
Bubble talk - dmnd
http://blog.samaltman.com/bubble-talk
======
steven2012
"I am pretty paranoid about bubbles, but things still feel grounded in
reason."

Asking a VC to determine whether or not there is a VC bubble is like asking a
mortgage broker or real estate agent whether or not there was a housing bubble
during 2006. They have a self-interest to believe that the good times will
keep going. During the dot-com bubble and the housing bubble, the
rationalizations that were being spouted by those in the midst of it were
incredible.

The same goes for now. There is no metric by which Whatsapp is worth 19B,
except for the fact that Facebook can spend that much money. Any attempt to
monetize those users will result in decreased users.

The only thing keeping the valuations high are because people delude
themselves into believing that Google or Facebook will pay billions for
customers. If Google and/or Facebook declared they would be doing no more
acquisitions, valuations would plummet immediately.

The valuations given to companies with no real revenues, or profits to justify
ridiculous valuations. But the rationalizations that get spouted to justify
them are what is a big indicator of a bubble to me.

~~~
varunsrin
if im not mistaken, whatsapp already monetizes their users, charging $1 / year
after the first year.

with 700m active users, they potentially could be generating ~ 3.6% of their
sale price in annual revenue.

~~~
mcintyre1994
Are you a user? If so, and you've been such for over a year - have you paid?
I've never been charged, and to my knowledge nobody I know has either. I don't
get if we should be getting charged but they just don't seem to bother. I get
an annual notification saying I've been extended and no more information.

~~~
lugg
They do price testing, if they believe there is no better option for you, and
you will pay, they will charge you.

They will not charge you if, for example, you're someone living in the USA.
There is far too much free competition.

For their non smartphone market (don't have numbers but its large), there is
very little if any at all competition, and people in places like india gladly
pay the $1 fee for a years access on their dumbphone.

~~~
catchmrbharath
> people in places like india gladly pay the $1 fee for a years access on
> their dumbphone.

I am in India and I have never been charged for Whatsapp. Every year, whatsapp
decides to add more free months.

Also, there is significant competition in the messaging space in India, and
Indians are not comfortable paying for anything other than their phones.

------
washedup
Even if he is right about his bets, it does not prove that there was no
bubble. A lot of times when bubbles burst, many small competitors are whipped
out of the market, while the ones that have been successful up to that point
have a better chance of surviving. Not only survive, but once the dust settles
they are the few left to soak up any new investments.

Boom/bust cycles can be thought of as a redistribution of bad investments,
which often time results in the demise of fresh competitors or, at best, the
assimilation of "failed" capital (human, tech, infrastructure) of those
ventures into the companies which successfully navigate the transition at a
very low cost.

The bubble that different parties speak about when talking about the tech
world has to do not so much with the amount of money flowing into that sector
as an aggregate, but the near-exponential growth in new companies and the
unfathomable valuations of some of them which are hard to justify.

~~~
jmcatani
>>> Of course, there could be a macro collapse in 2018 or 2019, which wouldn’t
have time to recover by 2020. I think that’s the most likely way for me to
lose.

Macro collapse = Bubble Bursting. The performance of YC's personal portfolio
is irrelevant to the idea of bubble bursting if there are other investors
running a pump and dump on the industry at large.

~~~
etruong42
I took "macro collapse" to mean some tumultuous event independent of existing
market valuations, such as natural (or man-made) disasters, epidemics, war,
etc.

I've never heard the term myself, so I am speculating.

------
JimboOmega
The big question I debate with a friend is, if it's a bubble what would it
look like if it burst?

If the latest startups couldn't raise new funds (because of investor panic),
then suddenly the market is flooded with developers, do salaries, real estate,
etc, go down?

Is the startup economy entirely reliant on outside money? (Especially outside
of SV money - money like pension funds and other institutional investors)

Or would the Googles and Facebooks of the world - huge profitable companies
that they are - absorb the ones that failed, the downturn would be modest, and
soon some of those developers would be right back out there starting new
things?

I'm inclined to believe the latter.

People decry a bubble for other reasons than valuations, like San Francisco
real estate and how high dev salaries are getting. Companies that don't have
any revenue but can still raise lots of money.

I do wonder how high dev salaries can go - I think it is tied to how much
value a developer can fundamentally produce. It may well be far higher than
the current average salary (perhaps multiples of it), so I don't see anything
wrong with that.

But you could also say developers are themselves in a bubble, and that the
proliferation of app academies and their like will soon catch up with the
demand.

~~~
themagician
Right now there is a scandal going on somewhere, we just don't know where.
Maybe Facebook, maybe LinkedIn, maybe Yahoo, maybe even Google. Maybe someone
else, who knows. It always starts with a scandal. WorldCom, Enron, Lehmans,
AIG, etc.. When a company can no longer meet growth targets to stay
competitive they start lying to keep the capital flowing. They build a bigger
house around the main house, but it's built out of cards and eventually it
crumbles. This is what no one wants to believe, but it always happens. "It's
different this time.™" It's never different. There's always going to be that
incentive to cheat, and multiple people will take that bet. Someone eventually
gets caught.

Once one of the titans fall, investors get scared and pull back. Companies
like Google and Apple, with huge cash positions, are okay. Everyone else runs
out of capital in a few months. The fallen firm lets 10,000 people go.
Everyone else either does layoffs or initiates a hiring freeze. Now you've got
10,000+ locals out of work who can't get jobs. Now you've got 10,000+ people
who are a few months away from defaulting on a mortgage they could barely
afford in the first place because it was so expensive to live in an area
propped up by cheap money and heavy leverage.

People start defaulting, and things get even worse. You've got a bunch of
people in San Francisco who got $200,000 no interest downpayment loans from
the city. They can't pay them back and the city gets stuck with the debt. Now
there's public crisis.

Everyone and everything attached to the real estate market starts to freak out
that home prices might decline. More panic, more layoffs, more defaults.

The dust settles and we start over.

