

Are We In Inflationary Part of Internet Financing Bubble? 2011 = 1997? - eladgil
http://blog.eladgil.com/2011/02/are-we-in-inflationary-part-of-internet.html

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hop
One difference is its all private equity. These companies are not IPOing yet.
There isn't a mad dash by the masses to buy tech stocks (or buy and flip their
houses for that matter.) All these gains and losses are pretty well contained
by venture funds and Angels - it certainly could be a bubble for them, but it
will have nowhere near the wide ranging affects of the tech bubble from a
decade ago because there are so few people involved and its orders of
magnitude less in total valuations.

~~~
gatsby
Very important distinction, but I think we're already seeing these lofty
valuations being passed to individual investors (via "special vehicles,"
secondary markets, limited partners, etc.)

Most bubbles trickle down. VCs will gladly partner with companies at high
valuations because eventually banks, accredited investors, and secondary
markets are let in on the deal to drive the valuation higher. The first two
groups pray for and/or plan an IPO to dump an even higher valuation on the
public market.

Boom is the transfer of wealth from the bottom 95% to the top 5%. Bust is when
that transfer is complete.

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sammcd
Most all of the special vehicles and secondary markets I have heard of require
you to be an accredited investor to participate. You have to be somewhat
wealthy to be an accredited investor ($200,000/year income or $300,000 if
married)

I've heard these arguments a lot, but I've never seen anyone point to a
specific case where someone with under a $50,000 a year income ends up with
these stocks. Other than employees of course.

~~~
gatsby
Correct, most secondary markets only allow accredited investors. My point
above is not that secondary markets are allowing the general public to buy
shares, but rather, that secondary markets are a path to an IPO - i.e. if you
were an accredited Goldman investor who bought in at a $50b valuation, you're
likely hoping for a FB public offering to drive the valuation up to $75-100b
so that you can dump your shares and double your investment.

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rdl
I still don't see how this should really change how an entrepreneurial hacker
behaves, at least very much. Yes, money is cheap now, and might get more
expensive later. It's a good time to start a company for that reason, but bad
because there's a lot of competition for other resources with those dollars.
Maybe raise a little more cash now than you otherwise would, and make sure you
have a plan to get to profitability or exit in some form if you can't get
follow-on financing. If the market declines, it's cheaper to hire people, rent
space, etc. and a lot of firms will want to find lower cost alternatives to
products. Running a tech company in 2000-2002 was interesting in a lot of
ways.

Still, build something people (with money) want to buy.

The big thing right now seems to be that the overall economy (at least in the
US) seems much weaker than the tech economy, so there may be opportunities to
arbitrage this somehow ("offshore" development using non-internet programmers
from industrial companies in the midwest?).

IMO no one is going to be a more successful tech entrepreneur because he's
better at predicting macro economic trends. Those cycles are better spent
learning something worthwhile in your problem domain, or actual tech or
entrepreneurship skills.

~~~
eladgil
Overall I agree with your points - in general people should stay focused on
building something useful that people want.

I think the macro trends become increasingly important depending on the stage
of your company. E.g. Paypal raised $200 million at the peak of the bubble,
and this money saved them from burning out in the downturn when raising
capital became very hard. If you are 2 people bootstrapping this does not
impact you as much. If you are a later stage company that is not yet
profitable, and you need to raise money, macro trends are incredibly
important.

~~~
rdl
That's definitely true, and I guess it does feed back into decisions at
earlier rounds (i.e. will you accept liquidation preference and a high series
A valuation which means your only future exits are at bubble valuations?).

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OstiaAntica
More ominously, we may be entering a broadly inflationary new cycle where
nearly all assets are priced higher, but in dollars that are decreasing in
value. Commodities prices seem to indicate this. With a zero percent fed funds
rate, there's no where else for the money to go...

~~~
roc
Last I read, the spiking commodities didn't have expanding inventories. i.e.
It seems an actual lack of supply is behind those prices and not people
stockpiling to guard against inflation.

Wages also remain stagnant, which would exert considerable drag on any other
inflationary pressures.

> _"With a zero percent fed funds rate, there's no where else for the money to
> go..."_

Japan battled _deflation_ , not _inflation_ , despite a near-zero rate
throughout their Lost Decade (which is now more like a Lost Generation). They
also saw considerable wage stagnation.

Our crisis, half-responses and dialogue are almost note-for-note recreations
of Japan's experience. But I guess that old yarn about "those who don't learn
from history" is around for a reason.

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johngalt
The promise of the internet has always been real. The only issue is trying to
get too far ahead of what the current technology can deliver.

Just now (in 2011) we are living up to most of the tech promises made in 2000.
I'll get worried about another bubble when money starts chasing technology
that is obvious vaporware.

