

The New Tech Bubble - ireadzalot
http://www.economist.com/node/18681576
"Compared with the rest of corporate America, Silicon Valley feels like a boomtown. Valuations are once again soaring. In our leader, we point out the differences from the last tech bubble, but we still think that irrational exuberance has returned to the internet world."
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invertedlambda
I think it goes back to the learnings from the original tech bubble: companies
with a real business plan survive, those with a nebulous product don't make
it.

For example: Amazon was a rising star during the late-90s tech bubble, and
it's still around today. And it's very much a player in the tech space. How
many of us use AWS?

Google has a solid business platform and has definitely made it by all
measures.

Netflix is another example. Good product, has upset the industry, sky's the
limit type stuff.

Could all of these golden companies fail? Absolutely. For example, look at
Microsoft right now - they are still innovating in some spaces, but really
struggling in others. Will they go the way of IBM? (Hey, I hope so, but let's
not start dreaming now).

Then there's Facebook and Twitter - arguably the stars of the current tech
bubble. Are they worth what people say they are? Really depends on what
happens over the next few years. Both are definitely becoming platforms that
people do all kinds of interesting things on. But at the same time, people
could get tired of social networking. (That's my personal bias shining
through).

So...it's a bubble for some and not for others.

~~~
dreamdu5t
I don't think Amazon, Netflix, and Google are the companies people are
referring to when talking about this new bubble.

~~~
nostrademons
Amazon was definitely one of the companies people were referring to when
talking about the _last_ bubble, though.

It's hard to predict the future. A bunch of companies that people have thought
could never be worth their outlandish valuations turned out to be. And vice
versa.

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gfodor
I call bullshit. This article is heavy on speculation and light on (if not
absent of) actual analysis. Tell us, beyond valuations you disagree with, what
fundamentals are unsound here. Are businesses IPOing despite being
unprofitable? Are companies burning cash and garnering additional investment
despite no steps toward profitability? What, exactly, other than a _sneaking
suspicion_ that Facebook might not be worth it's valuation? Clearly some
people, the people buying Facebook stock, disagree with you. Why are you right
and they're wrong?

~~~
ikono
> "What, exactly, other than a sneaking suspicion that Facebook might not be
> worth it's valuation? Clearly some people, the people buying Facebook stock,
> disagree with you. Why are you right and they're wrong?"

It's not about anyone being right or wrong. The future is inherently
uncertain. Investing is about making a bet that will pay off on average. As
valuations go higher and higher, it becomes more and more likely that people
are only going to make money on an above average future. That's a bubble, and
the longer it takes for a below average future to come the bigger that bubble
will grow.

~~~
gfodor
You're not totally wrong, but this is a 'first-level' analysis that is devoid
of any real depth or understanding. I generally expect more of The Economist.
The point is to try to explain the world in a way that makes sense despite the
uncertainy, giving specific examples that _explain_ the reason for high
valuations and _why_ those valuations are unjustified.

~~~
ikono
You're taking the stance of investors are valuing Facebook and the like at X.
Prove that's wrong. I think in general if you're going to value companies at
significantly abnormal multiples of earnings. The burden of proof should fall
on the person assigning those multiples.

But I'll play along anyway. I'll use Facebook as an example. One of the
reasons for Facebook's lofty valuation is the very thin trading volumes.
People are buying/selling very small $ amounts of Facebook stock in a private
market at very high valuations. Imagine company X has one million shares of
stock outstanding and I sell 1 of them for $100. Do you think company X is
worth $100 million? If so I've got an endless supply of companies for you and
I'll even be silly enough to part with them for the bargain price of $50
million. One of us will be rich...

So I contend that the published valuations are somewhat meaningless. The
question then becomes what is a company like Facebook worth? Generally there
are three main factors that determine a companies value. Tangible assets (cash
in this case), earnings, and the value of retained capital. The first is easy
and relatively insignificant in this case. The second is very hard, the third
is just about impossible. My point is simply that high valuations relative to
earnings should imply that there is a very high probability of significant
growth in earnings. I think the people that believe in Facebook believe in
what it could become not what it is today. If that's true, then the true
profit engine is vaporware and it is therefore impossible to have enough
certainty in a sufficiently positive future to justify the earnings multiple.

Now one example doesn't prove the point but I do think there is enough
anecdotal evidence to justify thinking about the possibility of a bubble.

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ireadzalot
From the article: This time is indeed different, though not because the boom-
and-bust cycle has miraculously disappeared. It is different because the tech
bubble-in-the-making is forming largely out of sight in private markets and
has a global dimension that its predecessor lacked.

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maigret
This may be a private tech bubble though. To me it don't seems like tech
stocks are too inflated compared to the revenues we can see. Facebook may be
overvalued, the Skype buy was very expensive, VCs invest like crazy, but all
of that is private investment. Does anyone here see a risk for the stocks
also?

