
41,000,006 reasons why I think we're in a bubble - revorad
http://jacquesmattheij.com/41000006+reasons+why+I+think+we+are+in+a+bubble
======
edw519
I don't know about the rest of the world, but we sure are in a bubble here at
Hacker News. There seems to be a real disconnect between what people want to
build/invest in and what people in the real world actually need and want to
pay for. Just as sample of what I've witnessed in the past few years:

    
    
      Ask HN: How do you like my file sharing app?
      Ask HN: How do you like my social app for niche <x>?
      Ask HN: How do you like my twitter app?
      Ask HN: How do you like my facebook app?
      Ask HN: How do you like my iphone app?
      Ask HN: How do you like my facebook app that writes twitter apps?
      Ask HN: How do you like my game?
      Ask HN: How do you like my photo sharing app?
      Ask HN: How do you like my video sharing app?
      Ask HN: How do I monetize my free flashcard app?
      Ask HN: How do you like my app that helps other hackers to do <x>?
      Ask HN: How do I get traffic to my freemium app?
      Ask HN: How do I get angels/VCs interested?
      Ask HN: Look what I wrote this weekend!
      Ask HN: Look what I wrote in one night!
      Ask HN: Look what I wrote in 7 seconds!
    
      Customer 1: How can we sell through Amazon.com?
      Customer 2: How can we reduce inventory by $300 million?
      Customer 3: How can we increase conversion from 2% to 4%?
      Customer 4: How can we use software to reduce energy costs?
      Customer 5: How can we migrate one app into another?
      Customer 6: How can we get our phones to talk to our legacy apps?
      Customer 7: How can we take orders through the internet?
      Customer 8: How can we get our software package to do <x>?
      Customer 9: How can we reduce credit card fraud?
      Customer 10: How can we increase SEO effectiveness?
      Customer 11: How can we connect fulfillment and ecommerce?
      Customer 12: How can we increase revenue?
      Customers 13-200: How can we increase profitability?

~~~
patio11
To add, approximately one half of people in the real world share a common
demographic category with a sliver of HN users and a fraction of a sliver of
what we create.

Women have money. Go take it. Nobody else wants it in tech. (Well, aside from
Groupon, Zynga, and a few other companies that missed the opportunity to make
an iPhone app that you could wiggle to share photos.)

~~~
bambax
> _Women have money. Go take it._

What do they want?!? I could never figure that one out.

~~~
ebiester
It's about what _humans_ want. Humans act the same, for the most part,
accounting for cultural differences. (Fashion is an example of a cultural
difference, In Turkey, for example, men often place as much importance on
being stylish as American women do.)

So, think culture development. Talk To Customers. (And don't try to flirt.
Look at their faces. Write notes.) Talk to them both individually and in
groups.

Have a partner actually in the demographic.

~~~
chc
This is common advice, but I find it frustratingly vague. Talk to people? I
talk to people all the time. Heck, I talk to women all the time — half my
friends are women, I currently _live with_ two female housemates and used to
live with a third, and my mother is a middle-aged office manager. After years
of talking to them, I can only conclude that I've missed the boat on making
Facebook, Etsy, The Sims and Model Mayhem.

I imagine a lot of people are in the same boat. It's hard to talk to people in
a way that reveals product opportunities. That's why they make things for the
only people who will actually tell them what they want — themselves.

~~~
tptacek
You may find this a helpful starting point:

<http://www.dlt.ri.gov/lmi/census/wf/female.htm>

------
grellas
I guess it is a matter of terminology but I have to disagree on this one.

A bubble is all-pervasive and extreme. It represents a systematic investment
mania where everything becomes surreal. People sell vast tracts of land for a
prized tulip. Junk companies with nothing to offer but a vague concept about
revolutionizing how this or that will be done owing to some new phenomenon
such as the internet make serial stock offerings to the public and get
hundreds of millions for a modest percent of their unproven company. Lenders
pile on with countless real estate loans to unqualified borrowers secure in
the belief that what are really worthless loans will make them huge profits
because they can be packaged and disposed of through artificial securitized
instruments and because housing prices will continue rise broadly for endless
periods. All this begins to occur in endless and ever-expanding streams until,
in the end, large numbers of people are sucked into the vortex.

In such cases, broad markets affecting an entire society are sent into a
frenzy by which average people start both to get rich quick and to _want_ to
get rich quick. Large numbers of people leap in, therefore, in the hope of
making fast money and abandon their common sense in the process. And when
things go bust, this has a major systemic effect on the broader economy. A
stock market that had reached stratospheric heights loses 70% of its value. A
real estate market that had become so pricey as to make housing unaffordable
for average buyers plummets to the depths, taking down people's savings _en
masse_.

The current phenomenon represented by high valuations in parts of the startup
world is more transient and limited. It has not affected the broader society
at all, only an insular investment community. If it fell apart today _in toto_
, it would leave a trail of victims within the VC and angel communities but
would be felt scarcely at all in the broader economy, or at least would likely
have no systemic impact.

Viewed from the standpoint of the broader society, I think what we are looking
at here is a speculative frenzy affecting a comparatively narrow asset class.
The prices of some startups have increased considerably. The prices of
companies generally in the business world remain moderate, if not depressed.
Is it a pricing frenzy within a particular segment of an asset class?
Probably. Is it a bubble? No. Or at least not by historic definitions.

Again, I wouldn't disagree with a single specific point made in this piece,
and the author as usual makes some astute observations. I would disagree about
the terminology, though, and would say that we should reserve use of the term
"bubble" for the sorts of massively dislocating events that it historically
has come to represent.

