
We’re In The Middle Of A Terrible Blubble - cwan
http://techcrunch.com/2011/04/24/were-in-the-middle-of-a-terrible-blubble/
======
edw519
1\. Build software that provides value for your customers and their customers
so that everyone gets paid and makes money. Repeat for years.

2\. Stay busy and keep learning, but since you know that none of these things
really matter, you can ignore all Hacker News posts about them:

    
    
      - the bubble
      - the best language to do <x>
      - how to blog about <y>
      - how to tweet about <z>
      - your Facebook prescence
      - why technology <a> is dead
      - how to make Hacker News better
      - how much to pay for a domain name you must have
      - how to "socialize" your app
      - how social apps are changing the world
      - how we are losing our civil liberties
      - what makes Apple so cool (they are, but who cares)
      - what makes Microsoft so lame (they are, but who cares)
      - how to interview (just be yourself)
      - who's hanging out with who (who cares)
      - how to build software without programming
      - how to network (just get out there)
      - how to get rich (do the right things and let that take care of itself)

~~~
mojuba

      - what matters and what doesn't (who cares)
    

Seriously, and for argument's sake, the "do whatever provides value" mantra is
too simplistic and provides no value to entrepreneurs or engineers (or hybrid
types) whatsoever. Let alone that it doesn't contradict to any of the "lame"
stuff you listed. For example, understanding how Facebook works both at the
social level and technically may help you in building something that provides
value to 600,000,000 Facebook users.

Finally, listing "how we are losing our civil liberties" somewhere between
"who's hanging out with who" and "how much to pay for a domain name" is the
best way to bury the remains of our civil liberties.

~~~
michaelochurch
_Finally, listing "how we are losing our civil liberties" somewhere between
"who's hanging out with who" and "how much to pay for a domain name" is the
best way to bury the remains of our civil liberties._

Thank you for raising this issue. "Who's hanging out with whom" is in the
category that's both unimportant and very hard for an individual to change.
The loss of civil liberties is a matter where it's very hard for a person to
effect change, but it's an extremely important issue. I don't think it's very
useful to spend 4 hours per day on the Politics section of Reddit, but to call
politics "unimportant" just because it's impossible for an individual (in most
cases) to make changes is short-sighted and wrong.

~~~
bjelkeman-again

       The loss of civil liberties is a matter 
       where it's very hard for a person to effect change
    

I disagree.

In short I think good work in software and internet communications tools, like
Tor, can actually have a profound effect on shaping government policy. (Tor is
one of the darling s/w projects of the Swedish government.)

Slightly longer: I thought it was essentially impossible to influence
government policy four or five years ago. I was interested in environmental
issues and thought I would have to become a politician to be able to change
things (heavens forbid). Then I fell into an opportunity where we started an
open source software foundation to build online project, transparency,
donation, visualisation tools for development aid.

Fast forward four years and we are working closely with the Dutch Ministry of
Foreign Affairs. Get invited to publicly review the work of the Swedish
counterpart and sit in on bilateral talks between the USA and the Dutch on aid
transparency. I see public policy change before my eyes. Of course, this is
not only because something which we did, but we are at the right time and
place with the right effort. However, I do know that our work changes the way
policy is being shaped.

If you are curious to read more check out a couple of my blog posts:

[http://bjelkeman.wordpress.com/2011/02/06/law-is-hard-
code-i...](http://bjelkeman.wordpress.com/2011/02/06/law-is-hard-code-is-
harder-why-new-internet-and-software-architecture-will-define-the-future-of-
society/)

[http://wearefuturegov.com/2010/11/19/guest-post-where-
open-d...](http://wearefuturegov.com/2010/11/19/guest-post-where-open-data-
leads-us/)

------
grellas
This is actually quite a remarkable piece:

1\. It gently mocks the investors who proclaim "bubble" as a way to bitch and
moan over being caught in a price squeeze.

2\. It lampoons the alarmist press accounts of the same "bubble" as a sort of
guilt-ridden desire to atone for having so idiotically missed the real bubble
of 2000.

3\. It deprecates its own author in two splendid ways (swimming in the bubble
froth of holding a worthless vp biz dev position while on the ascendancy and
swimming in booze in the aftermath as the illusory fortune took wing and flew
away).

4\. It offers some sharp and pithy contrasts between what is in fact happening
today (some over-excitement in select tech areas) and what happened in 2000
(spend, spend, spend and to hell with fundamentals), all of which in fact
draws a sharp contrast between what was indisputably a bubble back then with
what is (likely) not really one today.

5\. And it does all the above with tongue heavily in cheek, right down to the
very title ("blubble").

You can love or hate Mr. Arrington, and he is undoubtedly one who provokes
strong reactions from others, but his work is anything but routine and, at
times, it even soars.

------
muhfuhkuh
Name a company in this "bubble" that has wasted $100 Million dollars like
Boo.com or pets.com or $50 Million like flooz without producing even 1% of
that in revenue.

If not, then there is _no bubble_. Facebook makes in the ballpark, if not
close to, two billion dollars in revenue a year. Hell, even Groupon would be a
better buy today than, say, hotmail was, and Groupon got offered 2x the price
to be acquired and turned it down. The only thing even _remotely_ close to the
bubble of old would be Twitter, and they have 200 million users. Name one
service during the dot-com era with anything approaching that number. During
dot-com bubble, AOL had the most that I can recall, and their peak was
something like 26 million or so.

Repeat, there is no bubble.

