
2016. The year we welcome squirrels – Unicorn Bubble - dexterm
http://filipmaertens.com/2016/01/16/2016-that-time-we-saw-squirrels/
======
Pitarou
D grade.

Too many mixed metaphors, not enough copy-editing, and he never even defines
what he means by "squirrel". The author uses a lot of words to make a very
simple point: many unicorn valuations are bullshit, and we should pity the
company founders and early-hires who are paying tax on stock options as if
these bullshit valuations were real.

~~~
nailer
Agreed. If by 'squirrel' the author means a business where fundamentals
matter, he's trying to re-coin an existing term, RABBIT

Real

Actual

Business

Building

Interesting

Tech

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sly_foxx
All the YCombinator companies are going to deflate.

AirBnB -
[https://news.ycombinator.com/item?id=10913151](https://news.ycombinator.com/item?id=10913151)

Stripe - [http://venturebeat.com/2015/09/17/paypals-braintree-is-
now-l...](http://venturebeat.com/2015/09/17/paypals-braintree-is-now-likely-
bigger-than-square-and-stripe-combined/). Braintree was bought only 2 years
ago for $800 million. 6x less than Stripe's valuation.

Dropbox - [http://www.theverge.com/2015/9/22/9372563/dropbox-really-
is-...](http://www.theverge.com/2015/9/22/9372563/dropbox-really-is-a-
feature). They are bragging about the number of users, but I bet many of these
'users' are fake accounts made to get free space from referrals and never used
again. Plus, there is so much direct and indirect competition. Their privacy
policy is also very bad.

Zenefits - [http://fortune.com/2015/11/11/snapchat-isnt-the-only-
startup...](http://fortune.com/2015/11/11/snapchat-isnt-the-only-startup-in-
fidelitys-crosshairs/)

~~~
nailer
> Braintree was bought only 2 years ago for $800 million. 6x less than
> Stripe's valuation.

Ask around: Braintree's product isn't as good as Stripe's.

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ryporter
Like many others, I think that tech valuations are quite frothy, but this
article is hyperbolic.

"Selling and buying stock with foreknowledge, manipulating the company
valuation at will, or simply witholding information from others."

First of all, this isn't a complete sentence. Second, this article is very
light on supporting evidence.

"But of course, anyone holding preferred shares or enjoying the protection of
a hefty severance package, as most outside CEOs do, walk away clean."

How many CEOs of unicorns are outside CEOs with hefty severance packages in
terms of cash and preferred shares?

"Taking a step back – doesn’t this situation feel a lot like Enron?"

Nope, not really.

"Just like the legal definition of obscenity, nobody can describe why we’re in
a bubble, but everyone can tell you 'I know it when I see it.'"

With pornography, this is a reasonable claim (though of course there are
debatable cases). With markets, it's actually notoriously hard know when we
are in a bubble. Many otherwise very successful traders have lost a lot of
money on false positives.

~~~
paulpauper
A lot of smart people have lost money on the belief that trends that seem
unsustainable must reverse or that history must always repeat, when there are
factors that can cause wildly diverging outcomes even when there are many
similarities between the past and present. You can have a situation where the
past matches the present with 99% accuracy, but that 1% makes a huge
difference in outcomes. This is related to chaos theory, where small
perturbations in the initial conditions can cause the evolution of the system
to change dramatically. Many people lost money shorting Amazon and Facebook
stock between 2012-2015 on the belief that we are in another tech bubble, and
while there are many similarities between 2000 and now (such as high stock
prices) there are some subtle differences, too, such as better fundamentals.
And those subtleties make the difference between a profitable trade and losing
your shirt. Or another example, may people got burned betting against the
stock market recovery, since 2009, believing that there would be a double dip
recession, that there would be a 'Great Depression', or that America would
become Japan 2.0, when, in fact, neither happened despite the many
similarities. These short-sellers grievously underestimated the propensity of
the consumer, undaunted by the doom and gloom in the news, to keep consuming
and the unimpeded ability of S&P 500 companies to keep generating record
profits and earnings.

~~~
poof131
Maybe they didn't underestimate the consumer as much as the Federal Reserve's
desire and ability to inflate stock market valuations and other asset
prices.[1] Certainly helped Silicon Valley and the unicorns, but we will see
how it plays out over the next couple years.

[http://globaleconomicanalysis.blogspot.com/2016/01/former-
da...](http://globaleconomicanalysis.blogspot.com/2016/01/former-dallas-fed-
governor-richard.html)

------
paulpauper
I'll believe it when I see actual secondary shares for major companies like
Uber and Pinterest see substantial declines. Until then, this is all
speculation. It's weird... It's like everyone want it to be 2000 all over
again, even though that was a bad time for tech.

~~~
hayksaakian
Some people want to be correct at the expense of everything else.

I think it's some kind of psychological thing, because there's no real reason
to be a doom-sayer. It's not like you get more respect or something.

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timrpeterson
> Everyone knows the party can’t last forever, at some point the music will
> stop and not everyone will get a chair, but nobody knows how it will end –
> Anand Sanwal, CB Insights

I think we know in many cases. Business fundamentals haven't changed. In the
case of food delivery, what's better about the year 2000 versus now? An app?
Does the app make these companies more money? It doesn't look like it.

~~~
sophacles
I have no opinion on the overall assessment, but about:

 _In the case of food delivery, what 's better about the year 2000 versus
now?_

For several types of business, the biggest difference between 2000 and now
isn't the App itself, but what that represents:

* Almost everyone is connected to the internet (in the US anyway)

* in 2000 ordering something on over the internet was considered by most people to be a risky task. Now it's such a common task that people are confused when someone doesn't do it.