~~~
klenwell
This is a great point. To condense what you said a bit: the dot-com bubble
followed the democratization of stock trading (which itself got a
technological assist from the internet). Lots of people, myself included, who
never bought a stock start using online trading accounts. The housing bubble
followed the democratization of home buying. Lots of people who never had
bought a house before (or a second or third house) start buying houses.

The question I've been asking for a while now: what's the next great financial
innovation that's going to revolutionize access to some market to which
average people don't currently have easy access?

I want to be on the upside of the bubble.

~~~
klenwell
Going to offer an answer to my own question: where's the next bubble?

My boring answer has always been: commodities. Yeah, ordinary people can buy
and sell precious metals now. But wouldn't it be more convenient if you could
just directly buy a nicely packaged product online (with no service premium)
that represents whatever arbitrary commodity or commodity future (or whatever
it is you trade) you desire? I'm sure this would do wonders for oil prices.
All those gold trading services that advertise on cable seem to be a niche
example of the phenomenon.

However, I just came across something which may offer a more interesting
answer: bitcoin, or more generally, currency. I going by what I was just
reading here:

[http://www.reddit.com/r/programming/comments/g7zlw/google_en...](http://www.reddit.com/r/programming/comments/g7zlw/google_engineer_releases_open_source_bitcoin/)

I don't fully understand what bitcoin is. But I'm sure that will only be part
of its charm if it ever goes mainstream. At any rate, just an idea.

~~~
hectorhector
bitcoin is just p2p paypal

------
dclaysmith
"A $41M investment at this stage in the life cycle of a business is normally
associated with either something that is technologically complex and thus
capital intensive or that requires new processes to be designed from scratch."

This is what struck me when I heard about the deal. Color is cobbling together
existing technologies and not creating anything new. This deal pushed me into
the "There is a Bubble" group. They had better have an ace up their sleeve.

~~~
nikcub
don't focus on the features of the product - focus on the team. it might end
up being something completely different (there is a word for that)

from the perspective of 'can these guys spin a $40M investment into something
that is worth more?', the answer is probably yes (probably enough to worth
investing in)

it isn't a bubble because this is still VC money, not crazy mom and pop
shooting at the NASDAQ money. during the bubble this company would have
already IPO'd and been worth $5B, and you parents would have called you up to
ask about it.

~~~
mkr-hn
Cuil had Googlers behind it. The people behind it can make a difference if the
other fundamentals (market viability especially) are in place.

Is there a $40m+ market for a group photo album app? This app is free, so
they'll need a great monetization model even if the market is there.

~~~
nivertech
For $40M+ investment it should be $1B+ market. I guess they probably pitched
something, like: "COLOR - the Facebook for Mobile"

------
jarin
Without any real knowledge of the VC industry, to me this "bubble" looks like
VCs are just suffering from a lack of things to invest in due to the
proliferation of angel investors.

They need to show their investors that they're doing _something_ , so they
throw a grip of money at a company with a solid group of founders and a
roadmap full of the hot buzzwords of the day.

------
z92
We might be in a bubble. But that bubble will continue to inflate as long as
people are screaming Bubble! Bubble!! The danger moment appears when all those
predictions appear false and everyone start to believe, maybe this time, for
some reason, exponential growth will continue forever.

The moment when everyone shut up and start to join the bandwagon is when the
bubble bursts. <\-- That's from my experience.

~~~
iqster
Your last sentence is very astute, and resonates with me personally. I thought
valuations were insane in the late 90s but ultimately gave in. I think that
was less than 6 months before the crash!

Regarding exponential growth. We need to think carefully what kind of
efficiency improvements can SUSTAIN exponential growth. The adoption of the
Internet to the mainstream was a major event. I guess people might be betting
that mobile/tablet is another one. I thought this was already priced in about
2 years ago. I can't think of what has changed in fundamentals that justifies
the current situation (except for inflation perhaps).

------
pclark
Hmph. If nothing else, posts like this are terribly offensive to the
entrepreneurs that dedicate their lives to products like Color.

Did anyone consider that maybe Sequoia, who have invested in companies that
make up over 10% of the NASDAQ know what they are doing?

Companies like Color, AdKeeper and Flipboard have "crazy" valuations based on
the founders having ridiculous resumes. They have all created billions of
dollars of value for their investors, hell, why wouldn't you invest in that
potential again?

Rationalising this metaphorical bubble to domain prices is absurd, since
domains have _always_ been traded for eyebrow raising prices. You think that
the domain color.com or path.com will be worth $10 in 5 years time? Seriously?

Color almost certainly didn't require $41M to get to the product you see
today, did people ever consider the company is - gasp - launching early and
has the capital to iterate and scale for the next few years? I can think of
lots of startups that raised $10M - $20M at company formation and has then
spent the next few years (or more) iterating.

Investors are less interested in where you are today, compared to _where you
are going_

~~~
kovar
\- If it is going to take them a few years to get to their eventual,
profitable, goal, why invest $41M now? Why not invest $20M now and another
$21M when they're on the track that will be truly profitable, once they've
demonstrated where they are going?

\- Is calling the investment "crazy" really offensive to the entrepreneurs? It
is more a compliment to them than anything else. The investment may be crazy,
but the entrepreneurs managed to get people to shell out $41M. That takes
serious talent.

\- Getting $41M for color _is_ insulting to a lot of other entrepreneurs that
have dedicated their lives to products like color and received nothing. Give
half of that $41M in $250,000 chunks to 80 other startups and Color would
still have $20M to play with.

If you know how these large investments work, $41M in Color may seem very
sane, but to a large percentage of the population, it does appear crazy,
particularly in light of the dot com bubble.

Perhaps you could point us to a good article showing why this is a sound
investment?