~~~
JimboOmega
One of the most bubbly signs (to me) is I hear people I consider reasonably
intelligent saying it's impossible for real estate to lose value, especially
in SF. Now's the time to buy, since it's only going to go higher.

Of course I heard the same lines in 2006....

~~~
mahyarm
Well if you look at bay area real estate since 1984, if you buy 1 or 2 years
before the peak, it never drops below the point 1 year before the peak
occurred. Except on the 2007 US real estate bubble pop, which was 2 years.

Then you have places where I am from, like Vancouver, for which the past ~15
years has been rising quite a bit, and now staying at very high price levels.
$1 million dollar houses are pretty average, and whats even worse is people
don't make nearly enough income to live there.

So this recent rise is pretty worrying from my perspective. If I want to buy a
place, my savings will be wiped out. I personally wish it didn't cost so much.

~~~
themagician
People keep using the word "never" and "always" to describe periods of time
that are relatively short.

We wouldn't say "never" with a sample size of 5 in any other scenario, but
with finance we seem to look at small samples and confidently say things like
always and never.

How does this make any sense?

~~~
mahyarm
I qualified my use of never with a specific time span. Within that period of
time you never see X. Any other word I could think of would just be more
complicated and thus harder to read.

And my timespan was 31 years. That is after several booms and busts. If the
pattern holds for even a decade +, that is a pretty significant part of my
life span and something I have to consider.

Also on a more personal note, my father was basically forced out of Vancouver
due to not buying a house when he had the chance 10 years ago, so it's a very
real possibility that I might be forced out too here.

So the reason why people use 'small' samples is because those timespans are
not small for a human being!

------
pkaye
Always this talk about valuations. Never about revenues and profits. Reminds
me of the dotcom days when people used every other metric when they couldn't
talk about profitability. Like eyeballs, clicks, etc. There will be a few
winners but a vast many will do down in smokes or get acquired for pennies on
the dollar.

~~~
gdilla
Business vs startup When Twitter went public in 2013, it was valued at $24B —
12 times higher than Times market cap. Twitter was losing money while Times
earned $133M the same year. Why do startups have such big valuations?

The answer is: cash flow. It is different between high-growth startups and
low-growth businesses. Startups would usually be profitable in the future.
Startup’s main metric is growth. [1]

[1][https://medium.com/@paulmillr/zero-to-one-
summary-8dbda22e15...](https://medium.com/@paulmillr/zero-to-one-
summary-8dbda22e1559)

------
jacquesm
> This bet is open to the first VC who would like to take it (though it is not
> clear to me anyone who wants to take the other side should be investing in
> startups.)

That sentence misses a 'why' I believe.

As for the subject matter: bubble or not, who cares? Those that will not
invest for fear of being in a bubble would do better to keep their money
anyway, and those that look at individual companies rather than the market as
a whole will always have a huge edge over the investors that simply follow the
herd. It's the followers that really get burned by bubbles, not the originals,
they'll survive one way or another on their own merits rather than on endless
capital being poured into their corporate coffers.

Bubbles are bad, corrections are good news for the _real_ movers. In a bubble
you can find yourself with a whole slew of competitors trying to go after the
same market polluting pricing and models by using investor money to prop up
their essentially broken propositions. Right after a bubble pops is when the
real fortunes are made, that's when all the nonsense goes away for a couple of
years.

It's a saw-tooth like curve and even though we're not technically in what I'd
call a bubble we're definitely no longer on the ground floor either. It's not
a binary thing.

~~~
rudolf0
I believe that sentence is grammatically correct without the "why".

------
PublicEnemy111
"House prices have risen by nearly 25 percent over the past two years.
Although speculative activity has increased in some areas, at a national level
these price increases largely reflect strong economic fundamentals."

-Ben Bernanke, circa 2005.

I couldn't help myself. I really admire Sam and the current tech bubble(if
there is one) is nothing like the credit crisis. Funds existed in 2008 whose
sole investment strategy was to buy the opposing side of credit default swaps
just so the bears had something to buy. Just wanted to poke fun :P

~~~
jpmattia
Your example is actually quite good: Are there people who think they are
better informed than the chairman of the Federal Reserve?

And to amplify: This was Ben Bernanke's assessment as late as March 28, 2007

> _At this juncture, however, the impact on the broader economy and financial
> markets of the problems in the subprime market seems likely to be
> contained._

[http://www.federalreserve.gov/newsevents/testimony/bernanke2...](http://www.federalreserve.gov/newsevents/testimony/bernanke20070328a.htm)

Bear Sterns went to firesale less than a year later. To actually make money
off of the market situation then (both on the long and short side), you had to
also recognize the Keynesian wisdom: _Markets can remain irrational longer
than you can remain solvent._

I don't begrudge Sam for talking his book, but pretending to have knowledge
about what constitutes "bubble valuations" is tricky at best.

------
malthaus
Of course we (or better: silicon valley startups) are in a bubble, fueled by
cheap money and short memory.

And of course the VC-ecosystem is denying that for as long as possible. Nobody
is saying that the 1bn+ club startups are not adding value, just that it's
magnitudes smaller than valuations would imply. They are driven primarely by
VCs and because they constantly push it as a valid success metric.

Investors have to deny it because they're betting their money on it, if they
show doubt - their money is gone before they can flip it. The startup kids
have to deny it because they want a shot at the big payout.

Where are the future profits/dividends that validate those insane numbers?
User growth was a ridiculous measure in '99, it's a ridiculous measure now.

Once the cheap money dries out, the bubble will burst. AirBnB and co will
probably survive but i doubt in 5years that many of them are valued >1bn. Once
weakened / no longer hip, regulatory pressure will increase by a lot and bring
down convenience & margins.

I respect YC for what they have built over the years, especially how they can
attract top talent. But boasting with valuations is insane and had me lose all
respect. Let's see what's left once its portfolio rides out more than half of
a economic cycle.