* infrastructure on the business side is better, well understood and more reliable. This means costs of running an online company are way, way cheaper, so profit becomes easier.

Basically it means it's not necessarily bad to revisit ideas that failed in
2000 - because perhaps the cause of failure was "too soon for this idea".

~~~
striking
Food delivery is nearly impossible to pull off, because you need to own the
entire delivery chain in order to make money off of it. Instacart attempts to
leverage existing chains around it, but then the prices are doubly marked up
so no one wants to buy things, and replacing entire delivery-chain competitors
in these highly ingrained markets is next to impossible.

The only kind of direct-to-home food delivery that will exist for the time
being is the kind offered by the stores (because they make plenty of money on
the goods they sell already, so they can offer delivery as a sort of perk), or
a kind of luxury food delivery (in the vein of Blue Apron or, to a lesser
degree, Instacart).

tl;dr: Blue Apron/Instacart, the "luxury" food delivery services, are the only
non-chain delivery services that will survive. Stop&Shop Peapod et al. are
subsidized and thus don't even need to worry about it.

Source: tried to start a food delivery startup, stopped when the math didn't
add up

edit: I guess I should provide a more direct rebuttal. What I'm saying is,
you've talked about the tech/PR side of this theoretical food delivery
startup, but you've forgotten the food supply chain. That is actually a lot
harder than the tech/PR side. It would require a highly substantial investment
and fully custom logistics.

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csomar
We can never know. Nobody knows. Well, maybe someone knows (insider), then he
can trade against the market and be rich. Though that's illegal as far as I'm
knowledgeable.

Regarding startups, they are risky assets. The reason people/investors are
moving to startups, as I see it, is that other assets are riskier than we
thought.

When oil drops to $30, it's probably not as safe as people has assumed. Same
goes for gold. The difference is that oil doesn't enjoy the same upside of
startups. Oil can't hover over $500. But it can potentially hit a floor of
$15.

So why not invest in a startup if all assets are going to the red. China
growth has stalled, and the entire stock market is in the red. And you enjoy
the upside if the startup has a +$1bn exit.

With oil at record low level, China growth stalling and this entire
uncertainty; 2016 is going to be an interesting year. But that does not mean
the end of high valuations in the tech sector. Maybe investors will move to
Silicon Valley salivating for higher returns. And we might see 2000s all over
again.

Welcome to the Jungle!

~~~
ra1n85
>The reason people/investors are moving to startups, as I see it, is that
other assets are riskier than we thought

Quite the opposite as I would see it. There has been very few places to get a
return on capital other than in equities. These crazy valuations are a product
of that. When the market sentiment transitions from return on capital to
return of capital in 2016 (as it's looking to be getting there), then we'll
see these valuations drop.

>The difference is that oil doesn't enjoy the same upside of startups

But they will share a similar downside. Oil is the canary in the coalmine, and
downward pressure on its price has broad impact.

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ChuckMcM
Man this is a confused piece of writing, but most importantly is this: _"
Early employees, founders or people at key positions typically hold common
stock, more often without any downside protections. These people pay taxes on
the options at the high valuations they are offered, often shelling out a
sizeable chunk of their savings, with the probable risk of seeing their
company being sold for a lot less."_

Yes if you bought your common stock and paid giant amounts of tax (via AMT[1])
on that purchase, you have put yourself into the position of losing all that
money. But I wonder how many people have fallen for that trap? Of course the
worse case would be RSUs where your granted (not optioned) the stock and are
stuck paying the AMT without any ability to sell that granted stock at the
time.

Everyone who is working for a Unicorn is, in theory, drawing a reasonable
salary (unreasonable to those not in the tech sector apparently) so it isn't
like your life savings that your living off of are now worthless (that _did_
happen to folks in the dot com crash).

I have had the experience of having a basket of stock and options being
"worth" over $12M at one date (when I could not do anything with it) and
"worth" less than $80,000 when I could sell those shares on the market. But it
didn't "bankrupt me" to "lose" over $11M dollars. Because all of the value is
fictional until its actualized into cash. Just like every PowerBall ticket was
"worth" $900M before they picked the balls, but after they picked them it was
"worth" $0. Nobody should feel like they "lost" $900M because the lottery
didn't pick your numbers. Just like you don't "lose" money because your common
stock is worth less when you can sell it, than it was when it was optioned to
you.

[1] The US "Alternative Minimum Tax" which computes your tax rate in a fantasy
universe where you actually saw the gain on the security you just bought and
pay that tax as if it were real.

~~~
superuser2
My RSUs only vest after an IPO. There's still the lockup period, but even
then, my understanding is that taxes are withheld by giving you a subset of
the RSUs, you don't owe a tax bill in cash.

~~~
ChuckMcM
That is clever (presumably IPO or other liquidity event) I think the ideal
thing would be to contribute a portion of your stock to the event to offset
the tax event (like the way Google sells some of your RSUs to pay your taxes
before they give you the rest) In which case you have no downside financially
if the company goes "poof!" you just don't get any stock in the newly dead
entity.

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tankenmate
A somewhat poorly structured piece; just reading the first and last paragraphs
of each section shows a more train of thought article than a strict call to
reason.

That being said however there is one important take away from this article for
employees (or prospective employees, or sometimes even pre series A investors)
because of stock restrictions and the nasty valuation overhang; a big
valuation can possibly mean a big correction which can wipe out large chunks
(if not all) of your stock options or grants. A double whammy if you've
already paid tax on it (countries other than the US can vary significantly on
this point).

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webkike
Aw man, I was really excited to read an article on squirrels.

