
I'm calling this Bubble 2.0, and it's ready to burst - cstross
http://www.antipope.org/charlie/blog-static/2012/05/bubble-20.html
======
d4nt
I have a theory about bubbles: It's relatively easy to spot that you're in
one, but it's very hard to pinpoint what sort of bubble it is. I'll explain...

During the lead up the 2008 debt crisis I saw a lot of people talking about
how house prices had been going up year on year and questioning whether we
were in a property bubble. There was a debate though. Demand for housing was
strong (partly due to population growth) and it appeared that globalisation
had freed up the capital so banks had plenty of money to lend to people to buy
houses. So the rising price of property, it was argued, looked like the
natural effect of market forces. In hindsight it's easy to see that there was
an oversupply of wholesale debt, but at the time I think people assumed that
it was just a more efficient distribution of global capital that was opening
things up.

Similarly, in the lead up to 1999 people seemed to know that there was too
much money floating around. Everyone seemed to be investing in stocks or
property and swapping stories of how much they had made. Yes, tech stocks were
rising quickly, but so was everything else, and there seemed to be no shortage
of investors coming up with money to fund these tech companies so what's the
problem.

I think what happens is that people always look at current circumstances in
the context of recent bubbles and try to look for patterns. When they don't
quite fit, they argue over whether this really is another instance of a
previous bubble. My theory is that the overpriced asset is rarely the same
thing as in the last 3 or 4 bubbles.

So, back to the present day. We have lots of high valuations for tech
companies. But we also have lots of tech companies actually making a profit,
plus operating costs are a lot lower. So we're not about to see a burst in the
sense that the funding will dry up and companies will run out of runway.
Instagram was like, 12 people(?), if they couldn't have got that $50mil
investment I'm sure they could have found a way to keep operating for another
year or two.

The challenge is to think about where the bubble might actually be. Could it
be in advertising revenue? Are advertisers burning though reserves trying to
get attention? Could it be in mineral resources? Are server or bandwidth costs
artificially low? Could it be a bubble in intellectual property? Is the exact
implementation of Facebook not actually as valuable as the companies valuation
suggests. I have no idea, but I don't think this a complete re-run of 1999.

TLDR; I don't think this is "[Tech] Bubble 2.0", this is probably "[Something
else] Bubble 1.0".

~~~
neilk
Maybe it's not a bubble per se, maybe it's just overinvestment? The world
economy really sucks right now, and people are seeking havens for their cash.
The tech industry is one of the few bright spots in the world economy, and
there's an evergreen hope of some runaway hit. So it could be possible for
there to be overinvestment even in the face of widespread skepticism.

We also have a lot of supercool mobile electronics platforms being made by
China now, and the companies and workers over there are just not getting a
fair share of the value they are creating. Just look at Apple's balance sheet.
Labor costs are rising, but given how things work in China...? So maybe it's
the Chinese Oppression Bubble.

~~~
heelhook
Too many people are throwing around the "people are just seeking a place to
park their cash because the economy sucks" misguided idea.

Startups offer investors exactly the opposite of what a capital preservation
strategy seeks: high risk with low possibility of considerable returns.

Even if the world economy were in recession (its not [1]) most asset managers
would recommend dozens of other asset classes before recommending investing in
a startup for capital preservation, specially when inflation is low as is the
case in most of the world at the moment [2].

[1] <http://en.wikipedia.org/wiki/Global_recession>
<http://www.economy.com/dismal/map/default.asp>

[2]
[http://www.indexmundi.com/world/inflation_rate_(consumer_pri...](http://www.indexmundi.com/world/inflation_rate_\(consumer_prices\).html)

~~~
Androsynth
Investment in a single startup is very risky, but if you were supplying the
capital for a venture capital firm, I would imagine the investment would be
much more consistent. I haven't done any real research, but I strongly suspect
that a lot of VC firms are making good returns across their portfolios.

~~~
heelhook
Yes, portfolio diversification is investing 101 (kinda curious how most of us
here, when working on a new startup, will invest close to 100% of our awake
time for months with no diversification)

Your post is somewhat related to what I said. The point I was making was that
saying that startups are getting funded because there are no better assets for
capital preservation are misguided. You are talking about "making good returns
across their portfolios", that's not the goal of capital preservation, that's
the goal of capital appreciation.

------
jasonkester
So what exactly is supposed to happen when this Bubble bursts that in any way
affects anybody here?

The 1999 bubble was only an issue because it happened with publicly traded
companies that lots of people were investing in and making unrealistic gains
on. You couldn't watch television without seeing ads for online brokers
showing how easy it was to get rich quick, and your "My Account" page on said
brokerage site was eager to tell you about your 10X margin and encourage you
to use it. When it popped, all those stock portfolios went back to where they
started (or worse), and hilarity ensued.

This time around, there's none of that. The "Bubble" is simply a handful of
private companies getting silly valuations. If that stops happening, there's
really no aspect of it that will bankrupt your random average family in the
Midwest.