------
ProAm
Of course we are in a bubble, it's impossible to agree with the fact that Uber
is truly valued at 41 billion and Google only at ~364 billion. It's hard to
swallow that Uber is roughly 10% of Google in value.... That goes for all
these companies many who still are not really profitable.

Of course SamA is going to say we are not in a bubble, when his company's only
goal is to take 1 penny and turn it into 4 pennies based on valuation and
further outside investment and growth.

The tech bubble will burst, but likely will not hurt society at large, but it
will likely dent the VC ecosystem.

~~~
sskates
If you're so sure, why don't you take the bet that Sam offered? All this cheap
talk on HN and no one wants to put their money where their mouth is.

~~~
headsupftw
1\. $100k is a lot of money for most of the folks here. Simply put, I can't
afford to lose $100k on a bet but Sam can.

2\. Even if I won the bet (impossible because I'm not a VC), I would not gain
anything financially. So what's in it for me?

3\. If he changes the terms to $100 a pop and winner gets to keep loser's $100
then I'm game.

------
cookiecaper
Let's try to convert all this navel-gazing into something usable by your
average HN reader. How can the average dev best exploit the current market
conditions, whether these are considered "bubblicious" or not?

Should we all high-tail it out to the Valley and get funded now so that we can
cash out with billions for something very airy and non-substantive that we
"made" with VC money? What kind of self-marketing and self-promotion needs to
be done to ensure that we are seen as something hip like Whatsapp and bought
at a massively unreasonable price?

What are the less invasive ways for Joe Developer to take an appreciable slice
of the pie, meaning getting something more than long-shot lottery tickets as
options and/or kind-of OK salaries? How can a developer make $1 million for
himself/herself this year without founding a company? Surely that lowly sum is
attainable by the humble developer what with the current valuations being
"grounded in reason" and VCs going gangbusters.

~~~
beatpanda
Yeah, if I'm going to live in a culturally dessicated Bay Area I'd at least
like to be getting a piece of the pie. Other reasons for living here are
getting chased out at an accelerating clip.

------
foobarqux
I think its laudable to back firmly held beliefs with a large bet. One of the
nice things about making a bet is that you need to be precise about the terms,
in this case what everyone means by "bubble".

The terms in this bet imply that it would not be a bubble if most of the
companies went to zero but 1-2 dramatically increased in value.

That makes sense if you are an investor in all of these companies, like YC
(nearly) is. But most VCs hold only 1-2, so if there is a wide variance in
outcomes (which is characteristic for startups) and the rest of the VC's
portfolio are not quite as great as the listed companies (i.e. much more
likely to go to zero) then there is a big risk of large drawdowns in VC funds.
I think that is a reasonably likely scenario, which many people would call a
bubble, but which wouldn't be reflected in the bet.

Put another way, the bet is like saying YC's portfolio (or at least the
synthetic portfolio described in the bet) is undervalued in aggregate, not
that many specific companies are.

------
dools
So long as Google, Apple, Facebook and Microsoft are there to acquihire failed
startups and return money to VC and seed stage investors, everything's peachy.

The whole "valuation" thing is dumb anyway... saying that if you buy 5% of a
company for $5, the company is worth $100 is incorrect because value is
defined by how much you can SELL a thing for, not how much you paid for it.

Given the fact that, if you buy 5% of some company in a seed stage round, you
can probably not sell it at all, your share of the company is valueless, so
the value of the company is whatever the owners can sell the remaining 95% of
the company for.

Every time you sell more of the company, it reduces the value of the company
unless the remaining percentage is increasing in value quickly enough to
offset what you've already sold.

It's not that valuations are too high, it's that we're calculating the value
of a company inaccurately.

------
aabajian
I appreciate Sam's perspective. He has much more experience with startups and
identifying businesses that solve real problems. My perspective is somewhat
naively stuck in the viewpoint of a software engineer who used to deliver
pizzas.

When I was a pizza delivery driver I made under-the-table minimum wage, $8 per
hour. It was very clear to me where that money came from. People would order
an everything pizza for $20, we'd subtract the cost of ingredients (mainly
cheese), absorb some profit for the business, and pay our salaries out of the
remainder.

As a software engineer making upwards of $50 per hour, I question where my
salary comes from. If I worked for FB, Google, or Pinterest, surely it'd be
from advertising revenue. But isn't there AdBlock Plus, AdBlock, and uBlock? I
install uBlock immediately after downloading a new browser. I think anyone in
tech does the same.

Which makes me worry about Twitter, Reddit, and Snapchat. These apps are
mostly used by people under 40 who are tech-savvy. They are all in the red
(maybe Twitter is green now?), but they plan on making money through
advertising. Their prime user base knows about AdBlock. What happens when ad
blocking is ubiquitous?

That's one way the bubble could burst. Here's another. I work for a company
that's venture-backed. My salary comes from venture capital. We've spent the
past few years building a healthcare product that's finally gotten some
traction. There are currently major incentives for hospitals to adopt emerging
technologies. These governmental initiates have made it easier for us to
approach customers. Federal funding fluctuates rapidly and while it may be
advantageous to start a health tech company today, that could change depending
on election outcomes and other spending.

Our investors are keenly aware of this situation. Should the environment
shift, they would be unlikely to perform another investment round. Venture
capital is not a sure footing to build a business on - at least not as sure as
selling pizzas. And I think this defines my idea of a bubble. Too many
venture-backed companies with extreme evaluations that are planning on making
money someday using strategies that worked in the past (e.g. advertising), or
assuming that the next round of capital will be there should their plan fail.

~~~
hullo
The use of the web has continued to expand at a much greater rate than the use
of ad blockers, even if it were true that everyone in tech installs one (they
don't). And now mobile web grows at a great clip each year as well. I imagine
use of ad blockers is much lower on smart phones; in particular given the
large share of market non-jailbroken iPhones have. I gather it's possible for
Android, but I haven't seen enough folks talking about it for me to believe
it's that common.

