
Welcome to the Dot Com Bubble 2.0 - jkush
http://www.codinghorror.com/blog/archives/000843.html
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danteembermage
It was actually very easy to justify the valuations of many (but not all)
internet companies in the first "bubble" although not by naive net present
value calculations. The key is to model scaling up as a call option on a
future larger version of the firm; you only get the larger version if your
company ends up valuable. With a standard checking account type model the only
ways to increase value are to increase cash flows or decrease your discount
rate, but with an option other avenues become available.

For example, the lower the strike price of the option, the more valuable. So
Webvan = enormous initial outlay = high strike price = bad, whereas two
college kids in the Yscraper = low strike = good. Another way to increase the
value of an option, and I think this is the critical one for the first boom,
is to increase the uncertainty of the value of the underlying asset i.e. the
hypothetical larger version of the company. In the boom, that uncertainty was
huge, we will all be buying pet food online next year, will Google manage all
commerce of any kind in five, etc.

So, interestingly, the very fact the wisdom of the crowd had no clue what Web
1.0 business should be worth may have driven the high valuations in the first
place.

In the second boom it appears 1. Strikes are lower, 2. Uncertainty is lower =
affect on valuations is ambiguous. That's basically the conclusion of article
as well as I see it, just approached from a different viewpoint.

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Tichy
Maybe it wasn't so much the business ideas as the greed that made the bubble
burst. Most bubblers just wasted so much money on consultants etc., which
really wasn't necessary. Since I heard this time around people are more
careful, maybe this bubble won't burst.

Besides, I remember Ray Kurzweill writing that the Bubble wasn't really a
bubble. The companies that really created value created so much value that
they compensated for the ones that went bankrupt.

~~~
jey
_Besides, I remember Ray Kurzweill_ [sic] _writing that the Bubble wasn't
really a bubble. The companies that really created value created so much value
that they compensated for the ones that went bankrupt._

Sure, overall the whole Internet thing has created a lot of actual value, and
this is evidenced by the fact that the recession that followed was pretty
mild. But it's still true that it was a bubble in the sense that companies
were being invested in with little to no actual value, with unworkable
business schemes, and a "hemorrhage money now, make billions later!"
mentality. The perception was that the Internet was a money-generating
panacea, all you had to do was open a site with a .com suffix, like
RoofShingles2U.com, and you'd automatically put all roofing salesmen out of
business and corner the roof shingle market.

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ido
I love this quote from one of the comments:

 _When life gives you bubbles - take a bubble bath_

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jsmcgd
A bubble can only be identified definitively in hindsight i.e. after it has
burst. If it doesn't burst then its just industry growth.

I think the lessons were learnt the first time around and because the stakes
are now comparatively very low the chances we are now currently in a bubble
seem remote.

~~~
mojuba
Still, there was one clear and strong sign of a bubble before it collapsed:
most public dot-coms gave zero dividends, or actually a tiny symbolic sum
close to zero. That was a signal for any smart investor to make money _now_
and run away.

~~~
nostrademons
More to the point, most public dot-coms had zero _earnings_ , which is even
more of a signal for the smart investor to take the money and run. Over the
long run, stock prices track earnings. Zero earnings = zero stock price.

~~~
mojuba
Not exactly. Dividends is what attracts investors (well, real and smart
investors), while stock prices is a measure of people's desire to have shares,
as well as their sympathy towards that company.

In other words, stock price is a matter of auction, while dividends is a
better indicator of whether your company can make money or not.

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mojuba
This second bubble was made possible by better web programming tools and
languages -- everyone becomes a PHP/MySQL programmer nowadays. These tools
weren't that affordable in 1990's.

Technology made many things easier, like copying books and music, automating
everyone's tasks, etc. But it also made programming itself a lot easier.
Programming improves everyone's lives and it improves itself too. So bubbles
are inevitable (as well as inevitable are some oscillations).

~~~
omouse
_everyone becomes a PHP/MySQL programmer nowadays. These tools weren't that
affordable in 1990's._

They're _free_!!! And they're widely available now which is why everyone
becomes a PHP/MySQL programmer.

~~~
mojuba
Sorry, I didn't mean "affordable" exactly in terms of money. The tools became
much easier to use, which means a better learning curve, which means saving
programmer's time, which means money.

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jkush
From the blog post:

Seven years later, we're now clearly in the throes of another dot-com bubble.
You might argue that the new bubble has been in effect since mid-2006, but the
signs are absolutely unmistakable now. The job market for software developers
is every bit as hyper-competitive as it was in 1999. The idea that you can
found a company on the internet-- and make money-- is taken seriously now.
There's a new one every week.

~~~
sabat
... and this describes a bubble, how? This describes a boom.

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create_account
Shh... don't tell all the people applying to YC!

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mojuba
After all, the guy coined a new term - Bubble 2.0, and I liked it very much.

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sabat
I doubt that the guy who wrote this understands what "bubble" means. I think
he means "boom", and booms are not fragile -- not like bubbles.

Truth is, this guy needs to read PG's essays.

~~~
mojuba
That first bubble was a "boom" until it bursted.

And what exactly he's supposed to learn from PG's essays?

~~~
sabat
nostrademons gave a fine answer to this.

The fine point here is: there is a difference between a boom and a bubble.
Boom == increase in activity supported by actual innovation. Bubble ==
increase in activity based on marketing fluff or other unsustainable models.

PG talks quite a lot about this kind of thing; in particular, he points out
that a boom can sustain for as long as there is innovation (wealth-creation)
to support it, and that there is no reason the economy can't support, say,
1000 people working on startups rather than 1000 people working for IBM.

~~~
mojuba
Ok, isn't Web 2.0 a similar marketing fluff? I understand with all
similarities it's not the same. I'm sure it is much better now, but add one
more new factor, like the failure of Windows Vista for example, and you may
have that critical mass for a new collapse.

~~~
sabat
"add one more new factor, like the failure of Windows Vista for example, and
you may have that critical mass for a new collapse"

Forgive me, but I don't see the connection. How would the failure of Windows
Vista do anything but _help_ applications that run on the web? I can imagine
some large things that could hurt this boom (economic collapse, maybe), but
nothing small.

Web 2.0 has a lot of hype right now, but that doesn't make it marketing fluff.
There is real substance here (and real profits, real innovation, and real
users).

In contrast: here is a quick story about a company that I interviewed with in
1998. I don't remember the name; they were located South of Market in a really
nice loft with lots of brick, glass, and chrome. Free lunch every day, free
beverages, lots of perks. The business model: we are going to get your
website's customers to fill out surveys. You are going to pay us for this. We
will get the customers to fill out surveys by rewarding them with frequent-
flier miles. I remember three things about this company, years later: how nice
their loft was, how stupid and convoluted their business model was, and how
arrogant they seemed to be about it. They acted like they were already a
success.

In contrast, btw, the startup I did join was operating out of a cluttered
office in Palo Alto that they'd got a really good deal on. Junk was
everywhere, and the Founder/CEO asked me if I minded. I told him, "hey, it
looks like a real startup." That company is still in business today. Frequent-
Flier-Miles-for-Surveys, Inc: not so much.

~~~
mojuba
Causes of some effect shouldn't necessarily be related, I was talking only
about a critical mass, when causes add up.

I understand what you are saying otherwise.