~~~
pclark
I cannot point to an article about why this is a sound investment, I guess my
entire point was that I do not understand why everyone has to jump all over
this as to why it is a bad investment, since you have such a hilariously small
data point to base any opinion on.

~~~
kovar
You assume that we have a small set of data points, which is a really bad
assumption, even if you were just making it about me, personally. Assuming
that the HN community commenting on this bubble/not bubble doesn't have a lot
of experience is a bad idea. Even more so if you cannot point to a single
article covering why this investment is sound.

------
michaelcampbell
I don't know if it's a bubble or not, nor do I have any idea if it's just
because of where I browse (self selection), but I've noticed a trend lately.
The trend is that people are excited about a startup BECAUSE IT'S A STARTUP,
and not because of what the underlying value of the business'
model/idea/value. As if the fact something is a startup is, in and of itself,
somehow magical and has intrinsic worth.

It reminds me of a few years ago when people were all googaw over social
networks, because they were social networks. That seems to have passed now and
they're focusing a bit more on how social can help this cause or that business
model.

------
fastviper
TL;DR: bubble is intentionally blown, so that certain people earn more money

Pumping bubble is intentional. Financial world knows and uses this technique
for years. They KNOW we have a bubble and THEY pump it up.

They earn money on stocks rising while bubble rises.

The more they invest, the more people come to them with the money (for
investment). They earn money on those people (commissions, investment credits,
accounts, personal advisory). And as more and more money pours from the sky,
the market rises. And they earn on stock rising.

Suckers (commoners like we) believe that they can catch a train with next
Facebook and sell houses or use life savings in hope for a fortune. And
financial world earns.

At the proper moment leaders of this mess bail out and we have a "crisis".

Most people decide to invest too late (for example now it's much too late) and
also bail out MUCH too late (after few hours or days from bubble blowout).

But those managers and capital owners.. People cry, media report suicides and
they just are buying another Ferrari and houses in the Canarian/Carribean.
They smoke a cigar, drink whiskey and looking at the sky think: 'suckers, so
long till next bubble'.

Works like charm for years. So sad that for example my country's currency ex
ratio and stock exchange is so vulnerable to this.

Financial managers are not stupid. They are pragmatically cynical.

------
dclaysmith
Someone should track the Color Fund vs. the 43 participants in YCombinator
W2011 class:

Round Color's (err) round up to $43m. Then say that Milner's 150K was actually
$1m with the same terms (convertible debt). You'd have 2 investments of $43m.
Track follow up rounds for the 43 YC alumni and Color and see which pot grew
the most.

~~~
kongqiu
I know which side of that bet I'm taking :)

------
iqster
One of the arguments I've heard that state that things are different this time
around goes like this: it is far less capital intensive to do a startup now
rather than in the late 90s because of open source software stacks and cloud
computing providers. I agree with this statement but it means that the average
software startup doesn't need a lot of cash to develop their product. Apart
from ads and perhaps domain names (haha), why does anyone need so much cash?

EDIT: I guess it could be patent licensing. I don't buy the technological
complexity bit, personally.

Also, if you know that everyone's headed towards a bubble, what is the correct
response if you are a rational entrepreneur? Riding the bubble to the top and
bailing before the crash does not jive with me.

~~~
arkitaip
Just because there might be a bubble doesn't mean that all startups will
autofail. However, if I ran a startup with ads as my main source of revenue, I
would be worried as advertising budgets are the first thing to be axed in a
crisis.

For entrepreneurs crashes are the best times to innovate and launch new
ventures because while everyone else is angsting about cutbacks and surviving
just another day, the entrepreneur can launch lean businesses and products AND
usually get great deals on people, equipment, office space, services, etc.

~~~
iqster
Do you mean crashes are the best time? During bubbles everything gets more
expensive.

I agree that a bubble doesn't mean all startups with autofail. I would like to
learn from the past and understand what worked.

~~~
arkitaip
Yes, I meant crashes. Fixed. Thank you.

I seriously doubt that modern democratic-capitalist societies as a whole can
avoid bubbles. Individual business owners OTOH can not only survive but also
thrive in the aftermath given that some basic conditions are meet.

------
tyng
The $41m injection might well kill the company. I've never seen startups with
too much capital early on to become the next Google/Facebook/Twitter - you
lose your chance to become "relentlessly resourceful"!

~~~
wat55
Sorry, but your company dies when you have no more cash. The $41 million will
help them survive for a long time.

~~~
tyng
But the point of the $41m from an investor's perspective is to get them to
scale, not survive.

------
scrrr
Well, I am not in a bubble. If anything my software is vastly undervalued. I
wouldn't know what to do with 40M. I could use 100k though..

~~~
pclark
The very fact you wouldn't know what to do with $40M is why you couldn't raise
$40M, and they could.

~~~
Tyrannosaurs
Yes but knowing what you'd do with it and that being a good thing to do with
it are different things.

I don't see what they need $40m for that's going to deliver real value.