So yeah, sure, call it a bubble if you'd like. But it seems from here to be a
harmless one floating off in the distance rather than a 1999-style one that we
were all living on top of.

~~~
F_J_H
hmmm....

Here's an exaggeration to make a point:

 _“The housing bubble didn’t really hurt anyone who already owned their home,
or those who never owned a home in the first place.”_

Yes, a tech/start up bubble burst would not have near as much impact as the
housing bubble for the reasons you point out, but when you suggest that it
won’t hurt “anyone here” (i.e. people who frequent HN), I’m not sure I agree.

Let’s say Angel and VC money dries up, and Series A funding also dries up. You
then have a bunch of start ups that don’t get funded at all, or who burn
through their first Angel/VC raise, and then can’t get any further funding.
They then can’t afford to hire or keep talent (hackers, system admins,
designers, etc. – i.e. the people here) and there are only so many positions
at companies like Apple, Google, Facebook, etc.

So, depending on the percentage of people who depend on work from start up, or
early stage companies who are not yet profitable and need to rely on further
funding to grow, a “bubble burst” could impact people on HN.

~~~
dkrich
> Let’s say Angel and VC money dries up, and Series A funding also dries up.
> You then have a bunch of start ups that don’t get funded at all, or who burn
> through their first Angel/VC raise, and then can’t get any further funding.
> They then can’t afford to hire or keep talent (hackers, system admins,
> designers, etc. – i.e. the people here) and there are only so many positions
> at companies like Apple, Google, Facebook, etc.

This is precisely what the view looks like for those inside the bubble.
Outside the bubble, that would be called a return to normalcy. A world in
which solid businesses that have a prayer of actually returning investor money
are rewarded and those that don't, die on the vine. The reality is that if you
can't raise money for your startup and you aren't making enough to pay your
employees, your business sucks and it's time to do something other than create
slide decks and beg people for money.

~~~
F_J_H
hmmm...not sure I agree that _"you can't raise money for your startup and you
aren't making enough to pay your employees, your business sucks"_.

When funding dries up, even good businesses have a very difficult time raising
capital, and it's not uncommon for a "good" business to be unprofitable for a
couple of years (or more) as it ramps up. (See Amazon, Twitter, etc.)

~~~
dkrich
When has Amazon or Twitter ever had any trouble raising cash?

~~~
F_J_H
I should have been more clear. What I meant by those example is that the
companies were not profitable in their early years, and paying employees may
have been difficult without the capital they had raised.

~~~
dkrich
Well my point was that if you can't raise money and you aren't making profits,
then your business sucks. That was poorly worded, but Amazon and Twitter never
had a problem raising capital when they needed it because there was a huge
amount of competition to get into them.

The companies that aren't profitable in their early years and simultaneously
can't raise cash are screwed and probably shouldn't be funded in the first
place.

------
phatbyte
Unfortunately I'm starting to agree with the bubble 2.0.

Last year I didn't believe it that much, but this year I'm starting to see
crazy company evaluations, highly inflated that don't generate any revenue at
all, so I don't know how can they be worth billions of dollars, but I know
math and little about economics.

But if bursts, it's a good thing. It brings perspective, a thing that's
missing a lot these days, where every social app or thingy that's the hottie
of the week is evaluated on > $400M.

~~~
benwerd
So let's be clear about this: these kinds of startups are arbitrary containers
for investment dollars. They could be corn, or property, or jelly futures. But
as it happens, technology companies are where a lot of people are putting
their money right now.

As a result, it's not the startups with the secure bottom line that are
getting investment: it's shiny startups that happen to be very popular.
Because those are the ones that look great in an investment portfolio, and
which could potentially be sold elsewhere. It's not about dividends over time;
it's about passing on a shiny valuable to someone else for a cash return.

Given that premise, it seems like two things need to happen for the bubble to
burst:

\- The odds of an investment going bad must increase (or the _perceived_ odds)
/ the perceived value of shiny startups in general must decrease

\- Another arbitrary, shiny container for investment must arise

Thanks to the banking crisis, we know that property and related investments
are going to be tainted for a little while. What else out there could threaten
the startup market today? How about in five years?

~~~
tomgallard
From what I understand, bubbles bursting in the past (e.g. Tulips, Dotcom)
have been triggered by a specific event rather than a new, more exciting
outlet for money.

In the Tulip bubble it was a failed auction in Haarlan, in the DotCom bubble
it was the Fed raising interest rates, paired with the judgement in the US vs
Microsoft trial.