~~~
timr
Where do you think all the VC and angel money is coming from? Banks and
pension funds and investment firms are almost certainly funneling money into
these things, we just don't get to see it because it's being done on the
private market.

The very thing that makes everyone comfortable with this bubble (that it's
mainly "private" capital) is the scariest part. Last time, you could mostly
tell when grandma's retirement fund was betting the bank on social networks
for dogs. This time, it's all on the down-low.

~~~
ikono
It's really more about the amount of leverage and the total volume of money at
stake. I haven't seen much evidence of either, although that doesn't really
mean anything. But let's take Facebook as an example. It really seems like the
"valuation" is due to the tiny volumes of shares being traded.

In general it seems like VCs are throwing 10s of millions around fairly
recklessly. 10 million is a lot for most of us, but it's nothing in terms of
the US economy. If/when it starts turning into billions instead of millions we
could see trouble

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caudicus
This is the cover of this week's Economist, despite the fact they really only
have two other articles in it...one talking about the Skype purchase and
another talking about the increased investment of web technology companies in
both the US, Europe and China.

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GeoffreyHull
Bubbles require genuine belief of a large group of experts and leaders. They
need to be convinced that eyeball counts will rise forever, that real estate
will keep going, and that the growth potential of users is near infinite. They
will come up with lots of analysis to protect their viewpoints and their
belief will get more profound with every passing minute. I dont see that type
of blind naivete in today's tech community

~~~
ireadzalot
What do you say to the fact that Skype just sold for $8.5 billion when it's
income is only about $400 million? And there is Color that is valued at $100
million even though its product is in almost-beta? Anyone who has watched the
tech. industry for the past few years could notice that the way valuation of
tech. companies are going up, it is alarming and exude "exuberance".

(Figures mentioned above are from the original article).

~~~
rbranson
These are just potentially poor decisions made by people with lots of money.
Tech startups are inherently risky -- many more succeed than fail -- even if
they are well funded. It is a fundamentally different equation than starting a
bagel shop or a car wash.

~~~
olauzon
I assume you meant many more fail than succeed?

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rglover
I think a lot of the responses here call out some definite omissions in this
article (detailed analysis, the preparedness of certain companies, etc.). All
of these points are valid, however, I don't think the concept of another
bubble should be entirely dismissed. The thing to pay attention to does not
revolve around the major companies like Facebook. The focus, rather, should be
on the smaller companies that seem to get ridiculous valuations and
investments for seemingly cheap ideas. Yes, Angry Birds is great but millions
of dollars in investments? The bust will come from mindless investments like
these. People will get bored with this game or that app and any dev that can't
keep up will find themselves having to answer for insane investments that went
nowhere. Luckily, like some have said, we've learned from the past in regard
to bigger web firms, but until recently, "small business" didn't have a large
voice in the web. You love the bakery down the street, but are their cookies
worth millions? Probably not.

We'll see.

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ksolanki
There is a bubble of tech bubble articles. No?

Edit: What I mean here is that we seem to like to read about "the new tech
bubble". It still is largely a speculation, no matter what arguments are
presented. The present time _may_ , just may be a golden period for tech
innovation, rather than a bubble.

