
Overvalued in Silicon Valley, but Don’t Say ‘Tech Bubble’ - bennettfeely
http://www.nytimes.com/2015/05/23/technology/overvalued-in-silicon-valley-but-not-the-word-that-must-not-be-uttered.html?hp&action=click&pgtype=Homepage&module=first-column-region&region=top-news&WT.nav=top-news
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Sir_Substance
>The problem with the bubble question is nobody seems to agree on what exactly
a bubble is.

A bubble is when a sequence of stupid people pay more for something than it is
worth, get lucky by managing to find someone stupider than them and hand it
off to the bigger idiot for a profit. If this runs long enough, the original
idiots tend to lose all perspective and get sucked into a loop of idiocy and
hubris, which establishes crazy new value norms.

The bubble bursts when it is no longer possible to find someone stupid enough
to buy the overpriced object, due to it's value being so high that it is worth
more money than stupid people can put their hands on. That's often a
depressingly high figure.

I know that silicon valley investors don't like that description but please,
let's not pretend we don't know how it works.

------
bcg1
> Even today, with the technology industry on fire, venture capital investment
> remains below its 2000 peak.

I don't know whether things are in a "bubble" or not, but reasoning like this
does not instill confidence. "At least things are not as bad as the worst
they've ever been", no need to worry about a thing.

~~~
guelo
Look at this S&P chart and realize that the first hump was entirely caused by
startup mania. [http://654advisors.com/wordpress/wp-
content/uploads/2011/07/...](http://654advisors.com/wordpress/wp-
content/uploads/2011/07/20110730_SPX_max_linear.jpg)

That level of investment is huge. The second hump was caused by the real
estate mania but at least the country ended up with a bunch of houses out of
it.

~~~
jcdavis
Worth remembering that that chart is from 2011. The S&P 500 is now over 2100,
so over 50% above the end of that chart

~~~
guelo
The recent stock market runnup isn't entirely caused by startups. There's been
some IPOs but they mostly seem reasonable.

~~~
bcg1
Its possible that in the last 2 and this one, over-speculation using leverage
as a result of loose monetary policy was a significant factor.

[http://www.advisorperspectives.com/dshort/updates/NYSE-
Margi...](http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-
and-the-SPX.php)

------
cp9
How would we not be in a bubble? Uber is valued at $50 billion, but the
legality of what they do is tenuous at best. Big cities all over the country
could smack them down at a moment's notice, or at the very least drag them
into expensive litigation that could take years. Airbnb faces the same
problem. You can say this is what "disruption" is all about, but all I see are
fields of tulips

~~~
adventured
Money solves most of Uber's problems in the legal realm. In fact, the
pacification of the taxi industry in the US has already occurred, they've
rolled over. It's almost always easy to vanquish fractured, poorly organized
competition when it comes to politics. There will be no major challenge to
Uber's overall business in the US. Within another three years, the US taxi
industry will be so decimated as to no longer pose any threat. Uber will
suffer a few slaps on the wrist, and they'll say they're sorry and fork over
some fines, and that is all that is going to happen.

~~~
toomuchtodo
Uber has already been banned in several major metros, and continues to have
restrictions placed on it. You can't out-innovate they who control the roads.

------
hacknat
My thoughts on this right now are, "so what"? How much money is actually on
the line? Yes, yes, there are a lot of crazy valuations going on right now
into the billions of dollars, but that's off of equity purchases that rarely
clock above $200 million, and are usually lower than that.

We may be in a bit of tech bubble right now, and it would suck if a lot of
people lost their jobs (although firms are a lot smaller than they were in the
last one), but there is barely any public money on the line these days.

Yes VC backed firms supposedly generate 21% of US GDP right now (although I
find that number to be a tad suspicious), but we have to allow that a huge
chunk of that number is for new-tech companies (someone at MIT invented a new
type of concrete, or a robot), biotech (someone at Johns Hopkins invented an
artificial heart), and other niche businesses where the goal is definitely not
to be a unicorn, but to hit a definable market.