~~~
akdubya
"The only thing even remotely close to the bubble of old would be Twitter, and
they have 200 million users. Name one service during the dot-com era with
anything approaching that number."

The raw numbers may have changed (there are more people on the internet now)
but the strategy is the same. In the late 90's it was all about eyeballs,
actual profit be damned. Nowadays it's all about "social". Twitter, Facebook
et al are going down the same road: many ephemeral eyeballs with no
discernible path to the kind of profitability tech sector investors expect.
They are at best media plays, and over the past 10 years we've seen how unkind
the market has been to the likes of AOL and Yahoo.

Groupon may be the standout company of this era (who knows?) but people who
boast of Groupon's numbers don't seem to understand that most of the revenue
goes into the retailer's pocket. It's an as yet unproven proposition that
there's substantial money to be made in dipping into the razor-thin profit
margins of struggling local businesses.

We won't know who wasted $100 million+ until it's all over -- that's the thing
about bubbles. The oversized VC funds and oversized valuations are relatively
recent phenomena and it will likely be at least 18-24 months until the well
goes dry. But when you see billion-plus dollar VC funds and a dozen me-too
venture backed companies in the mobile photo-sharing space alone, well, it
doesn't take an expert to see the froth in the water. Personally, I wasn't
alarmed until about six months ago.