So, its interesting to hypothesize what the 'trigger' event could be in this
case. I doubt it will be the Facebook float, as I think we have a while to run
yet.

~~~
_delirium
It's hard to predict these things, but if I had to guess a trigger, it would
be some kind of major negative news about internet advertising that causes at
least a temporary stampede of advertising spend out of the sector (which could
in turn trigger an even bigger investor reaction/overreaction).

Not sure what precise form that'd take. Anything from a major click-fraud-type
scandal (would have to turn out to be significantly worse than the current
assumptions about fraud, though) to a damning report about ROI from one of the
more credible white-paper-issuing analysts, or one of the players themselves.

------
didgeoridoo
Am I missing something? The example of a "poetry startup" is obviously meant
to be an extreme case, but doesn't prove anything about a bubble -- rejected
from YC, miles from funding, no product, no customers. If this idea just
closed a $500K seed round, it would be a different story. But people have been
coming up with silly business plans forever... What makes this one a
particularly convincing bellwether of the imminent __pop __of the 2.0 bubble?

------
hemancuso
Bubble 1.0 created an asset class that the public could get irrationally
excited about and invest into. Calling this Bubble 2.0 is misleading. The tech
bubble in the late 90s could characterized by companies going public with sky-
high valuations without revenue. It seems obvious the major difference is that
there are still very few companies going public. And the companies that do all
have meaningful revenue/profit.

What I think we are seeing now is the Venture Capital bubble. Lots of funds
have shitloads of money they MUST put to work. If they don't put money to work
most firms can't raise another fund and at some point the LPs can back out of
their commitment. For a while now there is a market where the only way to put
large amounts of money to work is to make much larger investments at a high
valuation, expecting a lower return.

9 and 10 figure valuations are being driven by too many large funds chasing
too few good companies. The LPs will get burned, funds will close, but there
is going to be no collapse of the venture/seed market.

If you see this Bubble "burst" it will slowly over the next 5-10 years when
second tier funds can't raise more money. VC is turning to a winner-take-all
game where only the top 3-5 players make sizeable returns, because their
brands are the only ones who afford them access to deals.

~~~
tatsuke95
> _"What I think we are seeing now is the Venture Capital bubble. Lots of
> funds have shitloads of money they MUST put to work."_

I agree. The fallacy of some who don't believe we're in any sort of bubble
often lies in the fact that they believe it will play out like 2000. If you
read some of the anti-bubble VC chatter, that's the spiel you'll often hear,
"I lived through the first tech bubble, and this ain't it."

But no two bubbles are alike. I don't expect the Nasdaq to blow up, crushing
people's savings. But I do expect to hear a large sucking sound as VC money
dries up. I do expect that the crazy demand for engineers we are seeing will
soften, drastically. I do expect to see far few incubators and poetry
startups. All of this amid an ongoing global recession.

There's a lot of money, billions, that is sloshing around the system. When
that disappears, the resulting effect is never nothing.

------
gozman
I've been thinking a lot about this as we finish up our tenure at a Canadian
accelerator and are getting our seed round together.

In MBA school, you learn about stuff like discounted cash flows and how they
are ultimately what is used to value a company. (Comparables and multipliers
are really just proxies for the notion of what the present value of a
company's cash flow is)

Then you get out and start raising a round, you throw valuations around in the
air and to most outsiders it seems illogical. I think this comes about because
many founders simply aren't financially literate enough to do more than say
"If AirBnB is worth X, then we must be worth at least Y"

Some people get excited by these uninformed valuations, others write blog
posts and call it a bubble. In my opinion, the truth is somewhere in the
middle. This crop of entrepreneurs learned some big lessons from their older
brothers. They've learned the importance of revenue and having an unfair
advantage. With a few exceptions, my experience leads me to say that most
entrepreneurs are trying to build real businesses and are not gaming the
funding community. This is very different from the IPO fever of the dot-com
bubble. (Not to mention the fact that the size of many seed rounds today would
barely cover a month of runway in 1999)

Capital is out there but the funding environment is not loose and there is
less cash in the system than there was the last time around. TechCrunch and YC
make it look easy, but fundraising is still fucking hard. Anybody who's
pounded the pavement or sat through months of due diligence only to miss
closing date after closing date will confirm this.

Instead of arguing on what our companies are worth, we should all be focussed
on building a strong, diverse and healthy North American tech industry. It's
time to get back to work and stop giving a flying fuck about what some
investor thinks you're worth. Debating whether or not we are in a bubble are
simply unproductive.

~~~
IsaacL
I upvoted you for being a voice of reason. I also find it interesting how much
the startup community in general hates on MBAs, and yet they also know so
little about finance. (I don't know much about finance, either, but from just
a little bit of self-education I feel like I know more than the average
Techcrunch etc blogger.)

------
lmm
I've been thinking for a while that someone (perhaps even me) should build a
better steam engine. It's cool technology, and the current speed record has
stood for over a century; surely we have better materials science now (and the
recent success of Tornado, a replica A3 Pacific, shows that it's possible for
enthusiasts to build a steam engine on a not implausibly huge budget). One for
kickstarter?

------
rpeden
As an outsider who watched a couple of bubbles from the outside (dotcom and
housing), it seems that the likelihood of being in one ends up being inversely
proportional to the vociferousness with which those on the inside claim it's
not a bubble.

i.e. Tell a Pets.com shareholder in 1999 that owning company stock and they'd
look at you incredulously and tell you how we're in a new economy. Or tell a
homeowner in early 2007 that prices are crazy and it might be a good time to
sell, and they'd look at you like you had two heads because, as everyone
knows, house prices always go up.

~~~
wtvanhest
This is really interesting. It seems like everyone on HN, arguably the people
who are most inside this industry are agreeing it is a bubble.

