
Ask HN: If we are in a VC bubble, how would the bust play out? - fivedogit
In 2007, many people knew housing prices were out of control. But they didn&#x27;t fully realize how exposed the financial system was and that banks would fail on a massive scale.<p>Today, there is a debate about a startup-SV-VC bubble but I don&#x27;t have a sense for who is exposed and what the greater ramifications would be, if any.
======
ChuckMcM
It plays out as companies that cannot reduce their costs enough to be
operationally profitable will exit the market or be bought for pennies on the
dollar. So something like uber getting bought/absorbed by a cab company.
Options/stock will be worthless in the dead company. Several VC companies will
report large fund losses and investors in those funds, and possibly a LP or
two will get out of investing completely. Some folks who thought they were set
for life will discover they have to get high paying jobs to support their
personal burn rate. They won't be able to and it will change their life,
bankruptcy, divorce, suicide.

For most people it will be a non-event, they wondered how people could invest
in a company at those valuations and so won't be surprised when they lose
their investment.

It will be really really hard to raise money for a while. Perhaps as many as 6
or 7 years. Companies that depended on new startups like digital ocean will
have large layoffs as they cut costs to stay profitable.

Anyway, that is my guess. We get to see how it plays out.

~~~
arielm
Well put. I think this time the bubble won't burst but slowly collapse. Insane
valuations (ex. Slack) won't be possible and the employees who are making more
than their ROI and get the hope of get rich quick option plans will have to
dust off their resumes and go work for the companies who handled expenses
properly and focused on revenue and profit.

When will this happen? Soon. If you look at the number of seed vs. A vs. B+
rounds, you'll see that A rounds are on the decline. That's important because
that's the stage where companies move from a startup to /real/ companies. Lack
of A rounds means investors are willing to throw a little money (seed) on
potential, or go big on proven success. That's usually great, but lack of A's
means they're not willing to take any risk. That's a sign this bubble is
deflating.

_FWIW - I'm a technical founder of a non-funded tech company._

~~~
woah
Wasn't there a "series a crunch" just a couple years ago?

~~~
WalterSear
It never stopped. It's been growing for some years, but until now, that has
been due to a parabolic increase in angel rounds - the frequency of series A
rounds has remained flat for a long time. If this has changed, it's a pretty
large signal, IMHO.

------
flipmonk
Over-valued companies will have to take down rounds - employees who joined
late will get their options roasted. A large number of small and new VC funds
will get wiped out. This time, the difference is, its the professional players
that get hit (VC's, institutional investors, hedge funds etc).

Last time, tourist investors (newbies and the lay man) invested in stocks that
crashed. Private huge rounds are protecting the tourist investors by virtue of
lack of access.

~~~
fivedogit
> A large number of small and new VC funds will get wiped out. This time, the
> difference is, its the professional players that get hit (VC's,
> institutional investors, hedge funds etc).

This is what I'm getting at. Is that extent of it? Before the housing crash,
most institutional investors thought it would be confined to the subprime
market... but that wasn't true at all.

Where are the VCs getting all their money? Are mainstream banks exposed? Hedge
funds? Corporations? Retirement funds?

~~~
nostrademons
The numbers (in startups, at least) are much, much smaller than 2008. Total VC
funding was about $48B in 2014 [1]. By contrast, the subprime mortgage in 2007
was $1.3T [2]. The current student debt loan burden is about $1.2T [3].

I predict that the coming tech crunch will be a sideshow in much bigger chaos
caused by the effects of rising interest rates on newly-minted college grads.
We live in a bubble in Silicon Valley; across most of the country, youth
employment never really ticked upwards. If interest rates go up, I think we'd
start to see widespread non-payment of student loans and possible political
unrest. That's much scarier than a few startups going belly-up.

[1] [http://nvca.org/pressreleases/annual-venture-capital-
investm...](http://nvca.org/pressreleases/annual-venture-capital-investment-
tops-48-billion-2014-reaching-highest-level-decade-according-moneytree-
report/)

[2]
[https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Subpr...](https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Subprime_mortgage_market)

[3]
[http://www.forbes.com/sites/specialfeatures/2013/08/07/how-t...](http://www.forbes.com/sites/specialfeatures/2013/08/07/how-
the-college-debt-is-crippling-students-parents-and-the-economy/)

~~~
fivedogit
Upvote for the term "tech crunch"

------
capkutay
My question is what would be the inflection point for the bubble burst? Would
it be one quick event like a failed Uber or Dropbox IPO?

