
The CEO of a $1 billion 'unicorn' startup admits we're in a bubble - lladnar
http://www.businessinsider.com/1-billion-unicorn-ceo-yes-its-a-tech-bubble-2015-6
======
ChuckMcM
In my opinion the bubbleness will be reflected when the music stops. Back when
the dot com bubble burst, the thing I found amazing was that people who had
been customers just a month before, vanished. Not into chapter 11
(reorginizational) bankruptcy, but chapter 7 (liquidation). I vividly recall
showing up for a meeting with a customer's VP of sales at their fancy downtown
San Francisco office and getting off at the elevator to an empty floor with a
broker taking pictures to put it on the market. From the previous wednesday,
"Oh sure, lets talk monday." to Monday's "The previous tenant isn't here
anymore." was really startling to me. Almost like the movie trope where the
shadowy agency removes its front company over night.

For those companies, it was the fact that they were "pre-revenue" and so the
only way to keep the lights on was to raise money. And right up until every
investor said "No" and they couldn't make payroll with the money left in the
bank, they operated like a company, and then they weren't, For companies these
days that do have revenue, they basically have to try to shrink into a
profitable place, which is keep as much of the revenue as possible with the
fewest possible people / computers / real estate etc. Then they have a shot of
surviving. But contracts like leases you can't get out of, can bite you and
force you to go into Chapter 11 briefly to renegotiate those contracts.

What is unique I think to tech bubbles though is that the developers are often
fine when the bubble bursts, they just go to companies that are built on
better financials, its the executives that pay the price and have a harder
time finding a new job.

~~~
mathattack
_What is unique I think to tech bubbles though is that the developers are
often fine when the bubble bursts, they just go to companies that are built on
better financials, its the executives that pay the price and have a harder
time finding a new job._

This is a rare form of corporate justice, since it's the execs responsible for
building a business around a lack of business. :-)

~~~
mcguire
Don't put too much faith into it. When the bubbles burst, there are always
more developers than chairs at other companies.

~~~
ChuckMcM
Back to an earlier conversation here on HN at the time I didn't know any
degreed developers who couldn't find work in the Bay Area. Yes, there was a
surplus which held down wages, but part of that was mitigated by the fact that
a lot of people with H1b visas ended up having to leave. It did put a stop to
the folks with 2 years of experience out of college demanding "Chief
Architect" type titles/roles.

If this is a bubble (and I share the feeling that it is) when it pops we'll
all get to add "I was there when ..." to our lexicon of stories. It is a
unique time/situation so be especially observant of things going on around you
to get your own sense of how these things play out. The dot com bubble/crash
gave me a much better sense of business value versus business flash, and a
better personal take on the difference between being wealthy and being rich.

------
swang
2010: Sorry, But This "Tech Bubble 2.0" Talk Is Ridiculous
[http://www.businessinsider.com/one-big-reason-were-not-in-
te...](http://www.businessinsider.com/one-big-reason-were-not-in-tech-
bubble-20-2010-12)

2011: 11 Crazy Signs This Really Is A Tech "Bubble"
[http://www.businessinsider.com/signs-of-tech-
bubble-2011-8](http://www.businessinsider.com/signs-of-tech-bubble-2011-8)

2012: A Non-Tech Person's Guide To The Tech Bubble—And Why There ISN'T A Tech
Bubble [http://www.businessinsider.com/why-there-is-no-tech-
bubble-2...](http://www.businessinsider.com/why-there-is-no-tech-
bubble-2012-5)

2013: Here's The Evidence That The Tech Sector Is In A Massive Bubble
[http://www.businessinsider.com/evidence-that-tech-sector-
is-...](http://www.businessinsider.com/evidence-that-tech-sector-is-in-a-
bubble-2013-11)

2014: Here's The Evidence That The Tech Bubble Is About To Burst
[http://www.businessinsider.com/evidence-that-tech-bubble-
is-...](http://www.businessinsider.com/evidence-that-tech-bubble-is-at-a-
peak-2014-10)

Have we reached peak, "Tech Bubble" talk yet?

PS. those last 2 articles were written by the same person basically
regurgitating the same talking points, but just 1 year later.

