
Silicon Valley: Feel the Froth - adventured
http://online.wsj.com/news/articles/SB10001424052702304470504579161880453868414
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jyu
Bubble talk and high valuations comes up every month or so. pud's comment sums
it up nicely:

Generally, being profitable precludes a company from getting "silly [high]
valuations" & buzz in Silicon Valley. Unless they're really, really
profitable.

Big valuations usually stem from not knowing how much a company will make once
they start charging for stuff. So the "it" crowd works itself into a frenzy
and VCs take a big gamble.

But once you make a dollar, all the mystery is gone. You're judged & valued
pretty much on your revenue alone. Which is usually low (startups are hard)
and unsexy (so not a ton of buzz).

Not saying a agree with it. But that's how it is.

[https://news.ycombinator.com/item?id=5236239](https://news.ycombinator.com/item?id=5236239)

~~~
adventured
The most interesting thing, to me, about the current valuations, is where
they're going to be in another 6 or 12 months of this momentum. Yellen is
highly likely to maintain the negative interest rate environment for years to
come, and that should encourage a stock market move even higher.

Motivated bull markets never stop at a bit above historical average values.
They go a lot higher, become quite irrational, and then crash. As it is
already, about 85% of the gains in the market over the last two years have
been pure PE expansion, as earnings growth has tumbled to low single digits.

I expect valuations for tech companies across the board to get significantly
frothier before the music stops again. If a company like Snapchat is worth
$3.x billion today, I see no reason to think capital won't bid it up to $5 or
$10 billion over the coming year, assuming the very accommodating environment
continues.

------
pg
"This year, shares of newly public technology companies are being valued at
5.6 times sales, estimates University of Florida professor Jay Ritter, who
tracks IPOs. That is well short of the median of 26.5 times sales in 1999."

At least the WSJ feels obliged to put facts in their articles, even if they
contradict the headlines.

~~~
nextstep
How exactly does that contradict the headlines: "Silicon Valley: Feel the
Froth: Tech Valuations Stir Memories of 1999, but There Are Some Differences"?

~~~
thatthatis
5.6 times revenue is a fairly cheap price for a fast growing company
(historically, on the average, ceteris paribus)

For example, P&G is currently trading at about 3 times revenue.

~~~
adventured
One of the problems with that 5.6 number, is how tilted down it is by larger
slower growth companies carrying much lower ratios. Some examples:

Facebook: 20 | Workday: 40 | LinkedIn: 27 | Yelp: 30 | Pandora: 9 |
RetailMeNot: 12 | Salesforce: 10 | Splunk: 25 | Rocket Fuel: 15 | HomeAway: 8
| Baidu: 15 | Priceline: 10 | Sina.com: 10 | Youku: 11

Twitter: 15? ($650m in expected sales or whatever, $10b assumed valuation)

So is there a bubble in a certain class of tech companies? I think frothy is
the right word for now. The valuations are clearly very high, but not 1999
high. Right now it reminds me a lot more of 2005 > 2007.

~~~
thatthatis
Data source? What are their growth rates?

------
VLM
"Some people worry that the looser rules may end up hurting small investors."

LOL bagholders will always find a way to set themselves up as bagholders, all
you can do is shove them in or out of certain markets. When you look around
the poker table and can't figure out who the sucker is, and you're only at the
poker table because its trendy and cool to play poker right now, guess who the
sucker is?

Just like real estate always goes up (until it doesn't) tech IPOs / valuations
only go up, so by greater fool theory you should put all your money into
whatever is going up because you can always sell to a greater fool at a profit
(until you can't)

If you use EPA/OSHA/NAFTA/whatever to eliminate all other resource extraction
industries, you end up with a bunch of sharks extracting resources (money)
from dumb investors. The same folks who would be selling the golden gate
bridge to multiple people are stuck selling tech IPOs at this time.

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jacques_chester
It seems to me that the surest indicator that a bubble is underway is people
saying that it's not a bubble.

~~~
mathattack
Is the converse also true?

People say that a bull market can't be stop until the last bear has been shot.
(Then again, who are these "people" that keep saying things?)

~~~
asmithmd1
Yes.

"The stock market climbs a wall of worry"

[http://www.investopedia.com/terms/w/wallofworry.asp](http://www.investopedia.com/terms/w/wallofworry.asp)

It will continue to go up as long as there are people who are afraid and have
not put their money in. As soon as it is obvious the market will go up
forever, then it will drop since there is no more new money coming in.