Usually that only happens after it is in mid/late pop. Is it possible that
people are just scared of bubbles as we are reminded every day of the housing
bubble? Alternatively is it possible that there is a specific asset class (ad
based platforms) which may be in a bubble? Possibly it is a real bubble across
startups that will certainly pop? I have no idea, but it is very strange to
see so many people talking about a bubble before it is clearer the bubble is
bursting.

~~~
rpeden
I see a lot of people who are inside the industry as employees agreeing that
it is a bubble. But I see a lot of people inside the industry as investors
saying it isn't. I'm not sure if that means anything, though.

~~~
olefoo
I would take the words of the employees over that of the investors, you tend
to be a little more clear eyed and less inclined to gamble when it's your
livelihood at stake.

That said, the bubble we're in is mostly a media creation; people want to hear
good financial news from somewhere, and if it's based on someone paying for
popularity ( Facebook buying Instagram )in the mobile cat-picture-sharing
space; it will still get more attention than it's worth.

Meanwhile the real economy is still in a serious demand slump, and has
structural issues that prevent it from achieving anything but tepid growth.
And while that situation obtains, excess capital will be looking for alpha in
the technology sector.

~~~
wtvanhest
Maybe, but I didn't see anyone in the real estate business (employees, not
investors) in any vertical or business saying there was a bubble until mid
2007. By that point, valuations had started coming down and financing was
being much, much more selective. I stand by my point that it is strange for an
industry to call out bubble repeatedly when there isn’t any real evidence of a
bubble besides a few anecdotal acquisitions at what people believe to be high
prices because they use a non-revenue metric.

Again, I don’t know if there is a bubble or not, but it seems odd for a group
to call a bubble so early unless there is already drying liquidity. I really
have no idea. It just doesn’t seem as self-evident to me.

------
zweiterlinde
A startup bubble is the best thing that could possibly happen.

Look at it this way. There are plenty of talented engineers, designers, and
entrepreneurs out there trying to build the next big thing. Due to the
incredible scale and reach of the internet economy, those who succeed will
become fabulously wealthy. But most will fail (or at least not reach that
scale) due to various circumstances---a misstep in execution, a superior
competitor, our simply bad luck. There are certainly many small successes, but
success or failure can seem like an incredibly binary event.

Why should engineers shoulder that risk? That’s the raison d’etre of finance
and investment. Let those with capital take on the risk, and give the
engineers enough security so that a “failure” doesn’t put a talented person
out of the game. If every startup that demonstrates that it execute on an idea
and can clear some threshold of viability gets a reasonable exit, then the
investors will still get enough Facebooks to generate a good return, and the
startup teams are much less captive to chance and fortune with respect to
whether they can pay the bills or not.

~~~
sethg
In a tech bubble, capital does not chase engineering talent; it chases
whatever shiny thing resembles the last shiny thing that made headlines. And
when the bubble bursts, the entire sector goes hungry for capital, even
companies which, in a more sober market, would be recognized as good prospects
for growth.

~~~
gaius
AKA the AI Winter...

------
roc
I thought one of the characteristics of a bubble -- almost a pre-requisite --
was for the money of the general public to be flowing in.

If things like this poetry IPO idea haven't _happened_ and garnered piles of
cash from unwitting investors throwing money into a market they don't
understand in a herd mentality ... how exactly is it a sign of anything other
than a goofy idea?