Certainly it would be sad to see some of these unicorns die, but as an overall
percentage of where a lot of VC money goes (and I mean the whole world of VC,
not just the SV VCs that are interested in the next billion dollar companies),
they don't make up a huge percentage of the employment or income in this
country.

We might be in a bubble and it might pop, but the assumption that it will hurt
the economy like it did in 2000 needs to be backed up by a stricter line of
thought than, "the last bubble did".

~~~
bcg1
"The Citigroup chief executive told the Financial Times that the party would
end at some point but there was so much liquidity it would not be disrupted by
the turmoil in the US subprime mortgage market.

 _He denied that Citigroup, one of the biggest providers of finance to private
equity deals, was pulling back._

'When the music stops, in terms of liquidity, things will be complicated. But
as long as the music is playing, you’ve got to get up and dance. We’re still
dancing,' he said in an interview with the FT in Japan."

[http://business.time.com/2007/07/10/citigroups_chuck_prince_...](http://business.time.com/2007/07/10/citigroups_chuck_prince_wants/)

(emphasis mine)

~~~
hacknat
I'm not being facetious, but are you backing me up? This bolsters my point.
Equating the US subprime crisis and the vast entanglements that existed
therein to the current situation in SV is exactly the kind of monomaniacal
thinking that that SV engages in all the time.

My point was that there aren't any entanglements, there isn't any exposure.
Prince was making the point that _there was_ complicated entanglements that
existed at Citigroup so it would be hard to predict what would happen, but
hopefully their lack of exposure would help (which, by the way, it did).

There simply isn't enough public exposure to SV to make a bubble popping
important to the overall economy.

~~~
bcg1
You could be right, and frankly I hope you are.

If the current mini-mania slows down at all or a couple of big names hit some
bumps in the road... the financiers' portfolios also are also affected, and if
there a GSIFI's that can't afford to take that hit and can't find the
liquidity to paper over the losses... yikes

------
rqebmm
> “If the question is, Are these valuations divorced from fundamentals? I
> think they are,” he said.

> “There’s definitely some craziness and people overpaying”

> “I think we’re in a period of overvaluation and frothiness”

> "A bunch of bad decisions don’t necessarily mean we are in a bubble.”

So its just unrealistic valuations and a frothy investment market leading to
bad investing decisions. Right. Totally not a bubble.

------
undergrad_econ
Knowing that a lot of people here are from silicon valley, is it really a
BIEEN (Bubble in everything except name) situation there?

What are your thoughts on the massive valuations of companies that might
struggle to manage a profit 3-4 years down the road?

~~~
sillysaurus3
Given that "home runs" for VCs pay out 1,000x to 10,000x, and that IPOs have
much tighter restrictions than in the 90's, it seems fine. Even if it's a
bubble, who is harmed by it? The VCs are shouldering the risk. Those who put
their money into a VC fund know that it's high risk. Everybody is aiming for
the 1,000x return, and it may not be possible to get one without making a lot
of risky bets.

~~~
lmm
I'd worry about less sophisticated "end investors" getting burned. Mutual fund
managers know that private equity funds are high risk, but they're getting
into them anyway. Do the individuals whose pensions are being invested in Uber
know where the money is?

~~~
maxerickson
The information should be available to them. If the fund does not have a
sizable exposure to the particular company, it might only be as a statement in
the prospectus that the fund can invest up to a certain amount in a certain
type of company.

A flip side of this is that one of the many things that contributed to the
housing bubble was the requirement that many pensions have to invest in bonds
of a given rating. This helped fuel the market for rubber stamped mortgage
derivatives.

------
downandout
I was watching an interview with Mike Judge, the creator of the show "Silicon
Valley" last night. He said that he asked many real-world VC's about realistic
reasons that Pied Piper would have trouble finding financing so that he could
integrate those into the storyline. Regardless of the complications he
suggested, every VC told him "that really wouldn't be an issue...we'd still
invest".

