
A few points about the “tech bubble” debate - icey
http://cdixon.org/2011/03/27/a-few-points-about-the-tech-bubble-debate/
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dpapathanasiou
_"I don't know whether successful private companies like Groupon, Zynga,
Facebook and Twitter are over or under priced since I don't have access to
their financials"_

To play devil's advocate, how can anyone call FB, Twitter, Zygna, etc.,
"successful" (in the financial sense) _without_ that information?

~~~
icey
I was under the impression that everyone believes these companies are printing
money, but don't know how much money they're making relative to their
valuations. Although, I'm not sure about Twitter, are they considered to be
significantly profitable?

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redthrowaway
I find the argument that this isn't a bubble because the people driving up
valuations are private investors to be a bit of a red herring. That doesn't
affect bubbletude, just who gets hurt if and when it pops. Inflationary
bidding with the expectation of continued growth forms bubbles wherever it
happens.

Otherwise, the point about bubbledom being determined by the strength of the
companies involved is valid. So too, is the point about diversified revenue
streams speaking to a stronger underlying market. I'd actually like to see
more on this last point. We can all agree that it makes sense that a market
that relies on a single revenue stream (advertising) would be shakier than a
diversified one, but I'd like to see some analysis into how diversified the
current market is, and what that says about it's fundamental strength.

~~~
gruseom
_the argument that this isn't a bubble because the people driving up
valuations are private investors_

Whose argument is that? Chris certainly didn't make it.

His argument (implicitly) is that this isn't a bubble because the tech sector
has sound fundamentals. The point about private investors is unrelated. If
anything it's somewhat at odds with the rest of the post.

~~~
redthrowaway
You're right, I was imprecise with my statement. His argument is that it's
better that inflationary investing is happening in private markets, and while
that's true for the general public, I'd still say that that has no impact on
whether or not we're in a bubble. If there is a bubble, and it does pop, that
would be very bad for the HN crowd. The fact that VCs and investment bankers
would be losing most of the money doesn't change the fact that a whole lot of
devs will be out of work, and there will be a few lean years of funding for
people trying to launch. In fact, for just about anyone who cares whether or
not there's a tech bubble, its existence would be bad. So yes, while it may be
better for the economy as a whole to have the risk taken by a select few, it
won't matter much to the rest of us.

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d2
Chris is conflating the startup bubble with a general tech bubble and using
the strength of profitable companies to defend startups.

Twitter and Color are startups with no clear business model. Groupon and
Google are going concerns.

As per the blog entry: "A bubble is a decoupling of asset prices (valuations)
from their underlying economic fundamentals". [Agreed!]

Throwing $45 million at Color with nothing more than an idea and the hint of
an app is evidence of a bubble. So is Twitter's recent $7.7 billion valuation
based on a predicted $150 million in 2011 revenue.

I know it hurts - hell it's going to hurt all of us - but you better believe
it. Prepare to be profitable or die.

~~~
gsmaverick
Twitter has a very clear business model: advertising. They are on track to
make $150+ million this year from it.

~~~
d2
Which means they're valued at 51 times revenue. To put that in perspective,
Google is valued at just over 6 times revenue.

~~~
nikcub
Totally different stages of business and incomparable. Google revenue is
growing steadily, since $30B p.a for a single revenue stream is about as big
as you can get.

If you want a proper comparison, Google's PE ratio was 150 at IPO (and 300 at
the high range of estimates, and it eventually reached that)

A lot of smart people thought that was a bad buy at the time, as well:

<http://nikcub.appspot.com/the-google-ipo-skeptics>

~~~
d2
Google turned a profit every year since 2001 and earned a profit of $105.6
million on revenues of $961.8 million during 2003. They IPO'd August 2004.

~~~
nikcub
and Twitter has revenue of $150M and is probably 2 years away from an IPO.
Just because it hasn't made a profit each year, like Google, doesn't mean that
you can compare its current 50x PE to Google's current 6x

I would suggest that Twitter are likely waiting to book an entire year of
profits and 3-4 years of revenue growth before they file

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nikcub
Analysts are searching for simple analogies to explain what is happening - and
in tech it is either bubble or not bubble. Nobody is bothered or able to
explain in any real terms how a company like GroupOn can go from unknown to a
billion in revenue in 24 months. They only know to take the easy analysis by
looking at valuations and calling bubble.