~~~
akshatpradhan
All the URLs come from Business Insider. That's kind of like John Stewart's
point how the News Media says year after year that this is the worst Allergy
Season ever. Its the worst allergy season every year no matter what because
pollen count increases every year no matter what.

~~~
TheBeardKing
Why do pollen counts increase every year? Global temperatures don't rise every
year.

~~~
dragonwriter
If the rising pollen counts are part of a process that is driven by the
overall global temperature trend but which is relatively insensitive to annual
variation around that trend, such that the output is smoothed compared to the
input, that would produce the pollen counts rising every year with a rising
global temperature trend, even if global temperatures don't rise every year.

One particular reason this might be the case is if the process driving the
increased pollen count is a reaction to global temperature (or some other more
direct product of global temperature) that moves to slowly compared to the
average rate of global temperature change to ever reach an equilibrium point
with the current global temperature, so that its always trailing well below
what it would be at the current global temperature if that temperature were a
long-term sustained average.

~~~
akshatpradhan
Could you ELI5?

------
kittenfluff
> I had drinks with one of the $1 billion "unicorn" CEOs last night, in a
> trendy Noho bar in London.

Where the hell is "Noho"? Is this some ridiculous attempt to Americanize
London by trying to rename parts of it after bits of New York?

If the author means the area north of Soho, I am happy to point him in the
direction of any map of London, where he will see that area labeled
"Fitzrovia".

Also, who points out that they were in a 'trendy' bar without covering the
word 'trendy' in a fetid, glistening layer of sarcasm? Business Insider
journalists, I guess?

~~~
dragonwriter
> Is this some ridiculous attempt to Americanize London by trying to rename
> parts of it after bits of New York and San Francisco?

AFAICT, SF doesn't have any role at all in the source of names, but otherwise,
yes [0]. Of course, lots of the place name in the continental US (and a number
of other places) are a result of the same kind of thing in reverse centering
around renaming every piece of the continent after parts of Britain, and
particularly England, so turn about is fair play.

[0] [http://www.bbc.com/news/uk-england-
london-11305340](http://www.bbc.com/news/uk-england-london-11305340)

~~~
kittenfluff
Well, I'm glad that Londoners have collectively decided to tell the rebranders
where to stick it. I've lived in London for ten years and have never heard
someone refer to "Midtown" or "Noho". Urgh.

------
austenallred
So many of these articles (and CEOs) fail to take portfolio theory into
account.

Your chances of success are still very small. Almost infinitesimally so, and
your valuation doesn't change that.A lot of companies will fail. VCs hope that
the ones that are successful are successful in a big enough way to make up for
all of the losses.

But the fact that a bunch of "billion dollar" companies are going to go belly
up doesn't mean that everyone's acting irrationally. They're just going to
subsidize the failure of the many with the success of the few.

A bubble bursting happens if on average the investors lose so badly that their
LPs start to put money into something other than startups. Not if some
"unicorns" fail.

And by the way, there are a lot more variables than even the success of the
startups. Interest rates, success of other types of investments, etc. probably
play more of a role in startup valuations than the success of most startups.
Right now interest rates are essentially zero, and as a result people are
throwing money at almost anything that has a vague promise of a return.

That being said, the entire VC slice of the economy is laughably small
compared to other aspects. It's basically rounding error.

------
clarky07
My question isn't is it a bubble or not, the question is what would the
effects be this time around?

Most people seem to agree the bubble (if it exists) is in privately held
venture backed startup companies. Does the popping of that bubble have
significant ramifications across the economy as a whole?

1\. Last time they were all public companies, including the big ones like
intel,msft, being wildly overvalued. Everyone lost money, not just VC's

2\. It will certainly be harder to do a startup, but I suspect all these
engineers won't be unemployed. They will go and work for AppGoogBook.
AppGoogBook will welcome them with open arms.

To recap, at least I think/hope, VC's and founders are the only one's losing
money compared to everyone who might be invested in S&P 500 (read everyone)
and there shouldn't be any kind of major unemployment causing extra problems

Is this a reasonable view?

~~~
rayiner
I don't think it's a reasonable view. Leaving aside the question of whether
we're in a bubble or not, if a bubble existed and burst it would have a major
impact at least on the bay area economy as a whole.

1) What makes you think there is room at AppGoogBook for those unemployed
startup engineers? If the bubble bursts, it'll be because of a reality-check
in the growth potential for consumer technology and advertising. AppGoogBook
are chasing a lot of those same areas.

