a bubble.

I strongly disagree with that last point – the housing bubble was definitely
spotted using data before it burst, as was the last tech bubble. It's just
that few wanted to believe that the old fundamentals still applied. But thus
far, they always seem to.

------
davepeck
Good question. I built a site to help us decide:

<http://techbubbleforeveryoneorjustme.com/>

------
vectorpush
The tech companies who are actually hiring people (i.e. the antithesis of the
two person startup seeking technical co-founder) are selling a product or
service for money. The only people worried about a bubble are those who are
hoping to cash out on their user count. Ask yourself: "does the work I do
contribute to a product or service that can be sold?". If the answer is yes,
then you're living outside the bubble.

~~~
potatolicious
A bit of an oversimplification, no?

There are plenty of startups of the "lots of users, show ads" variety, some of
which might actually make viable businesses, most of which probably won't.

The trouble here is overvaluation - there are plenty of startups which _do_
sell a product or service for money, but are overvalued and over-hired. I can
imagine many startups here that would make viable, profitable, 10-person
shops, but instead are swimming around with 100+ engineers. The fact that they
_have_ revenue and monetizable product isn't going to save them when the
bubble bursts.

~~~
vectorpush
Indeed, I am generalizing somewhat, but it's a core truth that holds pretty
well. Consumers don't really care about a bubble, if they value a product or
service they're going to buy it. The bubble won't make a company any less
profitable, an over-hired company is still over-hired regardless of whether or
not a bubble exists; this applies even to ad-based companies. If the bubble
bursts tomorrow, Facebook and Google won't care, it's not as if their ad-
clicking users will suddenly stop clicking ads. A bursting bubble is only a
threat to those who rely on external cash infusions to bootstrap their
operations until they can figure out how to turn a profit. If 10,000
conversions a month is profitable, it will still be profitable when all the VC
money dries up.

------
jasonkolb
I think there is a bubble in articles about whether or not there is a tech
bubble. I cannot wait for it to burst.

~~~
gm
Agreed, enough with the f-ing BS about asking the same question over and over.

Signal/noise ratio has taken a nosedive on HN lately; sad.

------
hexis
Are there any tech investors who say there is a bubble right now? Or do we not
get to read about that until _after_ the bubble pops and it becomes status-
enhancing to have "known all along" that it was a bubble?

~~~
j_baker
Did you have any facts or logic, or were you hoping that casting VCs as the
next subprime mortgage brokers would remove the need to present them?

~~~
tatsuke95
The evidence _is_ the sub-prime mortgage brokers.

Or do you think that there is some invisible line of morals that separates one
kind of person who lends money, from another?

~~~
Volpe
Loaning money that poses no risk to yourself (subprime brokers) is quite
different from loaning money you risk losing (VCs).

Morals don't come into it, they are factually different. VCs aren't on selling
their risk (thus mitigating it). Are they? (I could misunderstand how VCs
operate).

------
InclinedPlane
Of course there's a tech bubble, there will continue to be tech bubbles for a
long time.

But, it's not that much of a concern any more for several reasons. First, the
core strength at the heart of tech continues to get stronger with many
diversified sources of revenue, regardless of the bubble. Second, the bubble
isn't all encompassing, only some companies are part of the bubble, not all.
Third, there's widespread awareness about these bubbles while they are
happening.

The online business sector has matured tremendously in the last decade and a
half, it is no longer even a little bit monolithic. The web is now just a
platform, and while some online businesses may play in dangerous bubble
infested waters, many others do not. We will never again have a situation
similar to the original dot-com bubble, with such a huge impact across nearly
every online business and such a huge impact on the entire economy.

~~~
dimitar
How about a "social media" bubble?

------
oskarth
The best sign that we are not in a bubble is the fact that it's mainstream to
think that we are in a bubble. This suggests that the possible overhype is
already accounted for in the market price.

It's the equivalent of _when your taxi driver starts talking about a "hot
stock", it's time to sell_.

~~~
eli_gottlieb
_The best sign that we are not in a bubble is the fact that it's mainstream to
think that we are in a bubble. This suggests that the possible overhype is
already accounted for in the market price._

No it doesn't, because most of these companies aren't trading on the public
markets. They're taking venture capital funding or trading on private
exchanges. So it takes VCs believing it's a bubble (which it is against their
interests to believe!) to actually factor that into valuations.