------
zackchase
This post scares me in the way that most bitcoin journalism does. There is no
shortage of press talking about the start ups themselves (as opposed to the
state of the capital markets). For many people, the state of the markets
really does matter. If if you're looking to raise capital, it helps to know
that these are historically favorable times. If you're looking to invest, it's
important to consider whether things may be overheated. This article advocates
silence (I'm tired of hearing about [insert topic]). This head in the sand
talk is alarming in the same way that it's scary to hear people say "I'm tired
of people saying that bitcoin is a pump and dump scam". Generally, it's a bad
sign when a viewpoint is suppressed. Having lived through the dot-com bust (in
which my father's "bubble" talk fell upon deaf ears) and the subsequent
housing bubble in which people were similarly dismissive of "negative" voices,
I'm wary of this rhetorical style.

------
mathattack
I would take this bet.

I'll put 3 caveats:

1 - I don't have 100K lying around to allocate to charity bets.

2 - I'm not an early stage investor.

3 - Perhaps because of 1 and 2, I'm not in Sam's position to take the bet.

But Sam has laid 3 very aggressive goals. His position is that the market is
significantly undervaluing all 3 stages of investment. The odds are that at
least one of these will be wrong. (And it won't take a bubble to prove that -
all it will take is just 10% returns in one of the 3 phases of investing
rather than 15+%.) If it were a cash bet, it would be worth taking just as a
hedge.

Net - any true naysayer should take Sam up on it, as it's a good bet for even
folks who think we are in for just modestly good times.

~~~
aetherson
Well, there's an additional tax on the negative bet: if you lose, you lose
$100k. If you win, you get no money.

The first question for this bet is "How much would I pay to make Sam donate
$100k to a charity of my choosing." Would you pay $10k to make that happen?
$1k? $50k? $100k?

If Sam donating $100k to charity is only worth $20k to you, and you think that
Sam is 80% likely to lose his bet, then the bet has an expected -$4k utility
to you.

EDIT: Sorry, my model above does assume that paying $100k to a charity of
Sam's choice has 0 utility to you. If, for example, you strongly expect to
donate $100k+ to charity in 2020 anyway and aren't very choosy about which
charity, then obviously the bet is a pretty sure winner to you.

------
kirinan
The issue is we work in a field that has had a bubble in the past so until it
inevitably happens again, the doubters will look for every sign that a bubble
exists, contrary to the truth of the matter. In a similar manner to the
housing market, technology will always be seen as "bubbly" and every high
valuation just feeds the rhetoric. Ebbs and flows in economies is natural and
known to anyone that studies macroeconomics even at the basic level, but truth
doesn't sell: fear and doubt does unfortunately. It's annoying, but not quite
as destructive as the other fear mongering happening with other news around
the world.

------
dkrich
I respect putting in writing for all to see your predictions for the future on
a controversial topic. Not easy to do.

However there are a large number of companies lumped in together which sort
makes this a hard metric to measure definitively. The logic seems to follow in
the following way:

"A lot of people believe there's a bubble." -> "Those people believe all new
techy companies are part of this bubble." -> "Those people think all new techy
companies are overvalued."

I don't think that that logic is accurate. I think it's totally possible for
somebody to believe (as I do) that a large number of tech companies are
overvalued (Pinterest), while simultaneously believing that there are some
that are not (SpaceX). So predicting that that entire group will exceed $200B
in value in five years is making a broader argument that _some_ tech companies
that have already exhibited an unambiguous amount of success will continue
that trend in the next five years. But what if four of those companies go
belly-up or drop in value by 50%, while one outlier becomes the next Google?
Is the argument correct? Technically speaking, yes. But I think in that case
the overall point would be proven wrong.

Ultimately I think the entire "bubble" conversation centers on the argument of
whether private tech companies that are < 5-10 years old who's primary product
is a captive audience of users is overvalued when a single group of VC's
choose to value them in the 9-10 figures. It isn't bubble in the dot-com/real
estate sense that actually has a meaningful negative impact on the economy,
but more or less a disagreement on whether that value would be proven on a
public market after a meaningful amount of time.

------
untog
Man with vested interest in avoiding bubble says there is no bubble, more at
11...

~~~
simonw
... and bets $100,000 of his own money on it.

~~~
danans
$100k might be a big bet or a small bet for him, depending on what his net
worth is. In any case, he's probably not betting his IRA on this, so I'm not
sure the amount really matters beyond getting people to pay attention.

------
rckrd
[1] For context, this may be in response to the twitter conversation between
Sam Altman and Chris Sacca

[https://twitter.com/sacca/status/579731109753159680](https://twitter.com/sacca/status/579731109753159680)

------
netcan
Content aside, there's something to a blog that ends with: 'I'm pretty
confident that I'm right. If you disagree, I'll bet you $100,000.'

~~~
gojomo
Altman has 10X'd the bet that made Mitt Romney seem "an out-of-touch rich
guy"!
[[http://www.politico.com/news/stories/1211/70246.html](http://www.politico.com/news/stories/1211/70246.html)]

------
ChuckMcM
Interesting proposition. I've got a counter offer, invest $100,000 in the
named companies (It would require a bit of financial juggling to make that
completely work but it could be done) and liquidate in 2020, with whatever you
get back going to charity.

But that sidesteps the issue of bubbleness or not. Really the question is
whether or not the private valuations of these companies is in excess of their
"fair market value" (like Box's was) and so the private investors are over
paying for participation. Sadly we can't just convert these privately held
companies to publicly held ones to its hard to run the experiment.

------
ayb
Bubbles don't happen when everyone says "we're in a bubble".