~~~
pclark
Why would you see what they need $40m from when you are on the outside looking
in on a single product? Seriously.

~~~
dstein
There's absolutely nothing in the Techcrunch article that would suggest this
company is doing anything so technologically complex that it can't be easily
duplicated. They even admitted they have no concrete plan (or proof) they can
monetize.

~~~
Tyrannosaurs
The one thing in their favour (potentially) is network effects.

If they can get everyone using their software before someone else comes along
then the collaborative nature of it gives them a significant advantage in that
there are more people you can collaborate with.

But even that isn't a particularly strong lock in when the apps are free or
cheap and available near instantly anywhere you have a data signal. Someone
using a different app? Just go grab it - it's not like convincing all your
friends to leave Facebook to go somewhere else.

------
Kilimanjaro
So flickr goes mobile, gets funding, is sold for some billions, then a decade
later it is dumped for a handful of millions?

The lesson here is not to blame the idea guys, they will profit from it
dearly. Or blame the initial and subsequent investors all the way up to the
(ponzi) pyramid, they will profit too. Or even blame the guy who signed the
deal when bigCorp bought them, he got his cut under the table too.

Blame the poor souls who own shares of bigCorp for not enforcing
accountability in their C*Os spending money left and right chasing the next
bubble.

------
frederickcook
Best summary of bubble/non-bubble debate I've read yet:

[Are we in a bubble?]

“Maybe,” says Naval, “Certainly valuations are creepy up quickly in all stages
of deals. On the other hand, 10 years ago when we all felt like this last time
the total market size for any company was at maximum 100 million potential
users. Now we’re in the billions of users. Facebook connections alone bring
500 million, Twitter 200 million. 10 years ago we only connected for brief
periods of time when we were at our PCs. Now we’re connected to apps all the
time, everywhere we go. So maybe there’s a bubble. It’s hard to say. But we’re
also looking at unprecedented opportunity.”

\- [http://www.bothsidesofthetable.com/2011/03/22/the-magic-
midn...](http://www.bothsidesofthetable.com/2011/03/22/the-magic-midnight-
mind-meld/)

------
svrocks
We're not really in a bubble until Color.com (NSDQ: COLR) IPOs at a $500MM
valuation and quadruples on its first day of trading.

And then we're not REALLY in a bubble until Air.com, the leader in the social
breathing space IPOs at twice that.

------
trotsky
Make no mistake, a big factor in the creation / encouragement of recent
bubbles has been super easy monetary policy that provides cheap and easy
credit.

In '00 we had a market crash after a dramatic run up of stocks in general and
tech in specific. In 1998-1999 rates were low and credit was easily available
[1]. As we led up to the millennium changeover ("Y2K") unprecedented amounts
of short term capital were made available to banks and other institutions to
allow them to weather any run on banks that might occur [2]. This money made
it out the the markets and proceeded to whip them into something that was
similar to a drug fueled frenzy: the nasdaq has never come close to those
levels again. Alan Greenspan later noted that he believed his actions played
an important role in the boom/bust. Once the fed windows closed for Y2K and
interest rates were pulled upwards quickly all the money disappeared.
Coincidence?

After the dot.com bust targeted rates were lowered dramatically to attempt to
smooth out the markets. Check out this chart of historical fed funds rates as
it is really easy to spot the cycles [3]. The next bubble was in housing, and
predictably it began to burst when interest rates were raised again.

Look at that chart again [3]. The last couple of years have seen the lowest
interest rates that have ever been available since the chart started more than
50 years ago. They have been approximately 0 for some time. In addition, the
quantitative easing programs that the fed has engaged in (currently, QE2
composed of $600BN worth of treasury debt purchases) has left monetary policy
so easy that if it were a woman the village would be talking.

I've heard some confusion about how this money makes it into the markets. It's
really quite simple. Many people and organizations who would normally put some
of their money into safe debt like treasuries decide not to because they can't
make any money off of it and they are concerned about the effects of
inflation. This causes them to look for better investments that will have a
chance of returning something decent. The explosion of angels in SV is
directly related to this process - these geeks, unable to make a good return
in some traditional markets switched to making private investments. If more
money comes into a sector, valuations will naturally rise and the quality of
the companies funded will likely fall (or at least that seems reasonable to
me).

QE2 is scheduled to end June 30th, 2011. Unless it is followed by a "QE3"
(which there is probably a strong chance of) monetary supply will contract and
interest rates will rise. At some point fed target rates will need to rise as
a response to current growing inflation in the commodity markets and the
retail increases in food and gasoline. Once the fed signals that the party is
over, a ton of this money is going to run for the exits [4]. Don't expect to
be able to close your next round unless you're of stellar quality or can hold
out for 2-3 years.

Or at least, that's one version of it.

Of course, no one whose business relies on the expansion of public and private
equity prices will explain this to you. The reasons for that should be
relatively obvious.