Or would it be something like higher interest rates drying out VC funds
leading to startups going out of business left and right?

~~~
netcan
Interesting question. The second one sounds more severe, competition for money
from different asset classes.

------
shogun21
Global collapse. We'll be reduced to different factions struggling to survive
in the wastelands.

~~~
Ezhik
The person with the strongest laptop will prevail.

I better buy more ThinkPads...

~~~
lambdaelite
That sound you hear is the laughter of Toughbook owners.

------
pen2l
A lot of talk has been going on about this, and a lot of comments start with a
few set of presumptions.

One presumption, usually left unexplained, is that there are a lot of
"unicorns" that will collapse.

I am most interested in classifying these unicorns, and speculating which will
fall and which won't.

Here's my list -- I want your thoughts on it.

1) Uber -- will not go down

2) Dropbox -- will go down

3) Airbnb -- will not go down, unless threat from regulation becomes stronger

4) Snapchat -- will go down

5) Twitter -- will go down

6) Facebook -- will suffer significantly

7) Square -- will go down

8) Apple will be entirely unscathed

9) Google will suffer, but be largely fine

10) Microsoft is suffering already. It will continue to suffer, but will not
go down.

~~~
lancewiggs
my 2c on that list. 1): It's questionable whether or not Uber has a network
effect that sustains it as a leader in any market. The taxi industry is
catching up, and so is regulation, and I suspect that some markets will become
very competitive. This is not a defendable monopoly.

2): Dropbox is under attack from free/cheaper equivalents but defending well.
It is still the easiest to use and have an incumbency advantage, but has made
a few too many missteps (photos) to be comfortable.

3): AirBnB is under attack from booking.com and the like, but is a pleasantly
strong business for now.

4), 5) and 6) all are fashion (or nightclub) businesses where the crowds
happen to be, and the more they try to monetise the more they upset the crowd.
Crowds can leave at any time.

7) Square face competition from Apple Pay and the like for payments, and
payments is where they make their money. Out of the USA payment systems are
far more advanced.

8) Judgement day will come for Apple when they successively fail to launch
things that have an edge on everyone else, and as with RIM the decline could
be fast. For now they are well ahead but my own pick is that Huawei will
become the giant to beat.

9) Google is fat and happy, but their core revenue base is advertising, and
when crashes arrive advertising falls.

