
Tech Bubble? Maybe, Maybe Not - mdev
http://techcrunch.com/2015/03/24/tech-bubble-maybe-maybe-not/
======
btilly
To this excellent article I would add one fact.

A huge difference between the dot com bubble and now is that Sarbanes-Oxley
makes IPOs a lot less appealing. That is the most likely reason why
acquisitions and late funding rounds have replaced IPOs. This also means that
the amount of money that can pour into a bubble is less than the last time
around.

That said, bubbles usually are based a new theory about valuation for some key
asset. The echo chamber of people who believe this theory bids up the value of
that asset until they collectively do not have the resources to bid it higher.
Then when it starts to collapse, and everyone abandons the theory, the bubble
pops.

Given that, the growth of valuations is very worrisome. Doubly so since they
center around social apps. One of the elements of the last bubble was the
widespread belief in Metcalfe's law, that the value of a network scales as the
size of the network squared. I was one of several people who came to the
conclusion that O(n log(n)) is a better estimate. See
[http://spectrum.ieee.org/computing/networks/metcalfes-law-
is...](http://spectrum.ieee.org/computing/networks/metcalfes-law-is-wrong) for
more on that. Networks were not worth as much as people thought last time.

This time round we're again seeing a belief that social networks (such as the
one Facebook owns) are worth a tremendous amount. And this belief persists
despite the fact that those networks are regularly being forced to buy newer
social networks at high valuations because they can't prevent new entrants
from gaining traction in the marketplace. So current valuations seem to be
based on a theory which we have fairly direct evidence is wrong.

That fact is my top reason for believing that current valuations will not hold
up over time.

~~~
adventured
I think your theory about social networks is completely wrong. All social
networks are not the same in terms of the subset they compete in.

Instagram in photos, and WhatsApp in messaging competed with Facebook in a
subset of social networking.

All Facebook has to do is acquire winners in the new major subsets that bloom,
and then the competition is over for each. It's a perpetually affordable game
for FB to play, because each new blooming subset of social networking, is only
going to be worth a fraction of the total Facebook corporation.

There has been no new Instagram since Instagram. Facebook + Instagram have in
fact prevented any new Instagrams from succeeding, they already won.

It's likely that Facebook picked a winner in WhatsApp as well, at least for
the vast majority of the markets they compete in. There will ultimately only
be a few major messaging apps that matter, FB bought one of the few winners.

There has been no challenger to Facebook, the core system, in years. They won,
it's over. There is no inbound next Friendster or MySpace to attempt to
dethrone Facebook.

Where is Path? Where is Ello? (it's losing the little attention it had, that's
where) Where is Diaspora? Where are the countless others that have tried?
Irrelevant, that's where.

Facebook is worth so much because they have a monopoly in consumer social
networking (in a lot of big markets), that is presently worth $3 billion per
year in net income, and will probably be worth $6 billion per year within ~36
months.

~~~
btilly
First it is a truism that every startup starts in a small subset of the market
that they will eventually occupy. When Facebook was fighting MySpace, they
didn't compete in MySpace's core market. They focused on college campuses. And
then expanded. So you would expect to see any new competitor do the same.

Second, the "buy competitors" approach only works as long as competitors are
willing to sell. Eventually one won't. Don't forget that Facebook tried to buy
Snapchat for $3B in 2013, and failed. Based on emails leaked last year in the
Sony fiasco, if they can beat Facebook, they will. And they believe that they
have a chance. And if they fail, they won't be the last competitor.

But we'll all get to see what the future holds. You have a theory. I have a
theory. Read [http://www.businessinsider.com/snapchat-ceo-evan-spiegel-
has...](http://www.businessinsider.com/snapchat-ceo-evan-spiegel-has-grown-
up-2014-12) for the theory that Snapchat's CEO has. Eventually one of us will
be proven right.

------
DigitalSea
Surprisingly this is a great article about the speculation of there being
another tech bubble. I wasn't expecting there to be actual metrics and charts,
I have become too used to people voicing their opinions without backing up
their claims with actual data. I am still on the fence about whether or not we
are entering a bubble (or if you believe some people already within one).
Comparing metrics to the early 2000's is one thing, but I think the landscape
is dramatically different than it was in the early 2000's to the point where
maybe you can't make a direct comparison to what happened.

We are seeing highly successful and VC funded companies like Snapchat and
Twitter achieving high user rates, but failing to monetise their userbase.
Herein lies the problem: these companies are being valued at billions of
dollars because of their VC investment, but they're not making any money (at
least not enough to make a profit). In comparison to companies that are making
profits, but might only be valued at a fraction of Twitter or Snapchat. Surely
this has to have consequences even if they're not on the scale of what we saw
during the dot-com bust of the early 2000's.

