
Money Is Pouring into Tech Like It’s 1999, and That's Not Good - cyphersanctus
http://www.wired.com/2014/09/money-pouring-tech-like-1999and-thats-good/
======
netcan
An interesting twist in the current incarnation is this story is how big
"private" money is taking risks on the tech sector.

Overall, I don't really find this story convincing for a few of reasons,
though I suppose there is plenty of room for disagreement. (1)T he first boom
actually _did_ get a lot right. The PC-internet revolutions was intense and
did create a lot of new value. The mistake was treating it like a land grab
where all major players would be established by the year 2000. (2) Scale
_does_ matter when we are talking about bubbles.Smaller means safer. (3) There
is real revenue being generated by Google, Facebook and every reason to think
it will be generated by Uber too. (4) Private money doesn't (I hope) break the
economy in the same way that public money can. If VCs go bust there are
ramifications, but these markets are not that liquid. There aren't margin
calls going off and forcing fire sales. (5) War chests: The big boys and many
of the up-and-comers have nice big war chests. They are obviously concerned
about equity, but Facebook would be very hard to kill with a sharp decrease in
stock price. Options might need to give way to bonuses, but the Facebook is no
longer in the business of selling equity. They have plenty of cash. This goes
doubly for Google, MSFT, Apple & a surprising number of no-rush-to-IPO mega
startups like Uber , Airbnb, Dropbox Snapchat, etc. Their continued existence
is not dependent on the market for tech stock.

Bubbles are some sort of unstable financial complex that can be brought down
as soon as the equilibrium is broken. In 99' the money was ultimately coming
from IPOs and public markets. When that well dried, everything went bottom up.

The recent financial crash was bullet on financial instrument tautologies, a
system that created correlated risk. It could only continue to exist so long
as everyone could maintain that the risk was much smaller than it was.

Think of the companies in question. Most could continue to survive if
investors hid in a hole for two years, that's robust. Smaller, younger
startups would be in for hard times if investment stopped coming in, but 1,000
$10m (on paper) startups going under is a just 1,000 individual failures. This
is correlated in the sense that a shortage of cash would effect them all, but
it's not systemic in that their failure would extend far beyond the investors,
founders & employees that understand the risk.

~~~
7Figures2Commas
> Private money doesn't (I hope) break the economy in the same way that public
> money can. If VCs go bust there are ramifications, but these markets are not
> that liquid. There aren't margin calls going off and forcing fire sales.

Too many people trying to compare today's bubble to the first bubble are
making the mistake of assuming that it's being led by tech. It isn't.

The current "tech bubble" is just one of multiple bubbles being driven by an
even larger bubble in public equities. When the public equities bubble bursts,
Silicon Valley will this time be a victim, not the culprit. And there are
going to be lots of other victims as well.

> Smaller, younger startups would be in for hard times if investment stopped
> coming in, but 1,000 $10m (on paper) startups going under is a just 1,000
> individual failures. This is correlated in the sense that a shortage of cash
> would effect them all, but it's not systemic in that their failure would
> extend far beyond the investors, founders & employees that understand the
> risk.

How many people are employed by these startups? How would a glut of now-
unemployed startup workers affect wage trends? How many non-tech businesses in
the Bay Area are thriving on the tech funny money?

Companies like Google and Facebook aren't going anywhere, even if their stock
prices become heavily depressed for some time. And despite tech's prominence,
the Bay Area economy is still fairly diverse. But it's short-sighted to
believe that a significant decline in the number of funded startups would be
of minimal impact to anyone but investors, founders and employees.

~~~
avn2109
>> "The current "tech bubble" is just one of multiple bubbles being driven by
an even larger bubble in public equities..."

This is interesting. Could you elaborate on some of the other sub-bubbles? Not
being facetious, am really curious.

~~~
orbifold
I know nothing about finance but the Federal Reserve has provided new money at
almost no interest to banks for a fairly long period of time from ~2008
onwards (this was called quantitative easing). This essentially forced the EU
and countries like Switzerland to do the same, if they did not want their
currency to get too strong. It is not a stretch of imagination that this
fueled much of the current stock market boom, both Euro and Dollar have lost a
lot of value at roughly the same pace.

~~~
VonGuard
Yeah, the fed loans money to banks at, essentially, zero interest, and the
banks then use it to invest in the stock market, or some such. They make
money, because the market isat all-time highs. They pay back the fed, and keep
their profits.

All the major firms do this. It's nuts, but our government literally lends
free money to investors on Wall Street so they can make millions of dollars on
trades.

Of course, this all comes tumbling down when the markets are in bad shape.
And, unlike most people in this thread, I fully expect any and all bubbles to
burst due to some outside influence: Ebola, 9/11, war, etc. Something big
happens to scare the markets, and the big party here in the Valley is over.
Who know when that will happen, but it feels like the next year or so will be
the time frame, if my gut is any indication.