 _[NOTE: I am not an economist. I wasn't classically schooled in this stuff.
I'm also not a tea partier nor do I have any particular political axe to grind
here. I am just a coder who has been watching carefully since the dot-com
crash when I took a very big haircut. Take it all for what it's worth]_

[1]
[https://secure.wikimedia.org/wikipedia/en/wiki/Dot_com_bubbl...](https://secure.wikimedia.org/wikipedia/en/wiki/Dot_com_bubble#Bubble_growth)

[2] [http://www.greenspun.com/bboard/q-and-a-fetch-
msg.tcl?msg_id...](http://www.greenspun.com/bboard/q-and-a-fetch-
msg.tcl?msg_id=000scX)

[3]
[https://secure.wikimedia.org/wikipedia/en/wiki/Federal_funds...](https://secure.wikimedia.org/wikipedia/en/wiki/Federal_funds_rate#Historical_rates)

[4] <http://www.chrismartenson.com/martensonreport/coming-rout>

~~~
danenania
Good post. It seems common for participants in an industry undergoing a bubble
to concoct elaborate industry-specific theories to explain a sudden influx of
new money when the real cause is, well, exactly that: a sudden influx of new
money. Unfortunately, we've been trained to correlate the numbers in our bank
accounts with actual value, but the link has been all but severed for a long
time.

It seems unbelievable that we as a population could keep being fooled by the
same trick over and over, but when you look at the sums involved for those who
benefit, it starts to make sense. This racket dwarfs even the military-
industrial complex. It's rule-the-world money. In my opinion, anyone who tries
to portray the situation as obscure or highly complex either has a stake or
has succumbed to propaganda--printing money always causes artificial booms,
and artificial booms always lead to busts. It's been true since fiat money was
invented and it'll be true until we evolve beyond it.

~~~
wat55
This is completely wrong and absurd. We've had a gradual inflation rate since
the beginning of the U.S. Dollar. We were headed toward a deflation without
the QEs, which would've been a disaster in a highly illiquid economy. The QEs
simply brought the inflation back to a good, gradual rate, and put more
liquidity into the economy so businesses can start hiring again.

~~~
danenania
"We were headed toward a deflation without the QEs, which would've been a
disaster in a highly illiquid economy."

Right, this according to the brilliant minds who created the crisis in the
first place.

Clearly the financial situation is bad. Your 'good, gradual inflation rate' is
WHY we're on the precipice of disaster. It's not like we now have a choice
between an economic meltdown and a land full of unicorns and rainbows if only
we keep stamping more paint on more pieces of paper. Our only option is damage
control, but you'd rather keep piling on the damage.

Google some of the predictions made by Bernanke and his colleagues in the
years and months leading up to the crisis. They've been dead wrong every step
of the way. Yet now we are supposed to believe that inflation is no concern
when food and commodity prices are at all time highs and causing revolts
around the world? Talk about absurd.

~~~
cpeterso
"Good, gradual inflation" is how The Man keeps the proletariat busy working.
They can't afford to stop.

~~~
yummyfajitas
Inflation helps the proletariat, you know. Most of them are net debtors, so
inflation makes it easier to pay off their debts.

~~~
anamax
> Inflation helps the proletariat, you know. Most of them are net debtors, so
> inflation makes it easier to pay off their debts.

Not so fast. Lenders factor in expected inflation, so it's only unexpected
inflation that benefits debtors.

And, making payments isn't the only way to handle debt - bankruptcy works too.
You don't get any more "pay later" pizzas, but you get to keep the ones that
you already ate.

However, inflation hurts folks whose income doesn't match inflation. After
they stop paying their debts, they still need to buy food.

My cat's favorite food went up 25% last month. Since she was already on the
cheap stuff....

~~~
yummyfajitas
It's true that a higher inflation regime will not help debtors. But the net
effect of an event like QE/QE2 is to help debtors.

~~~
borism
_But the net effect of an event like QE/QE2 is to help debtors._

Let's be serious here. Net effect of QE is 0.

~~~
anamax
QE2 did push US mortgage rates up.

It's unclear why/how though, as the vast majority of new US mortgages end up
with a GSE that is heavily dependent on govt support, so the increase was a
political decision.

------
toddmorey
As someone else commented, Facebook could easily add a feature to show
pictures from friends geotagged with your current location. (Not a perfect
replacement but a lot of the magic.) Apple also appears to be getting
aggressive in this space with the new version of mobile me. Color has an
interesting vision, but I think traction as a photo sharing add-on is going to
be tough once the social network and the mobile device maker get into the same
exact business.

~~~
bhousel
What is far more likely is for Color to try to get themselves acquired by
Facebook.

If this is their real company strategy, the $41M investment actually makes
sense.

~~~
jamesmcintyre
that's exactly what I was thinking. I see this as being a very novel concept
that if reaches a certain threshold of brand-awareness and good design could
be a perfect acquisition target because merely replicating the feature-set
would be like Google Video before Google acquired YouTube (it wouldn't be
about the technical capability as much as the culture and community around the
novel concept).

~~~
bhousel
Perhaps we're seeing the start of something new..

    
    
      B2C = Business to consumer
      B2B = Business to business
      B2A = Business to acquisition?

~~~
jsnell
Building to flip is hardly a new trend.

~~~
bhousel
True, but I just gave it a new acronym :)

Edit: I'd like to clarify that the business model I'm suggesting _feels_
different somehow. Yes people have built companies to flip before, but their
valuation was still based on what they do as a company.

If what I am suggesting is true, Color's valuation is based on potential
shares in the company that it's being flipped to. These VCs are essentially
investing in Facebook, pre-IPO (set for 2012) without going through Goldman's
special purpose vehicle, and without dealing with the SEC's 500 shareholder
regulations.

If true, that would make this Color investment a very clever hack.

------
yannickmahe
What I don't get, economically speaking, is how we can both be in a bubble and
in a barely recovering economy. In other words, how do these angels and VCs
still have that much money to invest in such companies?

~~~
tyng
Ever heard of the term "two-speed economy"? It's happening right now on a much
larger scale in Australia.