Bubbles happen when everyone is excited, they all want in to the next pets.com
no matter what, and the general consensus is "this time is different".

~~~
washedup
Bubbles BURST when everyone says "we're in a bubble."

------
quipp
His three propositions can occur even though a bubble bursts and may even have
a better chance to do so because of it. i.e. The amount of money a company is
worth becomes insignificant when the value of money decreases due to the fed
dumping it from helicopters to avoid a depression.

That's the reason why bubble talk is not boring... because the very unnatural
successes that occurred post 2008 (due to market manipulations by the fed) now
being set to unwind. It's become a game of jenga, with everyone watching the
fed make its moves.

Like it or not bubbles will burst and when they do lookout below!

------
narrator
Typically the thing to look for at the top is a falling marginal utility of
capital. That is, capital can't find a place to invest itself so it starts
chasing after dumber and dumber investments. The high production cost oil
sector (e.g shale) is probably going to be the first thing to go.

------
jgalt212
It's amazing how quickly Sam went from founder of moderately successful start-
up to public intellectual.

I have nothing against Sam, but just because he took over for Paul doesn't
mean I'll read and mull over everything he says with the same intensity I did
with PG's writings.

------
SilasX
>Investors that think companies are overpriced are always free not to invest.

Not to detract from the general point, but during the last bubble crash, we
ended up being forced to invest via bailouts.

~~~
marincounty
You have a large amount of workers who are paid to invest. They can't put it
in the bank, and count on the interest. In order to keep their job they need
to invest. They will invest until it crashes? (When it does crash, I hope the
haves will take pity on the have-nots; just a little, and not just to the
obvious ones.)

------
kposehn
> The gleeful anticipation of a correction by investors and pundits is not
> helping the world get better in any meaningful way.

So very true. I think it is important for us all to remember that quotes from
sources in a marketplace are often about forwarding their own interests, as
opposed to being realistic or dispassionate and truthful.

This is often something people do unknowingly, especially well meaning people
that are discussing a subject of great import to them. Something to keep in
mind.

------
roadbeats
Successful examples don't change the fact that how much money is wasted
unnecessarily. I see startups spending lots of money on fancy offices with
massage rooms, when you can't find anyone around if you try to find donation
for a village in Cambodia where people living with 5 dollars monthly budget.
Some startups do good things exceptionally but how do people feel good about
hundred thousand dollars monthly office expense for a startup that doesn't
generate any revenue ? I don't know much about bubble and stocks etc since
it's kinda not my focus in general, but when I see something like Yo valued as
10 million... There is something wrong with this culture because you know this
planet we're living on, I can point you hundreds of cities where the currency
is a package of baby food. Millions of people struggle accessing water and
food but here we see 300 million dollars are thrown to the table for a dating
site. I don't know what exactly bubble refers to but as an engineer honestly I
feel bad about being a part of this culture and I'm waiting for the first
chance to quit this industry completely.

~~~
erbo
Fallacy of relative privation. [1] Just because things are bad in Cambodia
doesn't mean a startup can't spend its money how it likes, for good or ill. If
a startup _chooses_ to spend money on a fancy office with massage rooms, they
are probably doing so out of a _belief_ that this will help them attract and
retain higher-quality employees, thus produce a better product, thus become
profitable (or do so faster). They may be wrong in this, and in fact, quite
likely _are;_ most startups fail, after all. But if startups had to take the
conditions in Cambodia into consideration before deciding where and how to
spend their money, it's not likely we'd have _any_ startups at all.

[1]
[http://en.wikipedia.org/wiki/Fallacy_of_relative_privation](http://en.wikipedia.org/wiki/Fallacy_of_relative_privation)

~~~
roadbeats
"higher-quality employees"

yeah man... higher-quality employees... please take all that and move to
another planet.

------
vasilipupkin
My only quibble with this is that Sam is assuming about 15% a year
appreciation of market value for the established >= $10B companies between now
and 2020. That seems unrealistic, given historical returns of US equity
markets. I am sure those companies will innovate going forward, but given how
large and established they are, this should be priced into their current
valuations. But, I hope Sam wins the bet !

~~~
jeffreyrogers
> That seems unrealistic, given historical returns of US equity markets.

Especially considering we've just had 5 years of pretty remarkable returns in
the equity markets, so if anything you'd expect low returns over the next few
years. US equity as a whole is valued pretty high relative to earnings at the
moment, and the technology sector is in line with that.

~~~
vasilipupkin
This also provides some context

[http://avc.com/2013/02/venture-capital-
returns/](http://avc.com/2013/02/venture-capital-returns/)

------
myth_buster
I think this is quite a risky wager. I'm not sure how much of external factors
are accounted for. The economists and financial journalists are quite excited
about the whole QE and ZIRP effect. It's been deemed an unprecedented
experiment. Cheap money has flooded the market. If we look at each industry of
itself, most of them are in the similar state. Housing has become very
expensive, stocks are at all time high, executive compensation has increased,
commercial real-estate is popping up everywhere and the wealth gap is
broadening. So when someone looks at statup evaluations and see them getting
higher and higher, an expectation of market correction is in order just as it
would be with the stock market. Perhaps the inevitable will get delayed once
Euro takes up on the QE.

P.S: I think when someone talks about bubble, it doesn't imply that the
current crop of startup ideas are bad. It just reflects inflation in the VC
market.

------
staunch
There are now high speed internet, unix powered, quad-core pocket computers in
the hands of billions. You can't understand the implications of that and think
there's a bubble by any meaningful definition.

There should probably be 10000x more companies than there are. The 1+ million
mobile apps that exist hint at the true scale.

~~~
smacktoward
There were billions of internet-connected devices in peoples' hands in 1999
too. They were called personal computers. I'm not sure how being "unix
powered, quad-core" turns devices into magical bubble protection.

Of course _in the long term_ proliferation of communications technology will
result in big changes, but that's a generational cycle, not a quarterly one.
The market can (and probably will) boom and bust many times while that broader
trend works itself out.

------
ojbyrne
I enjoyed (and mostly agreed with) the article but the dollar amount of the
bet gave me pause. 10 years ago (aka before the bubble in long bets) that
would have been $10k.

------
dataker
Sam shows a great attitude that's quite different from many VCs and
entrepreneurs.

Some are quite dogmatic and won't even discuss the possibility of a bubble. If
you ever question it, you're taken as old-fashioned, ignorant and heretic.