2) A lot of service industries in the bay area are being propped up by the
software industry. All those new restaurants popping up in SF--how much of
their revenues comes from VCs and software engineers whose salaries are paid
by VCs?

3) Real estate values and rents in the bay area will plummet of there is a
readjustment in the technology sector.

~~~
clarky07
1\. "bay area" is not in fact "everyone in america/world" hence, much less
bad.

2\. I do not think that Apple, Google, and Facebook are significantly
competing against many of these startups. Facebook maybe to an extent, by not
Apple and Google. None of them are major phone manufacturers or search
engines. The only reason a bubble bursting is a problem is for companies
without revenue relying solely on VC money to run. Apple is not in fact
relying on VC money to run. Apple alone can afford to employ every startup
worked in SF (not that they would, but they could)

>3) Real estate values and rents in the bay area will plummet of there is a
readjustment in the technology sector.

I can't imagine that as being anything but good news long term. certainly sad
for those owners now though, i agree. Yet, still not everyone in america.

------
jasondc
Wait until we have the first 1 person startup valued at $1 billion (it is only
a matter of time).

I don't think this is from a bubble, but how new technology can let companies
grow very quickly (AWS for hosting, social networks for word of mouth, etc.)

~~~
brianbreslin
what is the smallest billion $ startup at time of sale? Instagram?

~~~
beat
WhatsApp, probably.

~~~
basch
$22 billion / 55 employees SO $.35 billion / employee

------
cheriot
So everyone agrees that the tech market is overvalued, but there's a pointless
semantic argument over calling it a "bubble"? There's always going to be a
downturn coming and it will always take some companies down with it. That's
why it's called a business cycle.

------
misterbwong
The one thing that's telling me it isn't a bubble is the sheer number of
people calling it a bubble.

It seems the majority of people, inside and out of tech, see it as a bubble.
This is what makes me think that it won't "pop" but instead deflate slowly and
painfully.

~~~
zzalpha
Funny, people said the same thing leading into 2000/2001... past is indeed
prologue when it comes to irrational exuberance.

Which is one of the main points of the article... many in the tech industry
(and many here on HN) are too young to remember what a tech bubble looks like,
or how painful it is when it pops...

------
mseebach
> _Sure, he says, Uber is a great business and a great company. But $41
> billion? Now? Maybe in a few years time._

If that's the best evidence you can come up with, it's not a bubble, it's an
overvalued market at best. Uber's valuation collapsing even to, say, 15B, is
not a bubble popping in any meaningful sense, and nobody can deny that there's
a business there.

In 2000, that we according to this mysterious CEO can't remember, companies
with barely any customers, next to no revenue, massive deficits and not even a
coherent business plan achieved billion-dollar valuations.

~~~
mason55
> _But $41 billion? Now? Maybe in a few years time._

Here's the other thing. If you're investing in a startup you're not putting
your money in based on some current metric like 3x booked ARR and saying you
expect it to throw off enough to cover your investment. The whole idea is that
you think it can grow into the valuation you're putting your money in at,
that's where the risk is.

If the market believes that Uber is going to grow into a $41B company then
that's what it's going to get priced at right now, even if they're not
currently "worth" that much based on some present value formula.

It's the same way that product announcements don't generally move stock values
- those products were already priced in.

------
paulhodge
In order for it to be a "bubble", the collapse needs to be severe enough that
it has a downward momentum. Enough so that even companies with good business
models are affected & become undervalued.

I don't see that happening. There are lots of companies with strong business
models (Google/Apple/Amazon/Etc) which will be fine if all the revenueless
startups suddenly go away. They'll probably be happy they get to hire up all
the newly unemployed talent.

Remember.. just because a downward correction is coming, doesn't mean it's a
bubble.

~~~
pyre
People are more likely to refer to it as a bubble because of the 2000 "Dot Com
Bubble." While 2008 was a "housing bubble" most people just refer to it as the
2008 recession. People are just most apt to draw comparisons between the tech
industry now and the tech industry in 1998-2000, so referring to it as a
bubble happens.

------
cylinder
Why do people keep making the point that in this boom, tech startups actually
have revenue? It doesn't mean anything if the company grosses $1 million or
$0. What matters is the _valuations._ Even taking into account their revenues
(in some rare cases, profits), the companies are wildly valued and investors
are making extremely ambitious and optimistic growth assumptions.