~~~
jcfrei
a bubble in the sense of the dotcom bubble doesnt require the involvment of
the public at all - it's simply an overvaluation of companies. as mentioned
before, bubbles may be limited to very small sectors (eg. social media) and
don't need to take down whole economies (like the housing bubble did) once
they pop.

~~~
roc
But it's a _chronic_ or widespread overvaluation of something, right?

I guess I just don't see how professional investors could be snowed on a grand
scale. Even if there is a bit of a trend in, say, social media - that doesn't
mean an incubator is going to be taken in by a nonsense pitch, does it?

I would think you would need a lot more money from less educated or indirect
sources to start passing off unquestionably _weak_ companies, due the heat of
the sector. (e.g. people trusting their long term money to money-managers with
conflicting short-term incentives who are willing to gamble on known-bad goods
on the assumption that they can find a bigger idiot to sell to before the
music stops. Which essentially describes the entirety of the IPO and CDO
nonsense in the last two bubbles.)

------
steve8918
As the old saying goes, history never repeats itself, but it often rhymes.

Asset bubbles occur when people are more interested in acquiring assets rather
than effort to acquire the money used to buy the assets. Basically, people
start throwing money around just to get that asset.

It usually occurs when money is easily acquired through loans, etc, and as the
asset prices increase, the general idea is "I can borrow the money, make some
money on the asset, and then pay back the loan".

Usually a lot of delusional math occurs that convince people that the price
they are paying is actually "cheap". For example, people who made $50k/yr and
bought a $1M house would delude themselves into buying the house by saying
"Well, I can take the teaser rate for 2 years, and by then the price should go
up by $100k, and then I can sell, and use that money for a downpayment on a
house I can afford." Or, similarly during the dotcom bubble, analysts would
say "Well, the P/E ratio is currently 1000, but based on the projected
earnings 5 years from now, it's actually only 20." To be honest, in the midst
of the bubble, this type of thinking works well. We all know what happens once
the bubble bursts, though.

So when popular products like Instagram with _zero_ revenues are being sold
for $1 billion, there's a lot of the bubble math going on. "There are 30M
users and we're paying $1 billion, so we're only paying $30/user." Anyone
remember the acquisition of broadcast.com by Yahoo as a strategic acquisition?
The same goes for the rumored attempted acquisition of Path for $100M a couple
of years ago. Or Color.com paying $300k for their domain name. I think these
massive Internet companies like Google and Facebook are taking a product, and
applying dotcom math to it, and coming up with sky-high valuations given the
size of their audience. Maybe they're right, maybe not. But they are the ones
contributing to the idea that revenue-less products are worth hundreds of
millions or billions of dollars.

So, when VCs know there are giant vacuum cleaners that are willing to pay
ridiculous prices for products, of course they are going to drop all their
money and invest in as many startups as possible. They would love to invest
$250k in another Instagram and make $78M. And this helps sell investment in
their funds as well, which causes more investors to pile in, trying to get a
piece of a bunch of Silicon Valley startups.

And this is the situation where companies like Facebook or Google, or VCs are
more interested in acquiring assets (ie investments in startups), rather than
caring about the actual money itself.

My guess is that the bubble will burst soon after the Facebook IPO. Why?
Because at that point, paying $1B for a company with zero revenues will likely
be the cause of shareholder lawsuits, and there will be a lot more scrutiny
involved in these acquisitions. Since selling to Google or Facebook is the
exit strategy for most of these SV startups, if that door closes, then funding
will get pulled quickly and violently, and it will be the start of the next
dotcom bust 2.0.

People will also be closely watching Facebook's financial performance and
seeing if they can justify their valuation of $100B. If they miss estimates,
or if their ability to monetize consumers flattens, then it's most likely a
catastrophic, extinction-level event for most of the startups in the Valley.

I certainly hope this doesn't occur, but I can't see how it's not likely.
EDIT: To be clear, I don't mean that I believe Facebook will miss estimates, I
do however believe that we are in a bubble that will burst.

~~~
brudgers
> _"Since selling to Google or Facebook is the exit strategy for most of these
> SV startups, if that door closes, then funding will get pulled quickly and
> violently, and it will be the start of the next dotcom bust 2.0"_

This points to one of the differences between this boom and the last one.
Valuations are being driven by companies with lots of cash are buying startups
and sophisticated investors funding growth. Last time, the valuations came
from dumb money parked in IRA's and 401k's via Wall Street.

In other words, currently valuations are primarily based on the potential
sales of a company's products rather than on the potential sale of its stock
to mutual funds.

If the current startup ecosystem went bust, most people wouldn't feel it
because their retirement accounts and personal savings wouldn't see it
directly. In the dot.com bust, many more ordinary people saw the value of
their mutual funds decline because so many hot companies were publicly traded.

That's not to say that recent legislation to allow dumb money investment in
startups won't ultimately lead to a similar bust. But we're not close to that
yet.

~~~
hkmurakami
Mutual funds (since they typically invest in readily marketable securities)
may not feel the pain, but pension funds, university endowments, sovereign
wealth funds, etc. will take a hit: a non-trivial portion of VC money is
derived from such institutional investors (who are limited partners in the
fund).

Pension Funds: Retirees (ex: public workers) take a hit.

University Endowments: Future students, faculty, and employees (think of the
guy who's repairing the plumbing in the dorms, rather than the chancellor)
take a hit.

Sovereign Wealth Funds: The citizens of said country takes a hit.

------
viscanti
There's a lot of comparing apples to oranges going on here. It's difficult to
compare the current state of the world to Bubble 1.0. There's over 5x more
users on the internet now than when the first Bubble hit. In fact, for a lot
of those Bubble 1.0 companies, their biggest problem was that they were too
far ahead of their time. There's a lot more attention bandwidth now on the
internet, which can support higher valuations of more startups. I don't see
people moving away from technology in any significant way any time soon.

The other problem I see is that people are looking at an isolated outlier and
making predictions based on that. If we remove the one 1 billion dollar deal
(which looks like it could actually have been competitive with FB and cost FB
way more in time/money to compete down the road), we're not really seeing any
examples of Bubble like behavior, other than what we should expect to see with
a growing sector.

Some tech companies are focusing on growth over profitability, with the hopes
of being acquired. In almost all cases, those aren't billion dollar+ moves. I
haven't seen any broadcast.com like deals. The scale of deals/exits is
different now than Bubble 1.0.

------
hkarthik
Ultimately, the issue right now is nobody really knows how much users are
worth. There's a lot of speculation that if your site has a lot of users (20
million or more), your company is worth a lot of money. Even if you really
have no idea how to monetize those users without pissing them off. There's an
assumed value there that may not match up with reality.

Facebook's IPO is relevant here. Once more information comes out, we'll have a
better idea of how large user bases (like Facebook's) can be monetized and
what it takes to extract the value. Things could go either way after that, and
it all depends on how the market reacts to this information.

My hope is that the software industry can weather this storm, and that its now
diversified enough to deal with investors pulling out of the startups amassing
users and shift to focusing on startups selling to SMBs or enterprises.
There's bound to be some collateral damage here, but hopefully it'll be
minimal.

------
ThomPete
Poetry is the only artform that has more practitioners than appreciators. So
no wonder.

------
SuperChihuahua
I've been written a summary about all bubble theories here:
[http://blog.trejdify.com/2012/05/summary-do-we-have-new-
tech...](http://blog.trejdify.com/2012/05/summary-do-we-have-new-tech-bubble-
or.html)

~~~
neilk
Isn't it absurd to suggest that there cannot be a bubble if everyone agrees we
are in a bubble?