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staunch
It takes a hell of a lot to bore me when the topic relates to
startups/tech/silicon valley but all this Bubble Talk seems so silly and
pointless.

Why is this topic so damn fascinating to people?

~~~
jdp23
From a strategy perspective, it matters hugely to anybody in or thinking of
launching a startup.

If there's no bubble, then the current happy days are likely to continue: lots
of money chasing after good ideas, huge rewards for the winners and so as a
result easy access to angel investments and high valuations. Yay! So it makes
sense to think of a strategy focused raising a lot of money on great terms.

On the other hand, if there is a bubble, a very different strategy is called
for. One option is to sneak in and raise money at bubbleicious valuations
before it pops. But that risks setting expectations with investors that will
be impossible to meet in a post-bubble environment -- a recipe for a rocky
medium term. Another option is to batten down the hatches and focus on getting
to cash-flow positive ASAP to leave yourself in the best position to pick up
the pieces as other unsustainable companies crumble. Or as I said elsewhere in
the thread, maybe it's a good time to be contrarian: work out where the bubble
is likely to be, and position yourself differently so that when it pops you
can be there as one of the first exciting post-bubble companies. And it's also
possible to take a straddling strategy, ready to go either way depending on
whether or not it's a bubble.

Of course it's impossible to know for sure what the answer is. But hearing and
understanding various perspectives (right and wrong) and others' reaction to
them really helps map out the strategy space and highlight the best places to
be.

~~~
tomsaffell
I think the fact that you listed _so many_ options tells the real story: all
this thinking about whether there is a bubble is a distraction for
entrepreneurs (to a first order approximation). Build a great product that
people will pay for - there's money for those no matter the state of 'the
bubble'.

~~~
jdp23
I see it differently. A good startup has multiple options about what great
products it can try to build, the cost and revenue models behind them, and its
funding strategy. Products that are great for people who are throwing around
money in a frothy bubble environment can be millsontes in a buttoned-down,
post-crash situation. So while too much reading thinking about the overall
context is a distraction, ignoring it hugely increases risk and misses
opportunities for significant advantages.

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JSig
"It's not a surprise that we know we have crises every five or ten years. My
daughter came home from school one day and said, 'daddy, what's a financial
crisis?' And without trying to be funny, I said, 'it's the type of thing that
happens every five, ten, seven, years.' And she said: 'why is everybody so
surprised?' So we shouldn't be surprised..." - Jamie Dimon (Chairman & CEO @
JP Morgan; Dir of the NY Federal Reserve)

If you agree with Mr. Dimon, the party will come to an end sooner or later -
bubble or no bubble. Your best bet is to relax, enjoy yourself, have some
drinks and ensure you have a driver to take you home when the party is over.
As John Wooden said, "Failure to prepare is preparing to fail."

Personally, I don't know if there is a bubble. But, I see plenty of cracks in
the system that are cause for concern.

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grishick
I don't think Facebook's valuation is "bubbly". However, the valuations of
many early stage startup companies are inherently speculative, because they
are based on projections which rely on assumptions, and only time will show
whether this assumptions were true or false. This bubble is only as "bubbly"
as these assumptions are overly optimistic. This is why investors learned to
bet on people and teams, rather then on ideas, because the quality of the team
is a better predictor of its success then the business idea.

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larryfreeman
As long as we are seriously having this debate, we are not in the middle of a
bubble. It might be an overvaluation, fine, but that's not a bubble.

A bubble occurs when the overvaluation crosses an unsustainable threshold.
It's when the values are rising faster than people can properly evaluate the
risk.

We are definitely getting closer to a bubble. The euphoria associated with a
Facebook IPO might get us there.

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stretchwithme
Since Sarbanes Oxley has made it unpalatable to sell to the public directly,
we really don't know much like the dotcom bubble the current situation is. But
we do know that the Fed has pumped massive amounts of liquidity into the
economy and that it has to go somewhere. And the Fed is the number one creator
of bubbles in the world.