~~~
jacques_chester
Indeed. Today in _The Australian_ there was a story about laundry hands on
offshore rigs being paid ~$420k.

[http://www.theaustralian.com.au/national-affairs/laundry-
sta...](http://www.theaustralian.com.au/national-affairs/laundry-staff-
on-420k-a-year/story-fn59niix-1226027697866)

------
bhurt
One reason I know we're not in a bubble: because everyone is saying we're in a
bubble.

For you young whippersnappers who were too young to remember the 90's, a
bubble is a manifestation of irrational exuberance- with (almost) everyone
saying it's a whole new market, it doesn't matter how much the thing costs
it's worth it to buy it because it's price is just going to keep going up up
up, so do whatever you need to do to buy in now, because the longer you wait,
the less you make.

In other words- it's a bubble when everyone is saying it's not a bubble. But
if everyone is saying it IS a bubble, then it's not a bubble.

There is a difference between a healthy (or at least "not on death's
doorstop") economy and a bubble.

------
digisth
We might be, but are bubbles always bad? Lots of money gets thrown around.
More people get jobs. Ideas are everywhere. People get experience starting and
running companies. Interpersonal and business networks are built. Lots of bad
ideas are funded, sure, but a few great ones also emerge.

We shouldn't condemn bubbles as automatically bad. We should be aware of them,
though.

~~~
PaulJoslin
The problem with a bubble, is not that 'money is thrown around' by investors -
but that the source of the money ends up being in public hands.

The founders get their investment from the investors. The investors get their
money back when the company is acquired (or makes money).

In the early stages of a bubble, this process generally consists of 'money
being thrown around' as you say.

However, due to the hype of the returns from these 'investments' (e.g.
Facebook growth) - it attracts the public investors into wanting to get in on
the 'action'.

Typically this is done through an IPO, which allows the public to come on
board and potentially pay all previous investors / founders down the chain
their money back (plus more).

However, even without the IPO's of the last bubble (and they may still come!)
- the public money is finding a way in (e.g. Banks setting up Social Media
Investment Funds). Not to mention any other general investment companies
having some of their portfolio riding on 'internet based stocks'.

Then when the bubble eventually bursts (The trend reverses and everyone tries
to get out while they can) - it is often the public investors which are left
out of pocket / losing their homes / etc.

The point made at the end of the article is, if you are in a start up right
now (or even a VC) - it is better to get out early, than to get greedy and end
up getting burnt when it bursts (e.g. GroupOn).

------
crux_
I'm curious about a couple of things, but also ignorant... so here's hoping
for a helpful reply:

\- How much institutional money (pensions, sovereign wealth, etc) is ending up
in VC?

(My intuition tells me that the tremendous pressure on these funds to generate
returns, which was a huge part of the housing bubble, is in turn fueling this
bubble too, although not nearly at the same scale.)

------
NxguiGui
Don't follow the hype:) The way i see things is simple. X angel/vc knows how
to play the game of taking some Y startup with non super unique idea/product
and sell it to the Z highest bidder. When X invest money the most important
thing is to make Big News. The Z are full with money to spend, they know that
money need to circulate in order to multiply. They watch The News. They react.
With money. On the other side of the line are X, they also watch the news,
dream for success and want to be Zuckerbergs. And so on. From my perspective
the smartest move is to connect demands of Z and availability of Y. Be a X or
The News channel. But i am small, insignificant, away from first hand
experience and everything that i think is away from The Game that is x,y,z.
Thinks i can do with one million funding, if i have it, in terms of product
development, team building, business development, are so old school and simple
that are not interesting to put here at all. For me in this position the only
valuable model is bootstrapping everything, test early in real world and
iterate slowly and carefully in terms of technology and business model. But i
deeply respect The Game of x,y and z, not so in direct meaning but as side
effect. If all this money are 20% effective they push new technology to the
limit and test the audience and give as a valuable lessons without risking
money that we don't have. So if Z want to spend it's their decision to make.
Our is to choose a) to be valuable Y or b) to be other letter in the equation
making our own working function, with our own proven methods and variables:)

------
atrevisan
_Typically those kinds of things would happen once every year or so, twitter
(I still don't fully grok their business model), facebook and so on._

Don't understand Twitter's business model? Promoted tweets have the ability to
become AdWords for social. Millions of pieces of content are shared everyday
giving insight into user's pleasures, dislikes, and lifestyle. This user data,
when analyzed, has immense value for companies interested in purchasing. That
information is worth a ton.

Bubble or no bubble, I sure grok their business model.

------
rapind
If the $40m is mostly for marketing / advertising then this is definitely
reminiscent of the last tech bubble.

------
joelhooks
This is a typical business cycle[1]. Easy credit, low interests rates, no
incentive to save.

[1] <http://en.wikipedia.org/wiki/Austrian_business_cycle_theory>

------
nadam
It is not necessarily a bubble yet. I think investors think the mobile-social-
local market will be owned by very few companies. (Only a few can survive
because of the network effect). They invest into one company and hope that
with a lot of advertisement money they can win. There would be a bubble if
they would invest the same money into 10-20 or more similar companies
randomly.

------
RyanMcGreal
> No more 'x' buys 'y', where 'x' is some established player and 'y' is some
> new kid on the block that has a fancy office with pinball machines a hip
> domain name and an in-house chef.

Or as was often the case, 'y' buys 'x'.

------
antidaily
41 million (and growing): The number of views for Rebecca Black's "Friday"
video on YouTube: <http://www.youtube.com/watch?v=CD2LRROpph0>

~~~
jacques_chester
I would not have paid $1 to view it.