Burn that capital while you can, folks!

------
ep103
Theory: Wallstreet has limited other domestic outlets for their investment
money since the 2008 crash, and is therefore investing heavily in tech. This
will continue until either 1) more sectors of the economy recover present new
and/or better investment opportunities or 2) a crash occurs. However, in the
case of #2, which everyone fears, unless the conditions change and wall street
gets a new location to place their money, tech will still be one of the best
domestic investment opportunities, and we'll see a new climb in spending after
said crash.

That's my 2 cent theory, I'd love to hear some discussion on it.

~~~
howeyc
My theory is similar. We are in a "rise-all-boats" bull run thanks to the
injection of cash into the economy from the Fed. The few "Buffet-like" value
investment managers are saying there isn't much margin-of-safety in valuations
any more. Also, other than tech, other sectors of the economy are "easy" to
price. We pretty much know the growth of a utility company, real estate
company, etc is going to be. They can only grow so fast, and the market guess
within certain tolerances what it will be.

On the other hand, tech is one of those fairy land sectors that is not priced
on any reasonable metric (profits), but instead on hopes and dreams. Until all
tech becomes priced based on profits (like Apple, IBM, Google, etc) it will
continue to see large investments seeking outlandish returns. Right now it's
an area where getting market share from others can happen quickly.

It's pretty hard to grab market share from a utility (usually regulated
monopoly) or a rent seeker (you need to buy the asset to rent it out
yourself). Same goes for other sectors, only so many cars can be bought every
year for example.

Snagging eyeballs can happen quickly, can be fleeting (myspace) or more long-
lasting (facebook). Hence the WhatsApp stuff (OMG, so many eyeballs there,
just like facebook!!!).

~~~
dllthomas
_" or a rent seeker (you need to buy the asset to rent it out yourself)"_

"Rent seeking" is a different thing than "renting out access to an asset".

[http://en.wikipedia.org/wiki/Rent-seeking](http://en.wikipedia.org/wiki/Rent-
seeking)

------
zxcvvcxz
On a macro level, a likely hypothesis for this trend is that there is nothing
better to invest in than tech. But tech isn't moving fast enough (value is
hard to create, not in a gold rush period), so we try to translate money into
growth much more. Because otherwise that money's just sitting around!

In an ideal world that money might somehow be invested in long-term societal
growth than _can_ yield high tech growth in the future, like education, or
maybe investing in individuals for some long-term return on their income. More
R&D at all levels. Just random ideas. Point is, it'd be nice to see some
creative thinking with investment money rather than see it pumped into
companies trying to sabotage each other's ride sharing apps, or out-sell their
fundamentally identical crm services, etc.

~~~
jpmattia
> _On a macro level, a likely hypothesis for this trend is that there is
> nothing better to invest in than tech._

I think folks are missing a bigger part of the macro picture: It is not just
tech. Low interest rates and easy monetary policy have inflated many types of
assets.

By way of example, this is currently headlining on Yahoo Finance:
[http://finance.yahoo.com/news/some-powerful-voices-add-to-
fe...](http://finance.yahoo.com/news/some-powerful-voices-add-to-fears-of-a-
stock-market-bubble-153542781.html)

------
cwal37
I actually threw together some very lazy (just trying to do a little something
every day) graphs on VC yesterday[1] if you want to see the dot-com bubble in
terms of VC disbursements and number of deals. Both the old bubble and the
recession are extremely visible. It'll be interesting to see what these graphs
look like in a couple years when reporting catches up to 2013-2014.

[1] [http://btus.us/venture-capital-in-the-united-
states-1998-201...](http://btus.us/venture-capital-in-the-united-
states-1998-2012/)

------
calgaryeng
I have a hard time even reading any of these pieces where a VC is complaining
about high burn rates / valuations all while continuing to invest.

"Because my competition will continue to invest" is not a good reason.

You don't see Warren Buffet investing at valuations he believes are untenable,
just because the market happens to be up.

~~~
serve_yay
Sure it is. VCs aren't the money guys, they just invest the funds of the money
guys. Not investing really isn't an option for them.

~~~
lingben
VC's are paid to invest intelligently and get a return.

But they have a conflict of interest because unless they invest, they don't
get paid.

~~~
jamiesonbecker
That's for the carry. If the market crashes and their investments fail, their
carry income will be zero anyway.

VC's do get paid even if they don't invest via their management fee. It's
certainly enough for them to live comfortably on while investing the fund over
a ten year cycle.

But, to your point, there's another dynamic here: if they don't invest (and
thus have no carry), they will be less likely to be able to raise future
funds.

Just saying that it's not as simple as saying there's a conflict of interest.
VC's do have a fiduciary duty to their investors and their income is tied, at
least in part, to their ability to make money. Even if they lose all of the
money, there is no direct cost except for possibly a quite substantial lost of
reputation.