~~~
taki1
If interest rates are at 7% (savings account returns you 7% annualy) who will
invest in risky start-ups?

If you can just go to a bank branch deposit cash and get back 7% -- are you
going to go and invest in Uber instead? Really? Because it has "great
valuation" ?

~~~
austenallred
> If interest rates are at 7% (savings account returns you 7% annually) who
> will invest in risky start-ups?

Well, they're not. Interest rates are so extremely low right now that they
don't even keep up with inflation. In several banks and several countries, the
interest rate is actually _less than_ zero. Or, in other words, banks charge
you to store your money for you.

Given that, is investing in technology really that bad of an idea? You have to
put your money somewhere.

VCs are mostly funded by large stashes of money - some of it among the oldest
and most secure money in the world - called limited partners (LPs). Think
endowment funds, that type of thing. Those funds will diversify their
investments across multiple aspects of the economy. For simplicity sake, we'll
say 50% real estate, 40% stock/bonds, and 10% into VC funds. VCs take a small
chunk, and invest the rest in tech companies.

In that way, some of the most institutionalized money in the world will, yes,
be invested in Uber. Really.

~~~
taki1
You get it backwards.

austenallred 1 day ago | parent

>> If interest rates are at 7% (savings account returns you 7% annually) who
will invest in risky start-ups?

> Well, they're not.

Well, in 2000-2006 house prices weren't going down. Wait a sec! In 1800-2006
house prices in the US weren't going down. Sure thing, do nothing but invest
in housing in the US in 2006! I love that type of logic.

Interest rates can change very soon. The interest rates will go up. Sooner
than many think.

>Interest rates are so extremely low right now that they don't even keep up
with inflation.

If you use the same formula to calculate inflation that was used in Reagan
times we have had inflation in 5-10% year-to-year basis for the past few years
now.

> In several banks and several countries, the interest rate is actually less
> than zero. Or, in other words, banks charge you to store your money for you.

Real interest rates are in negative territory: i.e. you can borrow at lower
rate than the rate of inflation. That's _the only_ logical reason behind
investors buying into treasuries or swiss debt with negative return: because
investors understand that we currently have real interest rates that are
negative vs. cnbc and government propaganda of low inflation. The only reason
they invest in these is because they know we live in high inflation times. In
times of high inflation (like nowadays) it is extremely hard to find
investment that beats inflation, so investors tend to invest in "anything",
they just don't want cash. Cash is toxic. Investors are afraid of cash. They
want anything but cash. Even taxi start-up with valuation higher than all taxi
companies in the world - Uber - is better than Cash. Everything is better than
cash in high inflation times. People invest in Uber because cash is worthless.
Not because Uber is a good value stock. Are you trying to tell me people
invest in $32B "worth" "business" like Uber because there is no inflation?
Good joke.

> Given that, is investing in technology really that bad of an idea? You have
> to put your money somewhere.

"You have to put your money somewhere." you said it brother. Why I have to? If
inflation is low as you claim? Why? Because even Uber is less risky than
inflated USD. That's why. You have to put your money somewhere -- catch phrase
heard often in high inflation times. Really. Not deflation times or even close
to deflation. In deflation times you "dont have to put your money somewhere".
Because your money gives you nice return without actually doing anything with
it. If I can get the same amount of food, gas, housing, healthcare and
vacation for the same amount as I did in 2010, why the hell I need to invest
in risky taxi drivers start-up with $32B valuation? You don't make any sense
brother! Apply some common sense here!

>VCs are mostly funded by large stashes of money - some of it among the oldest
and most secure money in the world - called limited partners (LPs).

I'm tired of hearing about "the most secure money in the world". Heard enough
of it when working for Capital Group back in 2007/08\. They finally shut up
when their "assets" (very secure, very) went from $2T to $500B.

> Think endowment funds, that type of thing. Those funds will diversify their
> investments across multiple aspects of the economy. For simplicity sake,
> we'll say 50% real estate, 40% stock/bonds, and 10% into VC funds. VCs take
> a small chunk, and invest the rest in tech companies.