------
debacle
I think the author makes some weak arguments. I've worked as a consultant on a
few zany startups and all I have to say is that this kind of crap happens all
the time:

[http://ixjy.com/post/22704727159/will-somebody-please-
disrup...](http://ixjy.com/post/22704727159/will-somebody-please-disrupt-
poetry-already)

There are so many cocked up ideas out there (many of them built with someone
else's money in the hope that somehow, someone, somewhere will give them
money).

Some of these ideas actually get funding, which is tragic, and some of them
actually make it, which might be worse, but most of them never see the light
of day.

------
Sukotto
Here's a thought experiment I found interesting.

Assume Charlie is right: this is a bubble and the pop is imminent. What would
the you in 2014 or 2017 wish you had done now to prepare?

What will happen to your primary source of income when bubble2 pops? How much
runway do you have to secure another source of income? What expenses would you
wish you had cut? What relationships does 2014-you wish you had cultivated to
help find new sources of income?

Then, I suggest you make it a priority _now_ to do those things while you have
the chance. If this is a bubble, and if it pops, you won't have any more
warning than you do now.

------
2pasc
Lots of interesting points made here. If I could add only a few data points, I
would say the following.

I have taught a very successful class on Investor pitching in SF for 6 months.
I have had between 10 and 50 students per class, always sold out, even when I
raised prices... (<http://fundraisingviparisoma.eventbrite.com/)until> end of
March. Then, in April, I had to cancel two classes because I had too few
students, and I only have 10 next week in a venue when I never had less than
20. It just tells me that we are at the end of a cycle, when everybody who
drunk the "Social Network Movie kool aid" thought they could create a Groupon
for India, a language learning start up or an Opentable for Hair Salons. It's
a good thing for everybody actually.

Now as for Facebook's valuations, the question is - will Facebook bring as
much traffic to applications in the future than Google did to commerce
websites. My belief is yes (look at Viddy, SocialCam, Zynga, Pinterest, Draw
Something if you need examples). In that case, Facebook, like Google in
2004-2008, will grow into a 100B-$200 valuation (which does not mean that I
think it is the best stock purchase to do, the big money on Facebook has been
made already by earlier investors). Same for Pinterest. If Pinterest users
convert like crazy, then they will be able to demand emerchants to "pay to
play" and... they will.

------
neilk
I'm not an expert here, but is the real problem that there is no way to short
a startup? You pretty much have to wait until a startup IPOs to bet against
it. (Or is there some equivalent of shorting in secondary markets?)

Would it be fair to say that, until the IPO, every player in the system has an
incentive to inflate the price?

And in our little world even the press doesn't usually see itself as having a
critical role. Quite the contrary as with Arrington & Calcanis and their ilk.

~~~
hemancuso

      Would it be fair to say that, until the IPO, every player 
      in the system has an incentive to inflate the price?
    

If you had unlimited money to invest, this would be true. But every player
invests out of a fixed size fund. The more money out of your fund you bid, the
lower your return.

------
jcfrei
the only bubble I see is in social media (instagram and zynga, mentioned a lot
already in this thread). it's funny that business models which from my point
of view are far more sustainable and also much more beneficial for society get
considerably lower valuations (or at least media attention). i mean startups
like asana, heroku, fogbugz or duolingo - whose main use case goes beyond
sharing/playing with friends.