Why should any of us care? Because after the party's over the tech sector is
in for a rather bad hangover. The jobs and the capital will disappear
seemingly overnight. As entertaining as it can be to watch things go boom, I'd
much prefer sustainable growth.

~~~
ghshephard
"most of the revenue goes into the retailer's pocket"

I thought the standard model at Groupon was 50% to Groupon (who carries no
inventory, or service costs) and 50% to the retailer (who carries all the
costs of the product sold to the customer).

Outside of advertising and sales, Groupon is close to 100% margin (they carry
a bit of the per-coupon merchandising and servicing cost)- the retailer
carries all the cost of the product that the customer actually buys.

------
ajwinn
"Anyone can be a biz dev executive because it’s not a real job. It’s kind of
like sales but you usually don’t have any kind of quota. You just work on
'deals.' "

Haha. Love this comment. Mostly true - I know, because I work in biz dev and
have worked with a few of the biggest companies in the Valley. Looking forward
to eventually having an actual job, but have to admit it's a good gig for now.

------
Vivtek
Oh man, that burn rate thing is true. Back in '98 or so, when I was living in
Bloomington, Indiana, I interviewed with a guy who was forming the "first dot-
com in Indiana" (despite the fact that my own vivtek.com dates to 1997, and
I'm pretty sure efax.com was based in Fort Wayne). I think it was some kind of
real estate site; he was a local ISP.

During the interview, he took a phone call to scream at AT&T about
connectivity issues. When it came to money, I named what I thought was a fair
market price and he sat there, stunned, and blurted, "You make that much with
that site"?

Well. I made that much with consulting work, and so that was kind of the clue
for me that this wasn't going to work out. About two weeks later, after not
having heard anything from him, I told him as much and asked him to destroy
the code samples I'd sent him. He responded that the disrespectful manner in
which I'd treated the officers of the company had already led them to decide
not to hire me.

But you know? He sure did get his venture capital, apparently in rather large
amounts; I heard figures around a million. He moved offices from the building
they already had in Bloomington, up to Indianapolis, and later I heard that
he'd been advised that their "burn rate" was not high enough. They weren't
spending enough money. So they started flying by private jet instead of
regular flights, for instance.

Madness.

Yes, he crashed and burned. I don't know what became of him, but when the
economy went south a couple of years later and I qualified for EIC, I knew
exactly why.

That isn't happening now. Everything I read about startups includes "how to
manage your business". People understand business processes, mostly. There is
a concept of spending money only if it's actually necessary, not to increase
an artificial burn rate metric to impress capitalists that should damn well
know better.

My intuition tells me that this isn't a bubble - it's just what we should have
done the first time around.

------
lazy_nerd
Most of the recent VC funded Internet companies that have gone public have
never been profitable in their life (which sometimes stretches a decade of
existence). For e.g. -

DemandMedia Makemytrip Zillow Envivio

According to a recent WSJ artcile[1], 11 of the 30 tech companies going IPO
this year have been in red and 19 reported some profit last quarter.

That is definitely a sign of bubble if we take a cue from the 99-2000 bubble.

[1] [http://blogs.wsj.com/venturecapital/2011/04/19/a-look-at-
the...](http://blogs.wsj.com/venturecapital/2011/04/19/a-look-at-the-venture-
backed-ipo-pipeline/)

------
nagnatron
The fact that it's not like the one from '99 doesn't mean that there's no
bubble. One of the reasons bubbles happen is because after each one we are
looking for that one but a different one occurs.

------
citizenkeys
A better term is "growth phase". This growth phase, like the late '90s,
creates new jobs, new technology, and new industries. All of those things are
important for a healthy economy. Eventually, some of these new companies will
get bought out or go out of business. So what? Everybody is better
economically because the founders and investors at least made the effort.

A big factor in the dot-com bubble was a belief in the so-called "new
economy", where people, because of the Y2K scare or whatever else, believed
that companies didn't need good financials (
<http://www.investopedia.com/terms/n/neweconomy.asp> ). I don't think anybody
has any illusion during this growth phase that solid financials aren't
important.

------
lyudmil
Interesting reasoning. A bubble occurs when an economic sector experiences
growth that cannot be explained by the fundamentals (supply and demand).
Overvaluation is implicit in bubbles. Keep that in mind while reading the
following sentence from the article:

"No, the biggest problem [in 2000] was that no one had any idea how to value
[tech] companies."

So, the problem with the 2000 bubble was that there was a bubble. However,
it's different now because Wall Street knows to look at user-bases and page
views, and the companies don't hire as many sales people as they did in 2000.
That doesn't seem like a serious analysis of an important topic by an expert.

------
gbog
I was re-reading pg's essay and it convinced me to move to the Valley (today's
Florence), but now I hear that there could be a bubble and I could be too
late. Any advice? (Currently living in Beijing, which is said by some to be
China's Silicon Valley, but hey, I don't smell any sign of real innovation
here.)

~~~
ZackOfAllTrades
If you are doing something important and useful well, where you are and what
is going on around you doesn't matter much.

I imagine if you start turning over some rocks in Beijing you will find some
interesting innovations. You live in a country with like a zillion people.
Somebody over there has to be doing something with social that blows crap like
facebook away.

------
garrettgillas
This really is the best writing on the current tech economy I've read all
year.

Yes, there a growing financial problem in the tech community. No, it it not
like the bubble of the late 90's and it's silly to call it such a thing.

I thought Michael conveyed the message about as clear as possible without
taking this thing too seriously.

------
RBr
Meh... who cares?

Bubble, recession, natural disaster, war, whatever... there is never a
"perfect" time to start a business.

If you have a good idea and a repeatable model with an output that costs less
to produce then to sell... start the business right now.

Forget about mysterious bubbles that other people are telling you about, get
off of your couch and do it. Now.