------
sdizdar
Not sure if this particular investment can be called as a sign of a bubble.
Social networks, locality, mobile, and things are still new and unknown. But
there is a huge potential. There will be soon 2B people on the earth with
constant (mobile) connection to the internet.

In order to make FourSquare clone, you don't need a lot of investment for
development but you need a _LOT_ of money to acquire users and become a player
in that space.

However, the assumption is that there will be only few players and that is why
there is a need for these kind of bold investment moves. I disagree. The
system will become even more fragmented, democratized, and complex with many
unknowns, so classical ways of getting market share will not work. In other
words, even with 41M of investment, the company will not be able to fight
against some weird and original apps / social network or even coupon buying
system.

------
Tycho
_The previous bubble took 5 years to form and about 2 months to go 'pop'. I'm
not sure if that timetable is trustworthy, but we definitely seem to be
accelerating along the curve._

Just thinking aloud here, but how on earth _would_ you make a trustworthy
timetable out of that observation? What do you measure? Economy was size A in
year Y2K, technological faciliation was a level B, there were C people
involved directly with the market; now the economy is size X, tech is level Y,
and Z people are at the table... like why would you think one previous bubble
was in some way proportional to a present one?

One last thing, what to make of Max Andreeson's pet theory that there never
was a real dotcom 'bubble' - that a few companies were ridiculously overvalued
but overall most were ok and in fact _more_ investment should have happened
(in a more diversified manner)?

------
tyng
At least the domain name is worth some dollars.

I actually quite like the concept - makes group photo sharing fun & easy. But
worth $41m? Not yet

~~~
jarin
I wonder how much they paid for the @color Twitter account.

~~~
MatthewPhillips
Twitter doesn't allow selling twitter accounts.

~~~
jarin
Do you really think whoever owned @color just gave it to them though? ;)

~~~
MatthewPhillips
No, I think you're right, but I wonder how they did it. Must have been under
the table.

------
davidmathers
As the great philosopher Inigo Montoya once said: "You keep using that
word..."

Let's talk about this chart for a second:

[http://www.google.com//finance?chdnp=1&chdd=1&chds=1...](http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=0&chfdeh=0&chdet=1300998901448&chddm=1394503&chls=IntervalBasedLine&q=INDEXSP:.INX&ntsp=0)

Ok, see that 4000% increase in 18 months? That's what a bubble looks like.

Now, please point out to me where on the graph it made more sense to invest
your retirement money in the S&P 500 rather than Amazon.

Wait, you mean pets.com, not amazon.com? Fair enough. But now I'm not sure
what your argument is. That color.com is going to fail and the investor are
going to lose all their money?

That is what you're saying right? Because if you're saying they're taking a
_large risk that has a very small chance of paying off_ then you're saying
nothing. That's what investors do. That's what makes us (as a society) all
rich.

If your argument is that capital is being misallocated then you have to say
why and where the capital should be allocated.

Which brings us to what is actually a bubble and not just people with lots of
money taking big risks that may not pay off:

1\. capital being invested by (otherwise) non-investors

2\. who can't afford to lose

3\. who have come to believe, with certainty, that they can't lose

That was the case in both the stock bubble and real estate bubble. It's not
the case now. I guess the headline "valuations are unrealistically high"
wouldn't generate as much heat and would require a coherent defense.

------
david927
We're still just starting a watershed moment for ways of finding productivity
gains, forms of entertainment, ways to connect and share. We haven't scratched
the surface yet. There are huge leaps being worked on in the foundation
technology.

Give us a bubble! Spread it out, so that such 41mm deals go instead to a
thousand teams. And we will give you the future.

~~~
davidw
> Give us a bubble! Spread it out, so that such 41mm deals go instead to a
> thousand teams. And we will give you the future.

That happens eventually, it seems, in a somewhat roundabout way, to some
degree. Look at where the money from Viaweb ended up, as one example. Lots of
successful people's money ends up as angel funding: Paypal, Delicious, and so
on.

------
citricsquid
What's the difference between proof of it being a bubble and these guys just
making a ridiculous investment based on hype?

~~~
arkitaip
What's worrying is that these guys are Bain Capital, Sequoia Capital, and
Silicon Valley Bank - some of the most influential tech investors in the
world. They should know better. That or they have some incredible inside info
on the Color team and their product.

~~~
pclark
They _obviously_ have incredible inside information - you think they invested
based on the Techcrunch post? Is it silly day on Hacker News or something?

~~~
scarmig
For real! These guys are masters of the universe. Obviously they couldn't
massively overvaluate something.

------
mendable
Asking the wrong question?

What about asking, "How has taking this amount of funding helped this
business?"

Strategically, this much funding through all of the controversy it has
generated, will guarantee this company/brand gets in front of nearly every
early adopter over the next couple of weeks.

It will drive hundreds of thousands of people to try it out.

And that's before they've spent a penny of it.

Loads of Posts on HN alone excitedly linking to the app on Android etc (one on
the front page right now).

After that, it will sink or swim on it's own merit.

Would that have happened if they hadn't taken this funding? No. It would have
had 5 minutes on TechCrunch, and then been forgotten about because it may not
have been remarkable.