~~~
numeromancer
With the exception of duolingo, these are all companies which make products
for other businesses, so we should ask: What do their _clients_ make? If their
clients get popped in this (hypothetical) bubble, won't they?

~~~
jcfrei
good point, there's certainly some exposure to let's say rather overvalued
companies. eg. if you looke at the featured clients list of asana. nonetheless
in their case, I think the possible applications for their service go well
beyond IT companies.

------
JVIDEL
TBH I don't know

I was certain this charade was going to explode in 2008/9 but it didn't and it
even got bigger.

A guy I know mentioned the only thing that's going to pop this bubble is the
Fed raising interest rates, which are near zero. That will severely limit the
amount of money available for investments like these.

The problem is with a shitty job market and an economy that's doing bad almost
everywhere else but tech odds are the government wont do anything that could
risk heavily indebted California sinking into the sea because SV imploded.

Back to jobs, the amount of ex-something-else (not coders) turned
watrepreneurs is staggering, and that's because they all want to ride the
gravy train and "get paid". This is one aspect that's almost exactly like
during the 1.0 bubble.

One scenario I think could pop this bubble is a new bubble in another industry
siphoning the money from tech VCs to that other industry's investments. But it
would've to be a revolution to beat the insane returns of some tech M&As.

But as long as there's people rushing in because they are afraid of missing
the next instagram-like opportunity this is going to keep
going.............until the "nextagram" explodes in a ball of fire burning
everyone involved...

Then again chances are the guys who started this will get out mostly in one
piece, since they already made their money. But like when the previous bubble
collapsed there are going to be a lot of actually good startups with great
ideas caught in the shitstorm, seeing their valuations drop to the price of a
used geometro, and no way to get a loan let alone investments.

And the culprits? they'll be back the moment valuations get crazy again, and
they'll make more money, again.

------
firefoxman1
If it truly is a bubble, it must be the very beginning and people still have
their sanity. Otherwise, this chart would look a whole lot better:
[http://www.google.com/finance?chdnp=1&chfdeh=0&chdet...](http://www.google.com/finance?chdnp=1&chfdeh=0&chdet=1336593600000&chddm=25024&cmpto=NASDAQ:GRPN;NASDAQ:ZNGA&cmptdms=0;0&q=grpn,znga&ntsp=0)

------
fourply
Interesting article, Mr. Stross. I think it's great to see so many people
hungry for the next new thing, out hustling and working hard to try to make it
happen.

As awareness of startup culture grows, it is necessarily going to attract some
goofiness. That's OK. Not every idea is a good one, and not every good idea is
going to work. We need these stories to make the successes stand out so much
brighter.

You may be right, but I hope you're not. I see things like Pebble's success on
Kickstarter, Amanda Palmer bringing more attention to the idea of
crowdsourcing funding for something that is every bit today's poetry, and see
the spread of the paradigm shift we all already value (or else we wouldn't be
here). I think it's right to be nervous, but I am cautiously optimistic that
hacker/maker/startup culture is an attractive alternative to the existing
production model.

I always appreciate your thoughts, but nowhere near as much as I would
appreciate a new Laundry novel. Thanks for the good times.

~~~
cstross
I was in the web/dotcom 1.0 biz from early 1995 through late 2001.

I am reading the news these days with a strong sense of deja vu for late 1999.

Kickstarter and crowdsourced funding is great news for artists, but I don't
see it scaling much bigger than AFP and "Iron Sky" without attracting
fraudsters. Again: hacker/maker culture is great, it has brought us great
things in the past, and I expect great things to come of it in future, but
it's not delivering huge new industries on the scale of a Google or Facebook
or Apple. (Making stuff with atoms instead of bits is intrinsically slow,
energy and matter intensive, and hard to scale up exponentially.)

But this isn't about artists making a living. If this guy was talking about
crowdsourcing to fund his next book of poetry I'd be all in favour. But
instead, he's talking about building some kind of bullshit hosting/purchasing
storefront with the idea of raking off a percentage of gross from _a market
that died of natural causes three quarters of a century ago_.

Thinking you can set yourself up to rake off a chunk of the value in each
exchange in a particular field is the sort of wishful thinking that gave us
the Feb 2000 bust.

~~~
condiment
I appreciate how your experience in the late 90s has given you a heuristic for
picking up on the signals and leading indicators of a bubble, but I question
how relevant it is in this case.

The poetry blog post is just one bad idea that a couple guys had in an attempt
to gain a small amount of funding from a notable startup indicator. That's not
to say that there aren't more small teams with laughable ideas out there, but
I think it's important to note that nobody gave them money. I suspect they
went home empty handed because the folks who manage VC funds did learn from
the mistakes of the 90s, even if a new generation of wantrepeneurs have no
clue.

Which brings me to my point. The niche based thinking expressed by the poetry
disruptors and many others is an expression of the realization that individual
programmers have the ability to work alone to create products and businesses
that are capable of supporting them financially in much the same way that a
sole proprietorship would in the physical world.

I'm fairly certain that this wasn't possible in the 90s without outside help,
but I think that it explains a lot of the misguided enthusiasm from people who
want to build lifestyle businesses, but don't realize that venture capital is
not the way to go about it.

------
sushi
It is temerity to pass this prediction based on extremely small sample data.

Instagram, Colors, Zynga and others like that are still exceptions rather than
a rule. Indeed media attention for these social apps/gaming companies tend to
be high which might give the illusion that internet industry as a whole is
moving towards valuations without any base underneath.

~~~
davidw
There's certainly some bubblish stuff going on, but you're right that it'd be
nice to have more data.

------
tgrass
This is more Gold Rush 2.0 than Bubble 2.0.

------
metatronscube
I hope in a way this bubble would burst, I'm getting thoroughly sick of all
this web2.0 bullshit. Its nothing but social networks and photo/something
sharing sites. Nothing really happening and we need smart Engineers and
developers getting back into some worthwhile endeavors. I blame Facebook.

~~~
pavel_lishin
> some worthwhile endeavors.

Like what?

------
gosub
Saying that something is going to happen is easy, as in astrology easy. The
meat of any prediction is in the timeframe. If you know for sure that the
bubble is gonna burst in n months, you should bet against it in the
stock/future market.