The risk to entrepreneurs is not symmetrical. No guaranteed salary is
available to entrepreneurs. Even if a portfolio company fails, VC's still
receive a management fee.

This system works surprisingly well, except when VC's are stupid or screw
entrepreneurs. It's actually pretty amazing that it works at all, since really
the middlemen hold most of the power as the distributors, but not originators,
of the capital.

------
funcSoulBrother
I've discussed this at length with investors, entrepreneurs, and upper level
management at large tech service agencies, and I'm not convinced that there is
necessarily a bubble this time around. Accounting for the massive increase in
bandwidth, CPU, GPU, smartphone ownership, software development practices, AI
logic, and reliance on data compared to that of 1999, it's really a flawed
model to draw 1:1 parallels in my opinion.

While there will be a shift at some point away from software/web entities and
into manufacturing (to catch up meatspace to webspace), it will be these tech
entities that will largely lead the charge, to enhance their own offerings.
The example put forth in the article is as flawed as the logic it purports to
criticize: "SAYING WE’RE NOT IN A BUBBLE BECAUSE IT’S NOT AS HIGH AS 1999 IS
LIKE SAYING THAT KIM-JONG-UN IS NOT EVIL BECAUSE HE’S NOT HITLER."

Compared to 1999, the value drawn from these companies inside the "bubble"
doesn't even remotely exist within the same qualitative and associative
parameters.

------
serve_yay
If you think too much money is bad, wait till you see what not enough money
looks like.

------
mgberlin
Looking strictly at numbers in this situation is a bit like forgetting to
account the inflation difference between 1800 and 2014. Of course the amount
of money being invested in tech has grown enormously; in 1999 everyone didn't
walk around with the internet in their pocket.

~~~
potatolicious
And now everyone is walking around with the internet in their pocket, yet
revenue seems elusive to a lot of very highly-valued companies.

Lack of potential users is no longer an excuse, but we're still throwing
billions at companies with no revenue model, and billions at companies with a
revenue model but unable to get cashflow positive to save their lives.

------
at-fates-hands
>>>>In the same way, Gurley said, too much cash in the startup economy means
weaker companies can survive without having to generate cash for themselves.

Isn't this how business should work? Weaker companies lose and the stronger
companies win? Those with good business plans, good marketing strategies and a
solid product should be able to weather a crash.

Also, those companies that actively plan for a crash usually do much better.
Saving money, having a plan B in place and assuming its going to happen is a
lot smarter than simply believing we're not in some kind of bubble and then
losing everything when the market eventually corrects itself.

------
calinet6
In the summary, “At some point you have to build a real business, generate
real profits, sustain the company without the largess of investor’s capital,”
Wilson said, “and start producing value the old fashioned way.”

I do believe a significantly higher proportion of companies today are doing
exactly that, and are quite focused on it, whereas they were not in 1999.
That's a general and very un-scientific argument for why this bubble (which it
still surely is) is not as bad.

Sure, some companies have shaky monetization strategies; but you just can't
say companies like Uber are not producing value (rumors of ~$10 _billion_
gross revenue).

------
bowlofpetunias
People seem to have completely forgotten how completely nonsensical (and often
completely clueless about tech, the internet and business) tech start-ups were
in 1999 compared to now.

The valuations and burn rate may be too high and up for a big correction, but
most of the start-ups these days at least have some logic behind it by which
they may be seen as potential hits. 1999 was largely mass hysteria with no
foundation in reality whatsoever.

------
idlewords
It's not a bubble, but a blister. Lance it and it fills back up again.

------
erroneousfunk
Although the economy suffered a hit, does anyone remember what the job market
was like for programmers after the boom? If this article is right (which I'm
not convinced of), even to a smaller extent -- how do you think that will
impact the current job market?

------
mililani
Has anyone here personally lived, worked, and saw the dot com boom and bust in
Silicon Valley? More so, do you happen to currently live and work here still?

I have, and although I don't think the current tech boom is as bubbly as the
late 90's, I do see a lot of similarities in the area. Traffic, though, is no
where near as bad as it was back then. But, it's getting there. However,
construction is at an all time boom. I have never seen more cranes nor
construction in SF ever. I think we are back to heady times, and I would be
really cautious as an investor in the next 2 years.

------
squozzer
It's easy to chalk this up to herd behavior but what's scarier is the real
possibility that solid investment choices don't really exist in America
anymore.

------
felix
After trying to figure out if he was actually going to back up his argument
anywhere - at some point I realized he was essentially saying that Uber is not
different than Pets.com and stopped caring about the article.

------
troebr
It's at least the third article that spun off from the WSJ article (if not
even an older article/interview).

~~~
ep103
was there a HN submission of that article?