~~~
swombat
Like Qwiki? ($7m, I believe)

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j_baker
I don't think we're in a bubble for one very simple reason: people keep
insisting we are in one. There's more to bubbles than overvaluation. There's a
psychological component to it that blinds people to that overvaluation. To me,
the only way to effectively determine a bubble's existence is in hindsight.

For instance, how many times did you hear anyone talking of a housing market
bubble before it popped? Little to none. Right now, there's just too much talk
of a tech bubble for there to actually be one. And it's not just on sites like
HN. You see it in the MSM too:

[http://money.cnn.com/2010/12/20/technology/tech_startups_bub...](http://money.cnn.com/2010/12/20/technology/tech_startups_bubble/index.htm)

[http://www.foxnews.com/scitech/2011/02/10/twitter-tech-
bubbl...](http://www.foxnews.com/scitech/2011/02/10/twitter-tech-bubble-
barometer/)

[http://dealbook.nytimes.com/2011/01/14/in-groupon-i-p-o-
anot...](http://dealbook.nytimes.com/2011/01/14/in-groupon-i-p-o-another-tech-
bubble/)

[http://www.cnbc.com/id/37636070/Kaminsky_s_Call_Tech_Bubble_...](http://www.cnbc.com/id/37636070/Kaminsky_s_Call_Tech_Bubble_IPO_Trouble)

Sorry, but I just don't see it happening just this moment. A year or two later
might be a different story. But I don't see it happening now.

~~~
jwhite
I agree about it only being clear in hindsight. Part of the problem is that
many people who write about bubbles have a vested interest one way or another
(not implying anything about the OP as I'm not familiar with the author). Real
estate in Australia, where I live, is in a similar place right now. Lots of
statistics show it is significantly overvalued; there are lots of counter-
arguments why this level of house prices is "sustainable". "This time it's
different," etc. Often the same statistics are used to support opposing
conclusions by different authors. Unsurprisingly, most of the people who argue
that housing prices are sustainable and Australia is not experiencing a real
estate bubble also have an interest in selling houses. Arguably those on the
other side have an interest in selling equities...

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timcederman
Relevant video - <http://www.youtube.com/watch?v=I6IQ_FOCE6I>

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greenyoda
In order to succeed, all these start-up companies will have to sell a lot of
product (whether it be advertising, services, apps or tee-shirts). However,
the general economy looks like it will be in a sad state for years to come:
the unemployment rate is still around 10%; it will be years before the housing
market works its way through a glut of inventory; consumers are saving more
and spending less and have sharply reduced access to credit; etc. It's a
pretty difficult business climate even for established companies, let alone
companies that are starting from scratch with no paying customers at all.
Who's going to buy all this new stuff?

~~~
ef4
If the new stuff replaces more expensive old stuff, a recession can make it
even easier to grow a new business.

Software that makes a person 2x more productive is very attractive when
everybody is trying to do more with less.

~~~
greenyoda
That's a valid point, but most of the start-ups I've seen mentioned on Hacker
News don't seem to be selling business productivity tools. I don't hold out
hope that all those iPhone and Android apps are going to have a big positive
boost on employee productivity. And who knows how much productivity Facebook
has cost the world so far.

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robk
It seems inevitable to see massive burn outs though at the later stage rounds
in a year or two. Surely even the hedge funds will see the failure to gain
traction soon enough when these companies need another $10M for a Series N+1
in 12-18 months, at which point one can expect them to either fade away or
sell for pennies on the dollar. In that case the PE firms and HFs are the
losers and things are mostly contained elsewhere in the overall ecosystem. And
with the $10's of billions in cash companies like Google are carrying on the
books, that leaves a nice buffer to contain the damage.

~~~
eladgil
Yeah, that is the question - what is the "endgame"? Of the 3 scenarios I
outlined, which is most likely?

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Emore
> "To me, swings in MBA aspirations seem to track to a perception of 'where
> the easy money is' or, in bad times, 'where the safe jobs/career paths
> are'."

Interesting statement. Anyone else thinking the same (or differently), and can
back it up with numbers?

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mkramlich
one theory i have as to what's contributing to this is the fact that the
returns on safer investment alternatives are so low. example, savings accounts
that earn 0.5% annually. i remember when i could easily get 6%. so now taking
a risk and spreading a large gob of cash across say 20 startups looks more
appealing because even if the overall return for the group is a mere 5% that's
much better than <=1%

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aufreak3
Yes ... and Amazon is the new Sun Microsystems. They are profiting by selling
the spades and shovels bought by the gold rush enthusiasts.

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MatthewDP
if(2011 == 1997) { System.Threading.Thread.Sleep(1000 * 60 * 60 * 24 * 52 *
3); Bubble.Burst(); }

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fierarul
You're probably missing an *7 in there.

~~~
younata
no, he clearly just wants to sleep for 3/7 of a years.