10) Microsoft is resurgent, and I believe on the early steps of a long term
turnaround program. The switch to the cloud means we are less reliant on any
particular OS but Microsoft Office is dominant for business.

~~~
fivedogit
Smart analysis. I object to your classification of Twitter, though. I was
originally a Twitter skeptic, but the truth is, they've built a central hub
where Snoop Dogg, the Pope, POTUS and @pmarca all converse. Very powerful.
They need to do more, but they own more than a fad, IMO.

I especially agree on Apple.

What Microsoft has done recently is great. I hated them with the passion of a
thousand suns when I was in college, but Satya seems to get it. He knows that
if you put out a browser that causes devs around the globe to have to program
exceptions because it doesn't behave like the others, they will hate you for
it. (Doubly. Once for technical reasons and again for acting like a
monopolistic ass.) And what you gained from some niche technical benefit,
you've lost 1000x in goodwill and, ultimately, bad PR. I'm actually rooting
for them now. It's crazy.

------
sdjr
I propose we change the alleged "startup-SV-VC bubble" term to "cockroach"
because it just won't die. People have been predicting bubble for _years_.
Coincidentally, people have been predicting the decline of Tesla stock, and
when it drops 30 points they claim, "see!" Please.

[https://medium.com/@silicondowneyjr/bloat-not-
bubble-a90bb9c...](https://medium.com/@silicondowneyjr/bloat-not-
bubble-a90bb9cb461b)

------
netcan
I imagine that if the alleged bubble burst, VC funded startups and their
immediate environment would be where the most damage was/is. A lot of startups
would just fail. Employees would lose their jobs and options/shares would be
wiped out. Even otherwise healthy startups could suffer or fail from the mess.
If a company is worth $200m one day and $40m the next, all sorts of bad things
can happen even if they are profitable.

Beyond the immediate vicinity of VC backed startup land I don't think the
fallout would be very severe. VC funded startups are not really a very big
employers in the scheme of things. VC as an asset class isn't a big one
either. Since VC investments are expected to be high risk, most end user
investors allocate only a small portion of their portfolio to the class. It is
expected to be high risk and on the whole it is considered very irresponsible
to depend on its success. Even startup employees do not generally treat their
jobs as highly secure, so at least psychologically they are prepared to one
day find themselves looking elsewhere. They are also generally employable in
the much large technology fields that are not directly related to VC money.

For an analogy think of the hypothetical bitcoin bubble bursting. Some bitcoin
centric businesses would go bust. Some gamblers would too. But I imagine that
most people holding large amounts are aware of the risk, they haven't bet the
house on it.

I think the "systemic" impact would be minimal. The real dangerous bubbles are
asset classes like real estate, bonds, blue chip shares and those esoteric but
enormous "instruments" and securities. These are expected to be reliable and
safe so money that must not disappear goes into them. They are also much
bigger.

I guess you never really know unless it happens, but I doubt the kinds of
levers that make big bubbles so bad are present here. A lender
wouldn't/shouldn't be loaning out money to be invested in VC, so I don't think
you would have the kind of domino effects that make crashes spread.

If it was severe and scary enough with big name "startups" going under, tech
stock prices might dip. That might be a good time to buy. I can't see much of
a relevance of a VC crash to Google, FB or MSFT's medium term prospects.

EDIT: One more - Since VC is a "professionals only" class of investment, we
are not likely to see middle class people directly impacted. This means that
macro-demand shouldn't be effected much either, except directly by employees
losign their jobs and startups no longer consuming whatever they consume.

------
bwy
The real question is, "if we're in a bubble, how do we take advantage of
knowing it will pop?" (genuine question)

~~~
shogun21
Can you short sell a company that doesn't have a public offering?

~~~
uhwhat
Yes but you would have to make that deal with the private investor(s).

------
uhwhat
Recent trends in economics leads me to believe the accumulation of wealth and
capital from gains in productivity and technology is amassing into huge piles
of cash that want & need to invest in something, so now the question is what?

There are other more volatile economic "bubbles" out there to be concerned
about.

If you're assuming starting a business based on delivering over priced
telegrams or selling rolls of quarters at a 180% markup will lead you to your
"exit" than okay be afraid of "the tech bubble".

Start a real business that makes sense, and the bubble is irrelevant.