~~~
outericky
The main differentiator being that he wants companies to grow to be great (and
valuation is a measure of that success), whereas traditional VC's and even
entrepreneurs are looking for high valuation/exits as success, whether the
company is truly great being irrelevant.

------
jboy55
The current climate feels a lot different than the 2000 era. For starters,
what was 'valued' in 2000 was:

* The number of employees you had. I had the opportunity to be at a number of Idealab parties in 2000-2001, the only thing one company bragged to another was their head count. A company that had $500 in daily sales, bragged they at 36 employees. Oh, Goto.com has over 200 people now, they moved out of the Lab!

* Your marketing spend. A company I knew 'rebranded' themselves. No one heard of them before, but they nearly bought two full page ads in the WSJ (for $110k a pop), to announce the new 'name'. They did spend around $100k in advertising and probably another $100k on a renaming party. This company had collected no revenue their entire 2 year existence up to this point.

* You are measured on how big of a pop your IPO did. That is, how much money you left on the table. So, your company had an IPO price of $30 a share, when at the end of trading of the first day, it went for $300. Thus you collected $70 million, out of a possible $700. There was an ad for the WSJ about how much better your child would be if you subscribed, it mentioned that the child of a subscriber would start a company with a 'Record first day pop'. My god if you only doubled your price on the first day you were a complete failure, even though you might have had more cash to help your company grow.

If Über, AirBNB and the rest, have real revenue, and they realistically don't
need more funding to stay 'afloat' longer than a few months, then the bubble
"isn't as bad" as 2000.

------
harro33
"Aggregate value" is an interesting way to measure performance, and makes it
easier for him to be right than it looks at face value. On the face of it it
looks like he's saying their value will increase by 2x or 3x, but what about
capital raisings? Capital raised will still count in aggregate value, but
doesn't provide direct value for shareholders.

For example, one way for a company to go from a $1bn value to a $2bn value is
to raise $3bn and then fall by 50%

------
crdb
Glad he mentions the macro collapse possibility (which is out of his hands,
and therefore irrelevant to his career except as a binary "shall I stay in
this business" decision). I think any talk of bubble in tech should mention
the direction of equities as an asset class, and particularly the very cheap
capital available at the moment.

So when you are taking a directional bet on "the tech bubble" (including
deciding to make a career as a developer or startup founder) you are really
taking a position on China's economy, and global interest rates for the
duration of the bet.

Hypothetical question: how many of today's startups would make it through
their first five years if interest rates were in their mid-70s levels? What
happened to other asset classes during the high interest rate days and what
would a savvy investor have done at the time?

It's becoming a very real consideration for many countries; see the fall in
AUDUSD since 2013. In 2011, the majority of online e-commerce in Australia was
cross-border, because the exchange rate was so good [1] and wholesale prices
in Australia could be as high as 50% higher than the rest of the world. If
you're a domestic online retailer today, raising capital abroad and competing
against foreign retailers (say, you're The Iconic, financed in EUR and selling
in AUD, competing against ASOS selling in GBP and shipping in USD), life just
got a hell of a lot better.

[1] can't find the link now, but the Commonwealth Bank of Australia crunched
the numbers on over a million customers' accounts and published a fantastic
report showing where the money went. In some sectors, over 90% of revenue came
from abroad!

------
dnautics
Sam will win this bet. A macro collapse I think is more likely due before
2018, with plenty of time to recover. The only proposition he might lose is
the first one, because all of those companies except possibly Palantir may
fall victim to "trend cycles" (e.g. "nobody uses myspace anymore")... Although
Snapchat, the likeliest victim of trend cycles, is not in his analysis.

------
toddsiegel
I believe he is right. We are not in a bubble.

VCs make big bets, assuming that many (most?) of their bets will fail, but
they make it up on the winners. That is fine, I guess. What made the dot-com
bubble was that the public did not understand this and the VCs were able to
shovel many of these bets off in the form of IPOs, and many of these companies
had no business model whatsoever. That is not happening here. These people are
smart and learned their lesson, a rare trait in our economy.

There is a lot of exuberance, let's call it, in the VC world right now. On the
one hand I see lots of good companies that have a good service and actually
make money, or are getting close, but I also see a lot of social media
companies with dubious business models, like in the dot-com days.

I get very worried however when I see a sector of the economy starting to defy
the laws of nature, so to speak. What worries me are the valuations. Most of
the companies he mentions are good companies, as defined above, but few if any
of them I believe are worth these amounts. Sorry. I don't buy it.

Accounting shenanigans aside, public companies are relatively easy to value.
These startups are black boxes with astronomical valuations. It's really tough
to swallow. These valuations are clearly in the VCs interests.

What I see in the future are that some of these companies will succeed, some
will be bought at an overvalued price and a whole bunch will die as startups
do.

The latter two circumstances will certainly be a drag on the economy if it
causes a dip in further investment, write-downs, etc.