Maybe we're not in a tech bubble like we saw in the nineties, but I think
something is definitely going on. Just because people aren't losing retirement
funds due to buying stock in an IPO'd tech company that dies doesn't mean a
bubble hasn't formed in other areas that necessarily don't affect your average
investor. Like many things involving historical and financial data, nobody
knows what is going to happen tomorrow or in 6 months time. We can speculate,
but honestly, nobody knows: that's both the beautiful and destructive nature
of finance.

VC's are throwing money at these companies that are burning through more money
than they are making. Having to go through multiple rounds just to keep the
lights on. I don't see how that is sustainable in the long-run, at some point
you have to start making money right? It seems the approach most companies
take these days is to try and get as much investment as they can and when they
reach the point where they've given up X percentage of their company to
venture capitalists they either have to IPO or close down.

One thing that is definitely different from the nineties is we aren't seeing
startups host ridiculously expensive launch parties and events as much
anymore.

~~~
ghaff
It also strikes me as an interesting question how much collateral damage will
result from bubble deflation if it happens. Other events in 2000/2001
contributed (post-Y2K, 9/11) but dot-bomb also had a big effect upstream
because all those startups were pumping crazy money into big IT suppliers like
Sun, EMC, and Cisco. So the bubble bursting had huge ripple effects. I'm not
sure a burst bubble that's mostly about outsize valuations for web startups
with no business models today would have the same sort of impact.

~~~
taurath
All those startups are pumping insane amounts of money into the entire region
of the SF bay area, to the exclusion of nearly all other locations - no matter
what, it will massively effect the economy of the bay area.

~~~
ghaff
I'm not convinced though that the money being pumped in by those startups (as
opposed to the big tech companies that are making money) are of the same order
as when the first thing any startup did was to buy a few $M worth of
proprietary hardware.

~~~
nosuchthing
Real estate is siphoning hard off the Bay Area.

------
mdev
Startups will eventually have to stop giving out free VC money to acquire
users. I think the user acquisition cost currently is way to high. Companies
give away between $10-$25 (or $1000 for new drivers on Lyft) just to try their
service. There are no major differentiators between many of them apart from
free credits. Companies race to acquire users like how Groupon did in the
coupon business when tens of clones popped up within days in multiple
countries. There are many examples of these - I have no reason to stick with
one service or have brand loyalty. As long as the service is within reason the
cheapest one is the one I'd use.

At some point the incentivizing would stop after burning through a lot of cash
- to show profits. At that very moment some other startup could begin giving
out lots of free credits and users could very easily move.

That's when things could potentially come crashing down.

~~~
habosa
I think this is a huge point that is not talked about enough. Users seem to be
over-valued especially since there is nothing keeping you around once you get
your free credit. For instance I have gotten a free ride of 4 ride sharing
apps (Uber, Lyft, Flywheel, Sidecar) but I just use Lyft as a customer. The
rest just drove me somewhere once for free. Sucks to be them.

------
carsongross
I think the strongest indication that there is a bubble is all the Smart
People nervously chattering about there not being a bubble.

~~~
username223
Pretty much:

> Editor’s note: Bill Maris is president and managing partner at Google
> Ventures.

Hold onto your wallet. Wall Streeters are moving to tech[1], as are retirement
fund managers[2]. Bubbles only work as long as the Smart Money can profit by
selling to more fools.

[1] [http://www.nytimes.com/2015/03/25/technology/ruth-porat-
goog...](http://www.nytimes.com/2015/03/25/technology/ruth-porat-google-
morgan-stanley.html)

[2] [http://bits.blogs.nytimes.com/2015/03/23/daily-report-
privat...](http://bits.blogs.nytimes.com/2015/03/23/daily-report-private-tech-
stocks-attracting-billions-from-big-money-managers/)

~~~
vskarine
Silicon Valley is the new Wall Street

~~~
adventured
And before it was the new Wall Street in 2015, it was once before the new Wall
Street circa 1999, the Frank Quattrone era.

------
Permit
Man, we've sure been in a tech bubble for quite a long time!

[https://hn.algolia.com/?query=tech%20bubble&sort=byPopularit...](https://hn.algolia.com/?query=tech%20bubble&sort=byPopularity&prefix&page=0&dateRange=all&type=story)

Someone will get the timing right though, and go on to do a number of
interviews and maybe even publish a book.

~~~
swatow
The problem with bubble prediction is the perverse incentives. If you say
there is no bubble, you look like an ignorant groupie. If you say there is a
bubble, even if nothing happens, you can just say "you guys got _real_ lucky
this time".

~~~
roymurdock
That's why I only consider the opinions of people who put their money where
their mouth is. Having skin in the game usually tends to lend the proper
incentive to having an informed and insightful opinion. Usually, but not
always.