~~~
rrreese
I absolutely agree. I've been hearing predictions about the startup bubble for
quite a while now, no doubt the market will fall at some point. Markets are
cyclical so you can safely make a prediction once a year and eventually be
right. What I want to see are people stating when the bubble will burst and
even better, putting money on their predictions.

------
nostromo
It's hard to use this poetry startup anecdote as proof of a bubble since the
guy wasn't funded.

If YC had accepted the application, I could see it used as evidence that too
much money is chasing too few ideas. But they didn't.

------
aidenn0
Discovering a bubble is easy. Knowing when it will burst is not. This is why
most people can't bet against bubbles in the market; the market can stay
irrational longer than you can remain solvent.

------
kriro
Agreed, good chunks of the "web development startup scene" seem rather bubbly.

The entire "get a bunch of users and worry about making money later" mindset
seems somewhat broken. Let's see what happens if all major browsers come with
ad-blockers preinstalled overnight or more importantly if people/governments?
start taking privacy more seriously.

What happened to the good old bootstrapping mindset that used to be the go to
philosophy in IT. Seems like it got replaced by a cracklike addiction for VC-
money-shots.

------
ivarious
I don't agree that poetry have no consumers. It is an arguable pity that eyes
have blinders. Between simple taglines, among headlines. Happily in
advertising, Poetry vines.

------
mhartl
It seems that the main piece of 'evidence' here is a post by someone who wants
to "disrupt poetry" (contra the OP, no mention is made of an IPO), admits it's
a "longshot", and in fact is abandoning the project to join a different
startup. Moreover, it's just one dude with a blog. Charlie Stross realizes
that anyone can start a blog, right? To call this a strawman is an insult to
strawmen.

------
georgemcbay
My favorite of the new justifications is "in 1999, the Internet was niche, but
now EVERYONE uses it".

So a relatively large audience then with no revenue meant nothing, but today a
much larger audience still with no revenue is somehow different, somehow worth
a lot more.

This sounds to me exactly like the (very old) "we'll make up for it with
volume" joke, except people aren't using it as a joke! They believe it!

------
tgrass
I would not say the tech startup market is overvalued if one looks at money
invested.

On the other hand, if one considers the amount of time we're all dedicating to
development and market research on our as yet unprofitable projects...

------
mikemoka
Everyone keeps talking about the new bubble.. there is a slight difference
from the 2000s anyway..hasn't anyone noticed the 2 BILLION PEOPLE online?...

~~~
LargeWu
And somehow, Twitter, Groupon, Instagram etc., have not yet figured out how to
actually _make money_ off of those 2 BILLION PEOPLE. And last time I checked,
making money was the whole point of investing.

Edit: Just to clarify the above, making money == making a profit. I think
that's pretty well understood in business, guys. If I bought a single share of
stock for $100, and sold it for $50, I sure as hell did not "make money" on
the deal, even though I gained $50 in revenue from selling the stock.

~~~
zwigby
Actually Twitter and Groupon both make a lot of money off those people.
Revenue != profit. Groupon is spending a ton of money moving into new markets.
Now, I don't love Groupon but saying they don't make money is just wrong.

~~~
MortenK
"To make money" means to make a profit, not generate revenue.

------
jyu
I go by the taxi driver litmus test. If a taxi driver tells me about (insert
bubble) easy investment, then that's my cue to sell.

------
wtvanhest
Bubble or not:

 _shoe-shine boys offering stock tips_ \- Happens in all markets, even in
really bad ones.

------
mark_integerdsv
You are wasting time with this pointles pontificating.

Head down. Innovate.

------
bdg
Everything that might have been invented has been, because I haven't seen
enough mind blowing stuff this week. Therefore, we are closing the patent
office. Good day.

------
guard-of-terra
The Poetry startup seems to be a very healthy idea. There is a large audience
of poets; writing poetry is a very social process; and they use Internet
extensively . Right now they are scattered thru a million of small resources
and communities in social networks. But what if you can bring them all in one
place? There might be a sufficiently large audience to monetize even if we
forget about readers at all.

So his bubble sample has meaning and therefore his POV rests unproved.

~~~
brudgers
This reaoning is why it's a bubble - the idea that selling services to poets
scales in the way that selling poetry to consumers would (in theory).

~~~
guard-of-terra
Poets are consumers, consumers are poets. Also, you can target every poet out
there, in the past you could not target every consumer or producer.

It does not have to be big for seed funding. Might as well pay dividents.

------
sneak
Says the guy who sells books. I suppose that's a few rungs up from shoe-shine
boy, innit?

(Don't get me wrong, I love his books. But are we really looking to SF authors
for market guidance now? Just because he cites one failed business model?)

~~~
evilvoidhamster
He's an ex-developer for a payment processor. Might have a little bit of
knowledge...

------
ojr
Im 19 I've Spent $100 on Facebook ads, and when ads are mobile, i'll probably
spend more, and if I had a disposable chunk of 100K I will definitely try to
promote on Twitter Trending Topics, as the startup culture continues to grow,
college students like me will be willing to throw money on Facebook,Twitter,
and other sites rather than you know drugs and alcohol ;)