~~~
mathattack
I wish there were an accurate way to measure this.

~~~
jacques_chester
There are lots of people who claim they can, under the heading of "technical
analysis".

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arbuge
Valuations on AngelList certainly seem to be creeping relentlessly higher for
Valley companies.

The typical pattern seems to be the following:

\- first a seed round of $500k with a convertible note

\- next a valued equity round of $1m at a premoney valuation of $6m

The general impression I get from this is that valuation has become divorced
from reality. What seems to be driving it is that the founder/s just don't
want to give up more than 25% of the equity for around $1.5m funding. In that
sense they're kind of pulling numbers out of their nether regions to make the
math work out.

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MortenK
Well if not an IT bubble, surely there's a housing bubble. "Home prices in San
Francisco and surrounding counties rose more than 15% in the past year".

That's the kind of increase we saw year after year just a year or two before
the bubble popped, and prices fell by 50% or so (around 2005-2006 I guess).

It's funny how the majority just assume prices will keep on climbing (I was
one of those merry fools by the way), and in hindsight it becomes so obvious
that such increases are not sustainable.

~~~
dragonwriter
> That's the kind of increase we saw year after year just a year or two before
> the bubble popped, and prices fell by 50% or so (around 2005-2006 I guess).

IIRC, while prices in many parts of the state fell by that much or more,
prices in San Francisco did not (and the much smaller amount they did fall in
SF was much later than the general bubble collapse, around 2008-2009, as a
result of the general economic slowdown _caused by_ , among other things, the
collapse of the real estate bubble nationally, not because there actually
_was_ a bubble in SF particularly -- SF prices were pretty flat, IIRC,
2005-2008.)

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bandy
"Froth" as in lots of bubbles? One little bubble collapsing wouldn't
necessarily blow out the rest, unlike a singular bubble.

Or "Froth" as in "frothing at the mouth" (from insanity and/or rabies)? Given
the silliness, this is equally applicable.

From having worked on a trading system in the late 80s, I know that investors
(and traders) at the retail level work at a gut level and would see market
moves very shortly after news items would tick across on the Reuters feed. I
would argue that this article is intended to be like spraying valium into the
zeitgeist for the inevitable collapse. If they can grab mindshare with this
"foam" concept, they may very well be able to isolate failed IPOs to companies
(without real profit) in limited segments.

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jt2190
Original article here:

[http://online.wsj.com/news/articles/SB1000142405270230447050...](http://online.wsj.com/news/articles/SB10001424052702304470504579161880453868414#printMode)

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oscargrouch
Meanwhile, the amazing Nokia, was traded by bananas (7B) , while Twitter has a
market value of 11B ?? WTF

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michaelochurch
To me, the obvious sign of the bubble isn't the high valuations, but the
asphyxiating red tide of MBA-culture people who are in technology for all the
wrong reasons.

They're an invasive species. They come in during bubble times, compete
successfully for attention and funding, because they have superior social
polish (and, more importantly, can exploit the "just like me" bias of
chickenhawking VCs) to the real technologists, build a self-referential junk-
pile of nothing, and then leave just before the silly bubble-world they've
created collapses.

Then real technologists get a few years of relative calm and meritocracy
(although there's not nearly as much money in it, then) before the cycle
repeats.

Technology is incredibly rewarding and I wouldn't want to be in any other
career, but it's _hard_ and you gotta be real to get any good at it. It takes
years of realness-- hard work (often unrecognized) that kicks your mental
ass-- just to get the basics. When people who aren't real try to come in and
get the rewards-- Harvard MBA CEOs who don't even understand linear algebra
setting themselves up as "data whizzes" because they were able to hire smart
people-- it's irksome.

~~~
seivan
This... I've met them, I've seen them. They are scum.

I've noticed they tend to ingrain themselves into startup news and blogs or
similar things.

I know some MBA's that run some startup news site in Stockholm/Sweden as well
as their own startup. Really disgusting personality.

Really fits into the mild of "superior social polish and exploitation".

~~~
MortenK
I don't entirely understand. Is it wrong of them to run a startup news site
while having their own startup? If so, why?

Or is that unrelated, and it's just that these particular guys are not very
nice?

~~~
yuhong
I think it is the latter.