------
vskarine
Not sure they are counting money that is coming from wall street(banks, mutual
funds, pension funds, etc) that is in FOMO state and is actually making VCs
less relevant in later stage investing. Good article on that:
[http://www.bloomberg.com/news/articles/2015-03-23/dizzying-p...](http://www.bloomberg.com/news/articles/2015-03-23/dizzying-
pre-ipo-tech-values-spurred-by-rush-of-hedge-fund-money)

------
softdev12
Whenever I see charts that focus on statistics like IPO valuations (e.g. #4.
High-end IPO valuations are rising dramatically), it makes me think that
people have forgotten the cost differential in a starting a software-based
business now vs. 1995. When people talk of the few (<20) winners being
multiple billions of dollars, they don't consider all the thousands upon
thousands of tiny sub-five person startups that quickly try an idea and fail.
So the total number of startups in the "universe" of startups is probably an
order of magnitude greater today than in 1995 or 2000. It makes sense that
more winners would come out of a much larger pool of companies.

I wish people would flip the argument and instead of saying tech bubble, start
asking about the death rate of all the millions of apps, small shops, and side
projects that are flooding the tech sector. I would like to see if this "fail"
rate is too low (in the sense of not having enough winners) rather than a tech
"bubble" being too high.

------
georgeecollins
This is a good article, but I think you could argue that the point is that
this bubble isn't like the last bubble. No bubble is the same as the last
bubble. The sources of investment, and what is being invested in, is different
in every bubble.

Bubble is such a loaded, judgemental term. How about over-optimistic? A lot of
new things have been doing really well: Facebook, Uber, etc. So many
investments are priced very optimistically. Some will succeed, many will fail.
Many useful investents will be made. Much money will be lost. Unless you are
an angel investor I wouldn't lose a lot of sleep over it.

------
plaguuuuuu
IMO the most worrying statistic in support of a bubble is that graph showing
valuations outpacing fundraising. The very definition of a bubble is a
positive feedback loop of overvaluation.

Fundraising being low compared to valuations is a sign that VCs' risk
appetites take into account the probability that everything is hugely
overvalued.

Fundraising could ultimately surge towards 2000 levels if people _really_
start drinking the Kool-Aid. But if it pulls back then I'd expect to see
valuations plummet and, accordingly, share prices.

------
dismal2
Talking about a tech bubble in the current 0% interest rate (negative in some
countries), QE state of global finance is like complaining about a flooded
basement when a tsunami is about to come in. Economic incentives have been so
distorted for so long that the tech sector is probably one of the healthier
ones.

------
mdev
This article has lot more data and is comparatively less biased than a lot of
ones out there.

------
Animats
That's a good analysis. A key point is that this time, the bubble companies
are privately held, because IPOs happen so much later now. The losers when the
bubble collapses will be the second and third round financers.

Who are those parties? How much reliance do they have on borrowed money?
That's the big question - who are the losers when the bubble pops?

------
PublicEnemy111
More important than the current bubble, what happens when the self-driving car
becomes a reality? Probably a dotcom-esque era. Even if the current bubble
pops tomorrow, the self-driving car will bring so much focus to the tech
industry that it will recover pretty quickly. If not the self-driving car,
then personalized medicine or something.

------
copsarebastards
The main arguments against there being a bubble seem to be that things aren't
as obviously a bubble as they were before the previous tech bubble. This is
all a businessperson's approach to analyzing this situation.

Looking at it from a technical perspective: there are two kinds of companies
out there. There are companies that do something people care about and ones
that don't.

Think about Twitter for a second. If Twitter dropped off the face of the
earth, would you really care? I wouldn't. Even if I used Twitter, it wouldn't
be hard to just go find all the same people on Facebook or whatever and follow
them there. People and companies use Twitter for self-promotion, but that puts
Twitter into the same business demographic as a TV channel that runs
infomercials. Some people watch infomercials, but if the entire infomercial
market disappeared, nobody would really care. The problem with Twitter isn't
that they can't monetize their product, it's that they don't have a product.

Then there are companies that actually have a product. They may not charge for
their product, but if they did, people would pay for it. Uber and AirBNB
charge for their products.

Duolingo doesn't charge language learners, but they probably could: my
experience is that they are more effective for language learning than
Pimsleur, which a lot of people pay for. It's an artifact of the Google age
that companies don't actually charge for their product, but charge for
ancilliary services around it. Google doesn't charge for search: they charge
for ads. But if Google decided to start charging $10/mo for search? A lot of
people would pay it.

~~~
mbrubeck
> Even if I used Twitter, it wouldn't be hard to just go find all the same
> people on Facebook or whatever and follow them there.

The fact that Twitter overlaps with other services like Facebook doesn't mean
it's not valuable. For example, to take one of your own examples:

> If Google decided to start charging $10/mo for search? A lot of people would
> pay it.

"Even if I used Google, it wouldn't be hard to just go enter the same searches
on Bing or DuckDuckGo and find web sites there instead."