It's a bubble. Time to pick who's a real business, and buy their stock when
the whole thing crashes.

------
paulsutter
The debate is caused by the binary term "bubble". Neither answer (yes or no)
is correct. A better question might be "how exuberant are we getting?" (anyone
around in 1996 wil recognize that term)

------
confluence
This might be relevant:

[http://www.quora.com/the_edge/Intriguing-answer-on-
Silicon-V...](http://www.quora.com/the_edge/Intriguing-answer-on-Silicon-
Valley-bubbles-manias-booms-busts-crashes-and-winning-the-startup-lottery)

Apparently housing prices are bottoming out (US domestic) and people are
starting to get serious interest in San Francisco property (much more than
normal). I remember reading somewhere that rents had a massive run up during
the last bubble (where leases killed a bunch of startups - 5 year leases at
2000 prices during the crash).

From: <http://news.ycombinator.com/item?id=3850170>

Steve Jurvetson (DFJ Venture Capitalist) has this to say on whether or not we
may be entering a bubble:

[http://www.quora.com/the_edge/Long-wave-boom-and-bust-
cycle-...](http://www.quora.com/the_edge/Long-wave-boom-and-bust-cycle-from-a-
talk-called-Innovation-in-a-disruptive-environment-by-Steve-Jurvetson-at-
Stanfor)

Who knows, with the JOBS act passed, and the consequent relaxation in
securities regulations we may have sown the seeds of an unpleasant moment in
the near future.

Anyway some food for thought.

JOBS Source:

[http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...](http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups_Act)

JOBS Act criticism:

The Consumer Federation of America characterized an earlier version of the
legislation as "the dangerous and discredited notion that the way to create
jobs is to weaken regulatory protections"

Criminologist William K. Black had said the bill would lead to a "regulatory
race to the bottom" and said it was lobbied by Wall Street to weaken the
Sarbanes–Oxley Act.

"gutting regulations designed to safeguard investors", legalizing boiler room
operations, "reliev[ing] businesses that are preparing to go public from some
of the most important auditing regulations that Congress passed after the
Enron debacle" and "a terrible package of bills that would undo essential
investor protections, reduce market transparency and distort the efficient
allocation of capital".

------
jmtame
I'll probably take a karma hit for this, but I find it neither intellectually
stimulating nor effective to talk about whether we're in a bubble, especially
if it's fear mongering. If you want to convince smart people they're living in
a bubble, do it with data and intellect. This one at least seems like a step
in the right direction using specific companies and PE ratios, whereas the
previous articles were pretty easy to dismiss with hardly any data to
reference (Chris seems to argue against a bubble in this article, I just like
that he's using data).

The only thing I can look at and agree with is that seed round valuations are
higher. Can a bubble be created based on inflated seed valuations? That'd be a
more interesting conversation to have. The A rounds are not trivial to raise--
you still need traction, whether it's users or revenue.

If we are in fact in a bubble, what exactly are you going to do? Are you going
to immediately start focusing on revenue, knowing that it may be harder to
earn in the near future? Are you going to go out and raise your Series A/B/C
right now given your 6+ months of runway left? Or are you just going to
entertain the conversation? It doesn't feel like a very productive
conversation to have unless you're actually acting on it right now.

------
j_baker
It's nice to see someone approaching this question with actual _data_ , and
not gawking at a handful of acquisitions that are arbitrarily deemed
"excessive".

~~~
incongruity
Wait. What? Where's the data? There's a citation of P/E ratios for large tech
companies and then the author's _assertions_ about his judgements about seed
and A series valuations. That's not really a lot of actual data in my book.

~~~
j_baker
There's _always_ more data you can have. I was merely saying that the author
presented enough data to make a credible argument, not that he was correct.
His approach, though undebatably imperfect, is much more valuable than the
typical "Complain because company x got acquired for _too much damn money_ "
approach you see most everywhere else.

------
rythie
People need to define what they mean by a bubble, most of the companies
mentioned are privately held, it's not clear this is like the .com bubble or
that a crash would have wide ranging effects - unless someone would like to
explain?

------
sparknlaunch12
Can someone provide some stats on the number of "tech bubble" tweets and blog
posts; versus boom and bust economic cycles?

Does the bubble matter? Isn't it more important to be in a safe place when it
burst, which means building some reliable now in anticipation?