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frisco
The fact that "are we in a bubble?" is the question on everyone's mind is
highly telling.

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iamelgringo
Are we in a Bubble? Who cares?

Really. Who is investing in startups right now? Rich people who think they can
make more money investing in startups than they can investing in other
investment vehicles.

What happens if these rich people lose their money? Nothing. No bail outs. No
massive loss of income for "normal" citizens. Rich people get a little less
rich. Some rich people who put all their money into angel investing lose all
their money.

Who is getting funded? Teams of two and three engineers who have built a
product and have gotten some form of traction. Last published figures I've
read said that Angel List has gotten 300 startups funded this past year. How
much money are these startups getting? Anywhere from $50k to $1M.

300 startups * $1M = $300M in funding in angel capital this past year. The
National Venture Capital Association's numbers [1] states that Total VC in
2010 was $23B, which is still 1/5th of the VC that was spent in 1999, and is
in line with VC investment over the past 10 years.

$300M in angel funding is roughly 1.3% of the average VC funding per year over
the past 10 years.

What _is_ different this time around, is that there are hundreds of smaller
bets being placed, rather than dozens of huge bets.

Are all of these hundreds of startups going to have decent exits? No. Are a
number of them going to turn into successful businesses, perhaps.

But, what is going to happen is that hundreds of founders are getting an
amazing education on raising capital, starting a company, shipping product,
and trying to make money. What really excited me is what Silicon Valley and
the tech landscape is going to look like in 10 years. What this surge in angel
investment is doing is educating massive numbers of engineers in how to build
and ship product.

As far as I'm concerned that's a huge win for everyone, regardless of how many
exits there are this time around.

Is this a Bubble, really, who cares? Writers that need to sell magazines.

ref:

[1]
[http://www.nvca.org/index.php?option=com_content&view=ar...](http://www.nvca.org/index.php?option=com_content&view=article&id=78&Itemid=102)

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mbenjaminsmith
They're hedging. They even go as far as to say "you heard it here first". I'm
sure they would rather be in a position of being overly cautious than have
people lose faith because they didn't report on a coming bubble.

In terms of actual analysis, they're falling into the trap all other
journalists seem to be by just repeating the bubble rumors that are floating
around. You'd think Economist could come up with more substance for their
argument.

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dreamdu5t
If by "bubble" they mean companies that aren't profitable are being valued at
enormous amounts, and continue to garner investment even without any clear
revenue or exit strategy, then yes we are in a bubble.

The problem is the web industry considers investment to be revenue... in which
case you're never in a bubble because profit doesn't really matter. Success in
the web industry is simply getting someone to throw money at you.

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Spyro7
I have not really studied this issue in depth, but from what I can tell most
of the increasing investment activity that they are referring to is occuring
in the private investment world - not on stock markets.

With that said, it seems that it would be difficult to call this activity a
"bubble". "Bubble" in the popular nomenclature are typically used to refer to
developments that can have widespread consequences when they "pop" (Re: the
housing bubble, the credit derivative swap bubble, etc, etc).

There has been a lot of private investment activity in the tech world
recently, but I think that it would be fear mongering to refer to this
activity as a bubble. The Internet in general (and the web specifically) is
still a relatively recent development. It makes sense that you will see a lot
of investment activity in this area.

This same type of thing tends to happen whenever a major technological
advancement spurns rapid innovation (Re: the gilded age). It is merely
capitalism at work - not necessarily a bubble.

~~~
ikono
The real danger is that it's fairly localized to Silicon Valley. So it's
fairly likely that if this is or becomes a bubble it will be sort of contained
in a small area. As more money gets pored in, wages go up, rent/real estate
goes up, ...

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abbasmehdi
Tech bubble or not, judging companies based on how much finding they raise
alone is bad. Put profitably first and you shall survive any disaster. I don't
think we are in a bubble because people who invest usually consider profitably
over potential to flip to the next sucker. Investors I've spoken with seem to
be wanting in for the long haul.