~~~
copsarebastards
> "Even if I used Google, it wouldn't be hard to just go enter the same
> searches on Bing or DuckDuckGo and find web sites there instead."

Okay, go try that and compare the results.

It's not about overlapping, it's about it being equivalent. Bing and
DuckDuckGo are not equivalent to Google. They are inferior products. That may
change (I hope it does) but for now that is how it is.

~~~
mbrubeck
You could make the same counter-argument about Facebook and Twitter. If you
really think they're interchangeable, that just tells me that you don't value
the things that many of their users do.

Edit: Downvoted your original comment by accident, and there's no undo button.
Sorry. :( Maybe someone else reading this can fix that?

~~~
copsarebastards
> You could make the same counter-argument about Facebook and Twitter. If you
> really think they're interchangeable, that just tells me that you don't
> value the things that many of their users do.

I don't think you could. Facebook doesn't offer an inferior product to
Twitter, it offers products that are effectively the same, and come packaged
with other products.

I really don't think many people value the 140-character limit, which is the
only core difference between Twitter and Facebook feeds.

I can totally identify with the criticism that I don't value the same things
as Twitter/Facebook users (I don't have accounts on either service). But I
think I'm capable of empathizing with them and extrapolating what they value
from each product.

------
penprogg
I had no idea how much money was being thrown into the tech sector before the
2000 bubble. $100 billion seems unreal.

------
nosuchthing
Silicon Valley real estate bubble yes.

Businesses making use of modern technology bubble? No.

~~~
vskarine
They are very connected.

Tech bubble burst will trigger real estate bubble burst (lower salaries +
unemployment will cause defaults)

and as someone on other thread said: "Everyone and everything attached to the
real estate market starts to freak out that home prices might decline. More
panic, more layoffs, more defaults."

------
lmg643
somewhat off topic - it seems like there is a bubble in biotech. Something
like 70% of the companies in the nasdaq biotech index have no earnings (losing
money!) yet the index is up ~5x in the past few years. echoes of 2001 tech
bubble and 2007 real estate bubble.

it does get irritating to hear about "uber as a bubble." Consider how much
cash is flowing through uber right now, it is going to become/remain a massive
business.

~~~
vskarine
good point, but I think it's burst going to be relatively contained. My gut
feeling it will not affect much since not many other industries are feeding
off it. (I could be completely wrong here)

Tech on other hand is a different beast. It's bigger and a lot of things are
feeding off it (real estate and online ads for example). If tech bubble
bursts, it's effects can reach a lot further.

------
akhilcacharya
Two bubble articles on the front page? Is it going to be fulfilling?

Regardless, I'm honestly kind of scared, despite it not being a particularly
rational thing to think.

------
niche
I can think of 3 potential bubble bursters 1) Social media companies (2nd
party advertisers) 2) Webtilities 3) Taps

IoT to the rescue!

------
Fdndjxjxr
Calling this a "tech bubble" seems like an obfuscation of the issue. Biotech
companies aren't being overinflated. Hardware companies like Tesla aren't
being overinflated.

This is just the HTML5/ mobile app bubble, or in other words ".com bubble 2:
the media companies disguised as technology firms strike back."

~~~
WalterSear
[http://www.zerohedge.com/news/2015-03-22/nearly-two-
thirds-b...](http://www.zerohedge.com/news/2015-03-22/nearly-two-thirds-
biotechs-have-no-net-income)

------
michaelochurch
This one seems more mean-spirited and anti-intellectual than the last one, not
that the last was an era of virtue and heroism. The social distances between
employees and founders, and between founders and investors, have become huge
(and yet so many people are in denial about their prospects). We're now in a
world where age discrimination in _a job that requires many years of focused
experience to be good at it_ is the norm and almost taken for granted.
Meanwhile, startup cultures are a lot more corporate than in the last bubble;
sure, there are foosball tables, but there's also that "Agile" shit that
exists to cement the idea of the programmer as a permanent subordinate.

I don't care much whether "the market" goes up or down, but I want us to get
our fucking values back. How the fuck did "tech" beget Snapchat and Clinkle?
Those founders aren't fit to _work in_ tech companies, let alone fucking _run_
them. How'd we let ourselves get colonized by the mainstream business culture
and rendered their shitty outpost, instead of being something unique in the
world?

The 2011-15 bubble wasn't the worst in terms of numerical overrating of
technology companies, but I'm afraid that it will go down in history as the
time in which Silicon Valley lost what remaining character it had and became a
sideshow for the existing corporate elite, rather than a credible opposition
to entrenched and malevolent private-sector stagnation.