Now all they need to do is implement a business model / some way to make money
from it so their per-user revenue exceeds their cost of user acquisition, and
use the remaining $38,000,000 as a marketing budget to spread it to everyone
else. Profit.

~~~
kovar
So, of the $41M, $3M goes to technologists and $38M goes to ad agencies?
Hmmmm....

------
brackin
.com's are no longer important, blekko, duckduckgo, drop.io and similar
companies are proving this. It's not a big deal anymore. Every time I pitch
Reward.io I get asked "how will It make money" so saying that profits don't
matter anymore is a big understatement in my opinion. New business models are
being developed and used to make money like Freemium and more subscription
models.

There will always be some startups with over valued valuations but the big
thing is startups don't think they are invincible, with Digg and Myspace
startups know they could die if they don't work hard and try and find a way to
make money, even twitter which has gone almost too far recently with DickBar.

------
jbooth
So, at first everyone criticizes these guys for being on the wrong side of the
chicken-egg problem, then everyone says they raised too much money and are
being too ostentatious.

Seems like they're attacking the chicken-egg problem in the easiest way, to
me, the domain name and big dollar shine on everything make them look more
credible and established. And they have enough runway to focus on product for
the first few years while growing the userbase without having to monetize
immediately.

Could still flop a million ways, of course. It just seems like going all-in
could actually be a viable way to attack emerging social networky markets.

------
mkr-hn
If there is a bubble, then it's balancing stuff like this that will keep
things in check. I've been noticing it too, and I think that's a sign that
things are getting crazier as the months go by.

------
orky56
Back to the days of which venture has the highest burn-through rate!

------
beeeph
When a tech bubble pops, how does it affect a funded startup compared to a
bootstrapped startup? I'm relatively new to the startup world, but as I
understand it, startups that need funding are generally the only one's
negatively affected when the bubble pops since funding becomes more scarce. If
so, wouldn't that benefit the bootstrappers?

------
greendestiny
I think the only thing I'd generally agree on is that "in general it is agreed
upon" are weasel words of the highest order.

------
wat55
Sorry, but the U.S. economy is a $14 trillion economy. Anyone who says we're
in a bubble based on the aggregate Silicon Valley venture capital funding in
the last year is getting ahead of themselves. Before you lecture us on a
bubble, try to understand some basics on the U.S. economy.

~~~
sharonpaul
I am commenting from the perspective of someone who is not in the US.
Currently from the Asian region (excluding China), valuations are no where
near that of the US. In Singapore alone, even with for a startup with vast
customer based overseas is being acquired for only $10million. Yet, that
$10million acquisition is more than enough to make the startup a superstar in
our ecosystem.

Perhaps this bubble is only present in the states, but elsewhere in the world,
valuations are still reasonable.

------
evo_9
From Colo[u]r.com:

"Think fast!

Find someone. Take pictures together. Party. Play date. Lunch?

Simultaneously use multiple iPhones and Androids to capture photos, videos,
and conversations into a group album. There's no attaching, uploading, or
friending to do.

Share together in a new, moving social network. Just look around."

~~~
kovar
I wonder if encouraging people to digitally record everyone around them will
lead to legal troubles at some point? Back in the day when I shot film, I'd
often get the subject to sign a model release. Society and technology have
changed a lot, but if we're going to monetize something like Color, the people
whose images appear may want some of that money.

------
thedaveoflife
relavent link to his point about domain names: wallgreens buys drugstore.com
for 409M.

[http://dealbook.nytimes.com/2011/03/24/walgreens-to-buy-
drug...](http://dealbook.nytimes.com/2011/03/24/walgreens-to-buy-drugstore-
com/)

------
jeremymusighi
Nice touch writing out the full "$41,000,000" rather than just "$41M".
Definitely makes it look like more. Although I don't disagree that the size of
the investment seems unjustified.

------
known
Define bubble.

------
techiferous
What about the popularity of the lean startup approach? The focus on data and
customers tends to keep those startups real. Shouldn't this mitigate some
tendency toward a bubble?

------
eli
I'm pretty sure Dropbox paid a lot more than $7.95 for "dropbox.com" It's
actually somewhat difficult to find an unregistered, pronounceable domain
that's under 6 or 7 characters.

~~~
karanbhangui
Dropbox had an already successful product operating on getdropbox.com. When
you have some revenue numbers to play with, it makes sense to invest serious
capital.

------
kirbman89
Bubble Smubble. This bubble has a long ways to go before it pops. We're coming
out of a recession! We have a few years left before we should be concerned.

------
ohashi
I think the domain name argument is bunk. The domain market isn't 'hot' again
by any means. In fact it hasn't recovered from peaking in 2007-2008.

------
kia
jacquesm really added ads to his site.

------
HeyLaughingBoy
Who cares if we're in a bubble? The only thing that matters is "how can I make
money from it?"

------
tutanosh
There is a bubble in people calling a tech bubble, surely this cannot last!

------
sabat
Anecdotal over-investment on the part of three VC companies != a bubble.

A bubble is a stock market bubble based on massive, irrational over-investment
_on the part of VCs and stock market investors_ which, after implosion, will
hurt the US and world economy.

"Hey, those VCs are making some stupid investments" does not translate into an
economic bubble. VCs frequently make stupid investments, because they're human
and they're in the business of taking risks.

Please, I urge you to read a history of the actual stock market dot-com bubble
of the late '90s so you understand the word "bubble" in context.

