

Ask HN: Is VC entering a bubble? - tomrod

With such low interest rates in traditional investments, do you think startups and venture capital investments are becoming a bubble? Why or why not?
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iqster
Yes.

Why? Fundamental economics. Money is essentially free. People need to invest
somewhere. The stock market is already over-valued. Gold and other commodities
seem to be overvalued as well. It doesn't seem like the US will raise interest
rates (that's what the market thinks ... see the 10 year rates on Treasuries).
In theory, if you take money and make it somewhat productive (ala a hot-dog
stand), you have improved things. However, start-ups are not like hot-dog
stands. I think that a failed start-up produces less value than an average run
hot-dog stand.

A few startups are certainly creating value. But their valuation is being bid
up by the hordes of people with cash to invest. Case in point. Facebook is not
worth 50 billion. If Kevin Rose invests near this valuation, does he expect to
get a x2 or x5 on his capital? Seriously?? Don't give me the "if each user was
worth 10 bucks a year crap". Until FB figures out how to monetize in a
scalable manner, I remain a skeptic.

That's just my opinion :)

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damoncali
It's not a bubble - it's the consequences of the dramatically lowered cost
required to start a technology business. Money is just not worth as much to an
entrepreneur as it used to be, so the valuations are higher.

Not only do entrepreneurs not value cash as much, but the capital required to
open up shop as a "VC" has come down as well. The result? Lots of money
chasing entrepreneurs who are basically indifferent to investment dollars (at
least when compared to past times).

A bubble implies a greater fool - I think what we're seeing is a fundamental
shift in the economics of high tech startup finance.

Not that the above line of reasoning would make me comfortable in the shoes a
VC, but they're at least making a rational bet that the model will shake
itself out and leave realistic profit for everyone. It's not a pump-and-dump
scheme like it was in the late 90's.

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tomrod
Interesting. Do you think we will see micro-VC's start up, like Prosper or
Kickstart for startups?

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damoncali
I think we already have. They call them Super Angels, and YC is one of them.

Prosper style? I don't know. I think that would already have been done if it
were viable. In other words, something would have to change fairly
dramatically for us to see that.

~~~
tomrod
What typically keeps a person with average wealth from investing in venture
capital?

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imkevingao
Possibly. I mean in theory, correct me if I'm wrong since I haven't read any
books on this type of stuff, VC investments always have a bubble like
structure attached to it.

Every VCs nowadays want to find their Google or Facebook, so more and more
LP's are investing into VC funds so all of them can get a piece of the social
network / internet hype. If the VC firm's name is not Sequoia or Kleiner
Perkins, or any well known firm name, it is probably not going to attract a
lot of top tier entrepreneurs, but since they've already raised a fund, they
got to invest somewhere.

In a way it's good for entrepreneurs, since there's a lot of available cash,
but at the same time a lot of entrepreneurs are getting money for the "same
ideas". So let's say 100 secret deals are made this month on new social
networking sites. After a period of time, only one company will achieve high
success, 4-5 are surviving and resilient, and the rests are gone. All this
stuff is theory, but I'm sure if someone really digged into this, it can show
that there's a lot of flaws with the VC industry.

But one thing keeps it going, which is winning. I mean once you start to win
like Sequoia and KP, life is good. So I believe if there's competition,
there's what people like to refer to as a bubble. Since not everyone can be a
winner, there are always a lot of losers. I doubt there is going to be another
dot com bubble burst, that just happened to be a crap load of bad investments
faltering at once. In essence there's no that much theoretical difference
between dot com bubble and the great depression.

It will just happen again and again because of Gordon Gekko's favorite phrase
" Greed is Good"

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dtby
More interestingly, is the VC market inherently inefficient because of the
accredited investor rules? Is there a reasonable proxy for "startups and
venture capital investments" in the open market which would allow one to
parlay insight into cold hard cash?