I think that says alot about the Valley today. "I might miss out" seems to be
a mantra on Sand Hill Road these days. If you or one of your cofounders has
dropped out of Stanford or Harvard, you can and will get funded. Despite Peter
Thiel's protestations to the contrary, Stanford in particular is worth the
money for a year or two if only for this reason. Any education you receive is
just a bonus.

------
JonFish85
It's interesting to me that Sam Altman, who was ~15 (same age as I was) during
the 2000 dot-com boom/bust is $100k certain that his companies will be worth
$200bn in 5 years. I'm curious whether that's confidence in the companies,
confidence in the market or confidence coming from not having been involved in
dot-com 1.0.

To me, the writing on the wall for VC companies was when Paul Graham stepped
aside. Based entirely just on my own conjecture, I suspect he realized that
the glory days were coming to a close and chose to look for something else to
do. Curious to see if that's how it'll pan out.

~~~
Mc_Big_G
$100k to Altman is like $100 for you.

~~~
JonFish85
Fair, but ultimately it's not so much about the money as it is about the
publicity. The money is just to catch people's eyes and to keep things
interesting-isn.

------
justaman
I think there is an overestimation of the value added from the great data-grab
we have seen in the last 5-10 years. Customizing adverts based on a recent
conversation in [some-app] or similar means, probably doesn't increase the
"click-count" by a significant value enough to justify itself. In short, the
business trend "Big-Data" is likely based on false pretenses.

We see large corporations like Facebook grabbing up applications solely for
their user base to defend its current flawed business model instead of
adapting. Perhaps Facebook should extend its idea of connection to include a
method of discovery rather than sharing. Essentially, let me pay a dollar to
find all the single girls in the bay area who like Starbucks and C++ that have
a primary or secondary connection[friend of a friend]. Really stick it to
okcupid.

~~~
bcg1
> let me pay a dollar to find all the single girls in the bay area who like
> Starbucks and C++ that have a primary or secondary connection[friend of a
> friend]

That is a really creepy idea.

------
zatkin
>and Airbnb, the home rental service, will be worth more than $200 billion by
2020.

How is this influenced by city regulation? There are several cities that are
now taking measures to ensure that homes cannot be used in an Airbnb fashion
and it hurts Airbnb business.

~~~
adventured
Here's how that works.

You're Airbnb, you jump out to a fast lead, and dominate your segment across
the whole of the US market. You move so fast that regulations and politics
trail years behind you.

You operate in every major city in the US, 300-400 of them. Out of hundreds of
cities, two dozen cause you serious problems, such as bans or hard
restrictions.

Now, even if six of the 24 that cause you serious problems are major cities
(NY, SF etc), you've got 90-95% of the market (along with the rest of the
world to go after) that isn't causing you problems.

With your new vast scale, and large pile of cash, you triple down and go to
work on the politics in SF or NY or wherever else you're having problems.
There is no scenario under which, assuming you keep your 90-95% rest of the
market, that you can lose. With enough time, you wear down SF and buy enough
politicians to squeak back into the market. Your network effect instantly
brings you back up to dominating in SF upon being allowed back into that
market.

It's a form of the little bighorn market attack. The only variable is time,
and that will give way eventually, so long as you don't lose a massive portion
of the US market (which is extremely unlikely in Airbnb's case).

Meanwhile, they can attack the rest of the planet, and pull off the same jump-
out-in-front move, and then lean on their vast scale to go to work on the
problems.

In total, you end up with no terminal risks to the whole system, merely a few
broken bones.

~~~
zatkin
I'm loving the response, but can you provide a company that did this in the
past?

~~~
ekanes
The way Microsoft handled being a monopoly is admittedly different but feels
relevant. The consequences years later of their actions didn't slow them down
much.

Perhaps cigarette companies too?

~~~
zatkin
Yeah, cigarette companies would work. Like how they were really popular, but
then they got a smack on the wrist by health specialists who found out that
cigarettes causes cancer.

------
ekanes
High valuations don't make a bubble. A bubble is when people invest believing
there will be a "greater fool" down the road who will pay a higher price.
Startups aren't going public at the same pace they did in the last bubble,
where the public was the chump. Prices might be high but there's also more
value being created now, and more rigor in evaluating startups.