I do not see a bubble as I said, but I see a whole lot of risk building up.
It's not scary like the housing and dot-com bubbles, but it's definitely
concerning.

~~~
hnnewguy
> _That is not happening here._

That's not happening here...yet. We could be at the very beginning. Who knows
for sure?

------
kyledrake
Though I agree with you that it's important to stay positive and work to
create rather than destroy, I share many people's concerns about potential
misallocation of investment capital in tech startups right now, because the
current model largely depends on it for it's continued sustainability. VCs
need liquidity events in order to make a return, which are provided by going
public, or by being acquired by companies that have already gone public and
thus have large slush funds for acquisitions.

If that goes away, it could be a problem for the current model, because it's
not designed to work for small success or failure mitigation. So if the stock
market bottom falls out, it potentially takes down a lot of very promising
startups that could have been successful and profitable with a different
strategy. Their failures may not even be their fault, but simply bad market
timing. This isn't a new thing, of course - it's been happening since the
Panic of 1873. We're not exceptional to this risk, but I don't think we should
ignore it.

------
nosuchthing
Is there a bubble in the tech/startup/web business scene?

Probably not, this is where we're at with modern day services and business
making use of modern infrastructures and newly developed technologies.

Is there a bubble specific to San Francisco / Bay Area startups? I would
assume so, granted all it takes to run a startup is a sensible business plan,
talent, and an office space.

There's a lot of factors at play. Advertising and data mining analysis seems
to be fueling the value of services like WhatsApp/Facebook. SV has attracted a
lot of talent because it's a great area to live around, there's plenty of
fresh blood from the good schools in the area, and SV is where a lot of big
companies have set up shop.

There's always been charlatans and swindlers in the business world, and there
will be many interesting innovators to come. There's an excessive amount of
cash flying around [1].

It's not a tech bubble, it seems like a San Fransisco/Silicon Valley real
estate bubble.

[1] [https://xkcd.com/980/](https://xkcd.com/980/)

------
marcusgarvey
Where you stand depends on where you sit, so I understand Sam's annoyance with
the question of bubble / no bubble. And I get that the tech media knows that
it's a reliable source of pageviews. But it's not a spurious concern. _Anyone_
who's got a 401K should be rightfully concerned, because asset managers of all
stripes are now jumping into the pool. Zooming out, anyone who has a passing
interest in the U.S., and indeed global economy, has a right to ask because
the valuations are definitely being driven in part by low interest rates that
our central banks have resorted to -- which are hurting savers, pensioners and
anyone else on a fixed income. And if it ends badly I don't believe for one
second that the hurt will only be confined to those with skin in the game. The
global economy is far too financialized and integrated to hope so.

------
aliston
The problem with this "bet" is that it's made in terms of valuations that VCs
make up in the first place. To say that Pinterest is worth 11 billion in a
private, non-liquid market means nothing -- If you give me a 2x liquidation
preference / full ratchet / board seats etc., yeah, sure, I'll invest at a
ridiculous valuation because there is no downside risk.

I would take this bet without blinking if it were in terms of a reasonable
multiple on earnings in 5 years. However, my prediction is that the companies
Sam mentions won't go public for another 10+ years. The high valuations in SV
circles right now are influenced by increasingly complex balance sheets, which
will take a long time to unwind. As a result, this bubble in valuations will
eventually deflate, but a lot more slowly than the 2000 bubble did.

~~~
2arrs2ells
sama addresses the liquidation preference point: "Private companies are valued
as of their last round that sold stock _with at most a 1x liquidation
preference_ or last secondary transaction of at least $100MM of stock."

~~~
aliston
By the way, this isn't some theoretical situation. Box did exactly what I'm
describing. Even in a frothy Fed-fueled stock market, they IPO'd at a lower
valuation than their last private market round, which I'm sure was full of all
sorts of balance sheet gimmicks, and the stock has been on a downward
trajectory since.

------
jeffwass
Wow, pretty bold bet SamA!

Anybody know how Sam's Proposition 3 would have played out for prior years of
YC? He's betting that net valuation of the entire YC W15 class will exceed $3B
by 1st Jan 2020. That's roughly $30m per startup in 5 years. How many prior YC
classes passed that bar?

~~~
lettergram
Recall that the W15 batch was also much larger than previous batches with
billion dollar valuations.

~~~
jeffwass
That's why it should be normalized per startup. Roughly $30m per, at 5 years.

------
amelius
> Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX are currently worth
> just over $100B

The reason that most these companies (excluding SpaceX) are "bubbles", is that
their value is based on marketing only: anyone could start a next Uber or
Airbnb in their basement.

------
mcintyre1994
> Private companies are valued as of their last round that sold stock with at
> most a 1x liquidation preference or last secondary transaction of at least
> $100MM of stock.

Sorry for the ignorance but can someone help me get through the jargon here?
What happens if a company stagnates, never managing to raise again and never
IPOs? Am I right in thinking they'd remain valued at their current valuation
by this metric?

I guess my question is, assuming a company never raises below its current
valuation (and if that happens I don't think we'll need any bets to decide
they were overvalued) is there anything here that allows the valuation of a
private company to actually decrease?

------
pw
I know it's largely for show, but does anyone else think it's a bad look to
publicly offer a $100k bet (a la Romney's $10k proposition to Rick Perry)? I
think this might be the moment YC jumps the shark for me.

------
datashovel
I think this tweet sums it up pretty nicely:

[https://twitter.com/azizonomics/status/490595027589267456](https://twitter.com/azizonomics/status/490595027589267456)

~~~
JimmyM
That tweet was extremely funny, but the argument that followed it was very
much not.

I am beyond impressed with that person's patience.

------
datashovel
One point I would make is... I've heard it said many times. "Fear and Greed
are the 2 things that drive the markets". So I guess I would point out that
when you try to suppress one or the other too much this is when the market can
swing too wildly. My guess is it's probably healthy to have the conversation
because if it's truly a bubble then it will be less of a bubble when it
bursts. If it's truly not a bubble, then those who are invested will be fine
and have nothing to worry about.

------
pudo
Sam talks only about internal factors of the industry: is there enough value
generated by startups to justify their valuations?

This ignores the economic environment. There's just way too much capital
floating around US stock markets and private equity funds, and it urgently to
be invested in something. What that something is matters only marginally, as
long as it is capable to sustain a consensual fiction that an investment is
being stored.

A bubble may well be an externally induced one, not just dotcom craziness.