~~~
dogweather
Interesting points. Anyone know any counter-examples? Startups delivering real
value which were wiped out regardless?

~~~
flyinglizard
I can't think of any particulars right now, but my feeling is that many of
companies the 2000-era bubble would be sound and profitable today, they just
got to the market too early. It's very hard to judge an idea in isolation; the
key is how that idea is applied to the market under particular circumstances.

If a true bubble burst were to happen, it'd kill startups by percents, not by
merit. Some investors will keep money for their portfolio companies, others
will sit until the market hits bottom and they can get better deals. It'll
kill everything and everyone, not just the bad companies.

------
graycat
Likely the evidence for a bubble that would be risky for our economy is the
surprisingly large number of recent _unicorns_ , that is, private companies
who have a recent funding with a _post money_ evaluation of $1 billion or
more.

One reason for so many unicorns, that is, such valuable private companies, is
the reluctance of significant private companies to do an IPO. Reasons include
(A) having to try to please Wall Street that has a very limited view of real
progress for a company and a very short term focus and (B) the overhead of
Sarbanes-Oxley.

But I believe that you will find that a surprisingly large fraction of the
unicorn fundings are more like traditional private equity instead of venture
capital. So, for the unicorns, the high post money evaluation may be at high
risk (bubble bursting), but, due to the deal terms, the last investor is
relatively well protected and at only low risk.

That high post money evaluation was just something out in the ozone anyway, a
long way from that much in actual cash, so that, if such high evaluations
suddenly disappeared, that is, the bubble burst, then the effect on the
economy would be minimal.

So, why do these goofy late stage fundings and unicorns even exist? The
companies may want the cash from the equity funding and not want to attempt an
IPO, and the private equity investors see maybe an upside, if the bubble
doesn't burst first.

------
fsk
1\. Lots of unicorn corpses. They either get down rounds, fold completely, or
get bought for much less than their last round's valuation.

2\. It would be harder for new startups to raise money. The big losses in the
unicorns would then lead to smaller B/A/angel rounds.

3\. Lots of unemployed people who formerly worked at startups, scrambling to
get jobs and the handful of large survivors.

4\. With money drying up, it would be a good time for bootstrappers or people
who don't need much financing.

------
spir
Mark Cuban made some interesting remarks
[http://blogmaverick.com/2015/03/04/why-this-tech-bubble-
is-w...](http://blogmaverick.com/2015/03/04/why-this-tech-bubble-is-worse-
than-the-tech-bubble-of-2000/)

"If stock in a company is worth what somebody will pay for it, what is the
stock of a company worth when there is no place to sell it ?"

~~~
fivedogit
That sounds like a guy who regrets some investment decisions, wants to sell,
but can't.

------
hrshtr
I think bubble will not burst but it will start to deflate, when bunch of
companies with 1B+ evaluation fail to give the investors huge promised
returns. This will dry up seed funding and Series funding for startups.
Investors will loose their money and series of layoffs at startups. This may
impact the growth of big giants but nit sharply. Lastly, Silicon valley crazy
rental could be see decline too.

------
tmuir
I think the inherit nature of bubbles means that it's almost impossible to
accurately predict the fallout. Sure, there were investors that bet against
credit default swaps, but it was still a bet, or calculated risk.

If such predictions were easy to make, bubbles wouldn't occur, at least at the
scale of the dot com and housing bubbles.

~~~
gbog
What's easy to predict, though, is who will benefit from the burst: Chinese
big four will likely be the winners. (Protected on their back by the gov, they
also have the lucrative commerce in their hands, and they'll harvest all the
engineers from the failed start-ups.)

------
sloanmba
\- Huge bubble where startups valued at almost around $1trillion are not
regulated. \- They are not required to report anything to public. \-
Eventually, VC will need liquidity that may force these companies to go
public. \- Once public, they are required to show significant growth to
justify super high premium valuation. \- If few of the top unicorns fail to
show that growth, market may tank, VCs may loose money. \- VCs who lost money
may be more cautious in future but may also have hard time raising capital. \-
Many Unicorns do NOT have higher entry barriers or network effects. For
instance, why can't same driver serve users from Uber, Lyft & 10 other apps,
cheapest for customers & highest paying for driver - an arbitrage opportunity?
Or why can't someone list house on Expedia,Travelocity along with Airbnb?

------
burger_moon
If the tech/ anything bubble pops, what tech companies would be the best to
work for preceding this event? Which industries that employ tech workers would
be the best to work in preceding the bubble? This under the assumption that
getting a software dev job would become increasingly difficult with a rise in
unemployment in this sector.

I'm a junior developer, so if there became a huge oversupply of developers I
think it would be very hard for me to get a new job. This is actually
something that really worries me currently. I'm already having a hard time
finding a new job, if there was another economic crisis I feel like I would
have to leave the tech industry to get a job.