------
laujen
Why does any if this matter, bubble or not? The tech community has spent an
inordinate amount of time discussing it. What I see is a lot of companies
building businesses the right way -- customers first. If the funding dies
down, which it will one way or the other, these companies who have put
customers first and will be able to survive. As for the knock-offs and clones,
well, if they go away will anyone care?

------
tomjen3
That explains the old "we sell below cost and make up for it in volume" saw.

Always thought it was a joke, not good advice in light on a crazy situation.

------
Tycho
When I read stuff like this, I feel quite unsure about the truth %:

 _Everyone lost money on every transaction and nobody cared. Because your
stock price was tied to revenue, and when you ran out of money raising another
hundred million dollars was nothing more than a fancy powerpoint presentation
and a month’s work._

------
BerislavLopac
To have a bubble, we need a lot of large and irrational public investments at
extreme valuations regardless of profit. At this moment we have extreme
valuations and large investments, but "a lot" and "public" are notably absent;
we have a relatively small number (a dozen or so) companies with extreme
valuations. So it's not a bubble.

That being said, we are still not very far from one, since the only thing
preventing the current situation of becoming a bubble is the fact that the
biggest players are not on the public market, which is largely limiting
availability of their stocks, which are regardless oozing out through
secondary markets. So as soon as Facebook or a few smaller tech companies go
public, or if the SEC laxes the rules for investing private companies (as
discussed previously: <http://berislav.lopac.net/post/4489527749/opening-the-
valve>), the bubble will start to inflate.

~~~
jasonlotito
> To have a bubble

Did you read the article? Did you read the headline? Go, reread the headline.
Realize that blubble is _not_ a typo. Now, go read the article. =)

~~~
BerislavLopac
Your point being? I was commenting generally on the idea of the bubble, not
the article.

------
chailatte
Michael's main points are that

1.) Less money invested now than 2001.

2.) Low burnrate.

Therefore it's not a bubble.

1.) Sure, there is less money invested now. However, the market cap (and
possible return for the investors) is also smaller. Remember that at the
height of dot com in 1999, nasdaq had a market cap of 6.6 trillion. The bubble
crash wiped out $5 trillion in the market value of the technology companies.
The current market cap for nasdaq is $3.1 trillion, and if adjusted for
inflation, is 2.3 trillion. (using government inflation data. if you were to
use realistic inflation data, it would probably be way less than that) So we
have less money invested, sure. But it's because there is less return
possible.

2.) Low burnrate has nothing to do with overvaluation of companies. If a
company's potential exit is realistically X, and investors miscalculated and
invested an amount that valuates the company at 5X, and the ceo choose to burn
that investment over 16 months instead of 5, the investor is still gonna lose
the 4X over time.

And because the US economy is alot worse than 2001, (check government debt
level, unemployment rate, labor participation rate, average personal savings
rate, average retirement savings size, food/gas inflation) when the hangover
comes, the tech industry is gonna have a massive headache. Lots of layoffs,
startups shuttering, investors losing 90% of their investment, etc.

So the question you have to ask, and only ask is, will the company ever
realistically achieve that valuation, regardless of burnrate, regardless of
past performance, in the current and future macroeconomic conditions. For
companies like Facebook at $70 billion, Twitter at $11 billion, Groupon at $6
billion, etc.

~~~
Goladus
_2.) Low burnrate._

Not quite, he's talking about a particular mentality in that the goal was to
blow as much money as possible and get enough revenue to IPO, at which point
early investors cash out, profiting off public investment in something
worthless.

 _2.) Low burnrate has nothing to do with overvaluation of companies._

But overvaluation of individual companies does not mean there is a bubble,
either. It just means a company is overvalued. In the case of startups, "a
Bull Market for private investors" is a lot more accurate than "Bubble" but a
lot less sensational and scary because bulls don't pop they just turn into
bears.

 _So the question you have to ask, and only ask is, will the company ever
realistically achieve that valuation, regardless of burnrate, regardless of
past performance, in the current and future macroeconomic conditions._

As an individual investor, yes. But generally speaking the reason it's worth
asking whether there is a bubble (and not just whether a particular company is
overvalued) is because oversight and regulation can be effective at preventing
the sort of stock market abuse that led to the two recent crashes.
Overvaluation in general, though, is simply one of the risks of investment.

------
lotusleaf1987
"Heck, even I’m concerned when I see companies like SecondMarket holding
public auctions for Facebook stock, driving the price ever higher..."

Ah, nice a cleverly rephrased 'blame the speculators' argument, ignoring the
fact that all stocks are speculative in nature. Also, the Pets.com reference
felt lazy.

I'm really noticing a pattern with TC articles and a feedback loop on HN, they
basically just milk a subject until the comments die down and then once the
comments begin to show a new popular consensus they're quick to hop on that.
Reminds me a lot of Fox News. He barely even covers the topic his headline
implies the article is about--whether we are, or aren't, in a bubble
currently.

The article is mostly about himself. Funny when a journalists favorite subject
is himself.