------
systemtrigger
We might not be in a tech bubble but as sama said:

> Of course, there could be a macro collapse in 2018 or 2019, which wouldn’t
> have time to recover by 2020. I think that’s the most likely way for me to
> lose.

... The potential for global economic collapse in the next ~5 years is
significant. Read James Rickards (or watch his performance in the recent
Intelligence Squared debate "Declinists be Damned: Bet on America") for a
smart rationale in support of the pessimistic projection.

------
dennisgorelik
(1) "the thing that feels least reasonable is some early-stage valuations" Sam
means here that early-stage valuations are possibly too high.

(2) "Proposition 3: The current YC Winter 2015 batch—currently worth something
that rounds down to $0—will be worth at least $3B on Jan 1st, 2020."

So now (1) seems to contradict to (2): if 2020 expectation of batch worth is
$3B+ then current evaluations should be higher, right?

------
austenallred
It seems to me that the moral of the story for early-stage founders is this:
Don't (over)-optimize for valuation.

Naturally you want to raise at the highest valuation you can, but it's not
quite as simple as supply-meets-demand economics. There are different parties
that bring different sets of skill and enthusiasm to the table, and all not
only have to justify their investments to LPs, but are actually hoping to make
a return on the investment.

If I were to raise a seed round again (and we were oversubscribed - not best-
of-YC-oversubscribed but oversubscribed), I would optimize purely for
investors that would be most helpful, and let the valuation be an
afterthought. My guess is 90% of founders who have gone through it would say
the same. Doubly so if they had a really bad set of investors.

If you are a YC founder and you want to start a bidding war, can you find some
sucker wiling to give you money at a an absurd valuation? Probably. But when
Series A/B time comes you have to justify that absurd valuation. The day of
reckoning is ~1 year away. That's a hell of a lot of pressure on a short time-
frame for a company just barely getting off the ground.

To a certain extent (and I recognize this is a very flawed analogy), your seed
round valuation is like getting somebody to bet on what you'll score when test
time truly comes. So if you want to say, "I'm going to score X" and you get
somebody to believe you, that's great, but now you have to fulfill on that
promise or nastiness comes. That could mean a lot of dilution, a down-round,
CEO firings... not fun stuff.

That being said, every company is different, and a lot of the time I see
people saying, "Look at that valuation, it's 1999!" while knowing absolutely
nothing about the company, its founders, the market, the trajectory, the
metrics, the revenue, etc. There are relatively few metrics someone outside of
the deal could use to determine whether or not we're in a bubble, so we mostly
look at how many zeroes are behind a valuation and determine according to that
if it's "a bubble." Pretty difficult, but everyone will have their say.

Personally I wouldn't mind things being deflated a little bit. We didn't raise
the highest valuation possible, mostly because we wanted to go with people we
trusted and get back to work. I'd like to think taking a little bit of the
valuation edge off would make hiring less competitive, rent in Silicon Valley
cheaper, etc, and I'd be OK with it being less hot than it is now. Obviously I
hope a 2000-like scenario never happens again, but I'll be around no matter
what happens, so let what may come.

------
dharma1
2020 is not far off but there is room for another recession before then.

There has been a lot of money flowing into equities and startups as well past
few years - I guess it's at least partly because of QE (in the US, Japan and
Europe).

But in general I think it's great there is money flowing into innovative
companies, whether in some cases they are overvalued or not.

------
ggonweb
On the counter argument: just because there were survivors from .dotcom era or
'RIP times' doesn't mean that there was no bubble. Investing or startup
funding should be buy low sell high at your comfort level. Yes there will be
survivors after all bubbles and good for you if you had picked them all.

------
scelerat
"I would much rather read about what companies are doing than the state of the
markets."

This statement rings true for me when applied to much writing that passes for
journalism. "Horse race journalism," is the word for it when talking about
political journalism.

------
porter
Don't forget about MR MARKET as described by Ben Graham and popularized by
Warren Buffet. Also, you are not distinguishing between price and value.
Markets can be quite irrational at times, but intrinsic values are not
irrational. There is a difference.

------
brayton
Bubble or not - seems a little self interested to release this blog post the
day YC's latest batch is judged and valued (Demo Day). The last part "The
loser donates $100,000 to a charity of the winner’s choice" is pretty badass
though!

~~~
etrautmann
This strikes me as a bit cringe worthy, though perhaps it's my puritanical
modesty. I like Sama, but putting up significantly more than the national
average household income to make a point reminds everyone just how little the
money matters.

------
kra34
'My name is Sam Altman, king of VCs: Look on my works, ye Mighty, and
despair!' Nothing beside remains. Round the decay Of that colossal wreck,
boundless and bare The lone and level sands stretch far away

------
michaelpinto
If your ass is sitting in an aeron chair reading this, then yes you should
always be worrying about a bubble (unless to make up for that your desk is a
2nd hand card table)

------
hisabness
if there is a bubble and it persists then the valuations you propose are more
likely and would be provided by the same investors participating in the bubble
today. so, not sure of your logic here. maybe if you proposed a metric for
actual cash generation you'd be on to something, but there's nothing to
suggest that actual cash generation will be the driver of the valuations.

------
pdq

        Proposition 3: The current YC Winter 2015 batch—currently worth 
        something that rounds down to $0—will be worth at least $3B on 
        Jan 1st, 2020.
    

This is a clever way of wording to the VCs: "You should invest in the whole
batch of YC W15 companies because in 5 years your investments will own part of
a $3 billion group of companies."

------
lukasm
The problem is nobody knows what's in the contract. What is the liquidation
preference? etc.

------
icedchai
Yes, this time, it's different...

~~~
cookiecaper
To be fair, speculation of a "new tech bubble" has been rampant since a few
years after the dotcom bust, and there hasn't been a major tech-specific crash
yet. At some point the guys talking about a bubble will probably eventually
become correct, but that doesn't mean they're correct now.