~~~
nostrademons
Junior developers do fine as long as they actually have coding skills and can
demonstrate their work with a portfolio. Make sure you work somewhere where
you can point to stuff you've shipped and you'll be fine. The folks who get
tossed out of the tech industry in a recession are those who should never have
been in it in the first place, i.e. the folks who heard it was easy money but
don't actually enjoy programming or building things.

------
Jayd2014
My Guesses are:

1- Facebook: Will go bust and be bought by a conglomerate (non IT Group or
Microsoft). They will be the "Lehmans Brothers" of the next crisis.

2- Dropbox: Likely to go bust. No diversification and a lot of competition.

3- Twitter: Will be hurt but can survive,due to appeal to
Marketers/News/..etc.

4- Google: Will likely drop a lot of products and concentrate on search and
self driving cars.

5- Apple: Will become the new Microsoft.

~~~
onedev
Terrible terrible guesses

------
dogweather
Has anyone written a good set of articles about the 1999/2000 tech bubble
bursting, and which businesses it affected?

Lots of smaller companies, like Redhat, were hit in their valuation, but made
it through.

------
kak9
Proliferation of SPVs. Retail will get in on it. Eventually will spread to non
AAA deals. Private market bust.

------
aburan28
When interest rates start going up later this year this bubble will pop

~~~
slater
[Citation needed]

~~~
toomuchtodo
I don't have a citation to backup GP/OP, but the school of thought is that
because interest rates are so low, capital is chasing increasingly risky
investments to get an "acceptable" return (which is $expected_return after any
taxes or inflation).

With interest rates rising, other asset classes will see returns rise,
reducing the attractiveness of startup/VC investing.

~~~
testrun
Not only that, but the US, Europe and Japan printed a lot of money that is
floating in the system (quantitative easing). If interest rates rise, it will
mop up a lot of that.

~~~
toomuchtodo
Strangely enough, even with trillions of dollars in QE in both the US and
Europe, GDP is stagnant (or retreating) and the EU still has negative interest
rates.

Welcome to the new normal.

------
michaelochurch
I doubt that it's going to be anything like 2008's financial market crash. VC-
funded startups just aren't that important. Housing prices and interest rates
affect everyone; VC is just a game for rich people playing with other peoples'
money by taking bets on young narcissists with big ideas.

So far, when VC flips its products on to the public markets, the markets react
fairly rationally and the bad companies tank. Look at Zynga. The market may be
overvaluing it still, but it's nothing like the 1990s. Public markets seem to
be recognizing shitty tech stocks as what they are. So, we're not at the 1999
level of bubble.

Furthermore, the 2001 crash didn't have a major effect on the economy
(although it was bad for the Bay Area, and for many engineers). It wasn't the
crash, or even 9/11, but the sluggish ("jobless") recovery in 2002-4 that made
the 2000s (except for people on Wall Street or in the slowly recovering
Valley) a shit decade.

So, let's assume that the VC bubble ends. Some people will get hurt. The
celebrity engineers who make $500,000 and aren't any good will get beefed.
Run-of-the-mill engineers, if they're any good, might drop from $140k to
$125k; not such a big deal. The ScrumDrone engineers will have a hard time
finding work. Unfortunately, this will also hurt self-taught (meaning "no
college degree") engineers even if they are good; the ones who are talented
are still in a position of low leverage because "everyone knows" (well,
employers know) they're more sensitive to a dry-up.

The short answer is that some people will take painful hits-- you're going to
have a lot of 25-year-olds who thought they were millionaires, find out that
they worked overtime for nothing-- but average people of average-or-better
talent will mostly be fine. Bay Area salaries for good engineers might go down
10 to 20 percent at worst.

The bad news: housing in San Francisco's not going to become more affordable.
First, the people who actually have money (not a half-million from options)
are already diversified and less exposed to dot-com/VC, and the foreign money-
launderers aren't exposed to it at all. Second, people hoard rather than sell
(a steep positive volume/price correlation) when the market "should" soften.
The stupid competitiveness around getting rentals (e.g. competitive open-
houses, people cutting checks for a whole year's rent) will go away, but rents
and prices will stay about where they are.