~~~
crpatino
I do not agree that the Greater Fool theory is a necessary condition for there
being a bubble. That would be closer to a pyramid or a Ponzi scheme. Not 100%
sure of what the difference is.

Rather, the problem is when unsophisticated investors buy in because they
don't want to miss out of the gravy train. It does not matter if the mantra of
the day is "Computing/BigData/DaCloud is eating the world" or "Real state
prices will keep going up in the foreseeable future" or whatever they said
during the years of the Tulip mania; it is always magical thinking.

In theory, everybody knows that VC are high-risk/high-rewards. In practice,
once the dumb money starts flowing, it's only a matter of time before short
term greed triumphs over common sense and sound business practices.

------
solve
IPO is a fictional line. Is there really reason that there should be 100B+
post-IPO companies, but that there shouldn't be 100B+ pre-IPO companies?

Laws regarding IPOs create decent incentive to avoid an official IPO. Money
follows the incentives.

~~~
JonFish85
"Laws regarding IPOs create decent incentive to avoid an official IPO. Money
follows the incentives."

That's just the thing. If companies truly were profitable, in general wouldn't
investors want to keep the company private? No overhead of having to manage
SEC reporting, no oversight, nobody to answer to except themselves. The
problem is, investors need the public markets to make money, because their
money is not in the company actually turning a profit, it's in convincing the
public that the company is worth whatever they say it is.

Think Zynga/King. They were very profitable for awhile, but for their
investors to make money, they didn't want to sit on $50m/mo profit, because
their investments assumed that the company was worth billions. They knew the
company was doomed in the long run (meaning they couldn't sustain the
profits), so they ditched the company onto the public, cashed in their chips
and walked away. Now the company is bleeding money. If the investors thought
for a second that they'd continue to make money indefinitely, they never would
have pushed for an IPO.

It's not a fictional line, it's a very distinct line. Investors have convinced
the public that their company is worth however many billions, usually without
ever having turned a profit. They want their money back.

~~~
Eridrus
> If the investors thought for a second that they'd continue to make money
> indefinitely, they never would have pushed for an IPO.

Not really true, most venture funds have a fixed timeline where limited
partners want to get their money back around 10 years. And they don't
necessarily want just a steady stream coming back, they want their actual
money, to invest in things that have just as much growth potential.

Also, employees want a way to cash out, which is very difficult when a company
is private. Not necessarily because the company is bad, but because you would
much rather diversify your holdings.

Even if an asset is making money, it isn't natural to want to keep that asset.

~~~
JonFish85
The problem is that all of these things assume an IPO as an exit. Funds aren't
interested in building long-term profitable companies, they want to pump up
the stock price as high as they can and get the exit, profitability be damned.

Same with employees. If an employee has a 0.05% stake in a company that pulls
in $100m/year in profits, that's an extra $50k if you do straight-up profit
sharing. Problem is, these employees want no ownership whatsoever; they also
don't want a long-term stake in the company, they want to cash out and move
on.

It feels like the whole startup economy is operating on the "bigger sucker"
plan these days. It's not about building sustainable businesses with solid
profits, its about sprinting to an IPO and dumping the stock onto the public
to let them deal with the consequences. Maybe I just have an overly bleak
outlook on the current layout of startups (and I work for one).

~~~
spacehome
> Same with employees. If an employee has a 0.05% stake in a company that
> pulls in $100m/year in profits, that's an extra $50k if you do straight-up
> profit sharing. Problem is, these employees want no ownership whatsoever;
> they also don't want a long-term stake in the company, they want to cash out
> and move on.

This is the rational choice for the employee. Nobody wants more than 10% of
their net worth wrapped up in a small nascent (read: very risky) asset. I'm
sort of in the situation you describe, and I'd be very happy to sell my share
at a steep discount to avoid the risk.