~~~
RuadhanMc
I think you're being a bit unfair here. He did reference himself quite a bit,
but it was relevant -- he was talking from experience about the last bubble.
There's a lot of talk about a bubble and he made some good points about how if
we are in a bubble, it's not the same bubble as last time.

Just because Arrington wrote it doesn't mean that it is wrong.

~~~
lotusleaf1987
If it weren't such an ongoing pattern I'd agree with you, but MA inserts
himself into the subject of every topic he covers. He's the Glen Beck of tech
bloggers.

------
michaelochurch
I agree. We're not in a "bubble". We're in a half-decent spell after a lost
decade.

1998: The internet is going to generate a lot of value. Everyone sees this,
but no one knows which ventures will succeed and which will fail. People who
really don't know what they're doing get involved and it gets frothy. The '90s
had people who didn't understand business trying to start and run them, and
people who didn't know a thing about technology trying to get in the game.

2011: Recovery, making up for lost time. There's a decent amount of
enthusiasm, but it's only "hot" in the same way that a 70-degree day in March
is "hot" compared to what came before it.

When intellectual lightweights who only know how to draw 2-by-2 matrices start
getting into technology, then run-- and by "run" I mean pull out your money,
but stay in tech if you're smart, because even in the doldrums when no one is
getting rich this is still the best industry to work in. We're not seeing any
of that yet, though. Mark Zuckerberg may be a mediocre coder by HN standards,
but he's not an intellectual lightweight at all. No bubble yet.

~~~
temphn
> Mark Zuckerberg may be a mediocre coder by HN standards,

Don't mean to pick on this one comment, but he is certainly not a "mediocre
coder by HN standards". There may be a few people at Facebook who are better
at raw engineering, but in terms of the full stack (energy, focus,
originality, ability) Zuckerberg is one of the best.

Reading about Haskell != building Facebook.

~~~
michaelochurch
This is a good point, and being a great businessman is different from being a
great engineer, and Zuckerberg is clearly the former (at least, and with the
talent to be the latter). If you're a great businessman, you'll hire people
who are, technically speaking, better than you are. If you're the best person
at your company, that's a sign that you're doing something wrong.

Zuckerberg also never had time to become a great programmer, since Facebook
took off when he was 21-22. So he may have been, at that point, a "mediocre"
coder by 35-year-old standards, but he was excellent compared to his age. If
his coding skills haven't improved, that's because he was doing something
else.

He also seems to be improving himself, which is rare for business executives.
Often when people have that kind of success at a young age, they remain young
and arrogant forever. He doesn't seem to have done that, and my opinion of him
has definitely improved in recent years.

------
JacobIrwin
I'd use 'upswing'

~~~
JacobIrwin
...instead of 'bubble'

------
davetong
Patterns of the share market...

Step 1: create fear through speculation

Step 2: investors get cold feet from step 1

Step 3: the tech sector suffers again

------
jethroalias97
The title may as well have read, "I'm desperate for readership"

~~~
chc
Why so? Explaining why would be more interesting than baseless snark. The OP
seems to me like a very good analysis of a topic on a lot of people's minds
lately.

~~~
jethroalias97
Because, clever wordplay aside, "There is/isn't a bubble in technology"
articles generally attract readers despite the fact they rarely contain
substance. There was nothing in that article I didn't already know / have
banged over my head by every other fluffy tech blog that exists today.