Why? If inflation is so low? What for? Just keep it in the bank. With low
inflation there is 0% logic in doing what you propose - investing in real
estate, stock, bonds. Not to mention things that are start-ups with $32B
valuation in taxi "niche". You'll see - we'll lough from this soon enough. You
invest in Uber, because you recognize there is no return on cash (high
inflation).

> In that way, some of the most inssttitutionalized money in the world will,
> yes, be invested in Uber. Really.

Till the day even idiots at Fed who believe in their own cooked inflation
numbers open their eyes and see they need to stop the madness. Raises the
interest rates. Then the bubble pops. Like it did every time before. Really.

------
solve
You cannot "admit" a prediction of the future as if the prediction of the
future were a fact. It can only be predicted.

------
dataker
Related link

[http://www.businessinsider.com/sam-altman-y-combinator-
talks...](http://www.businessinsider.com/sam-altman-y-combinator-talks-mega-
bubble-nuclear-power-and-more-2015-6)

------
bla2
> tech stocks are at an all-time high

The stock market has a positive return on average. Which means that on average
stocks (not just tech stocks) are at an all-time high all the time, no?

------
jurymatic
Who cares if we're in a bubble or not? A sound business strategy is sound
regardless.

~~~
phdp
Everything has risk. During bursting of bubbles, there is a "flight to
quality." If you run out of cash to fund your business and you cannot secure
financing because the rate of return vs the risk is not attractive to
investors, you will go out of business. Those businesses who can survive
without outside investments will fare better, but even consumers can be
affected by a bursting bubble via layoffs, media talking heads, etc. They may
be less willing to spend on unnecessary expenses. This means less revenue and
likely profit for the businesses.

~~~
jurymatic
I agree, but I think the problem you're highlighting is intrinsic to business
models that emphasize growth over money making more than it's intrinsic to
bubbles.

------
3pt14159
The only point that I agree with is this one:

"Margin compression": A lot of tech businesses sell things, and because the
market is good there isn't much price competition. My unicorn sees a lot of
companies that appear to be dependent on customers paying what they're told to
pay. These companies have yet to experience, or survive, a price war with
their rivals.

All the other ones are BS.

> Entire generation of entrepreneurs under age 30 have no memory of 2000 or
> 2008.

Lol wut? I'm 29. I remember both in vivid detail. I worked in tech in 1999.
Sure I was young, but I had been seriously programming for already 4 years.
Let alone 2008, that was the year I graduated university. I remember barely
landing a job just as things went sideways.

Gen Y knows things can go wrong. Maybe some current 17 or 18 year olds don't.

> Interest rates: Central banks currently have interest rates [...]

Find me a bank that will lend me money so that I can invest in startups. It's
impossible. Interest rates going up will depress assets prices that are
frequently purchased with debt: Housing and Education.

> Valuations. [Specifically Uber]

If Uber wins it wins logistics as a whole. This is like talking about Amazon.
Back then Amazon realized that books were the only thing that made sense to
sell online because of the markups and the fact that customers don't need to
touch a book to want to buy it. Then once customers got used to buying stuff
online and Amazon worked out their distribution model they expanded to more
and more things. Read "ecommerce is a bear".

For other companies, sure there are some winners and some losers. But
Facebook, for example, has data on every person on earth that has real
spending power. Super, super valuable.

In the 90s only us nerds were online. Today tweens sext. Completely different
markets.

> Private valuations not matching public ones

1\. Sarbanes Oxley. 2\. Investors dump stocks that have no real growth left in
them onto the public. The only exception was Tesla, and that was out of
desperation, and look how well they are doing.

> Tech startups offering stock at a discount

This doesn't usually materially effect the valuations of a stock. 20%
discount, 50% tops.

> Burn rates

If you aren't burning money then it is a huge red flag to investors. There is
a very real risk that your money machine doesn't scale or that you can't
recruit talent in the same numbers as before.

> Too many business models are dependent on "one thing not happening"

This would be a factor if there actually were a bubble about to pop. There
isn't, so this will naturally work its way out. Also, it isn't like 1999 where
all money flowed through Yahoo or Microsoft. The world has more real world
businesses like arms contractors, that don't overlap business cycles.

I've been saying that there isn't a bubble for over 7 years. There still isn't
a bubble. There will be one that starts to form soon when crowd investing
starts to get underway world wide, but until retail investors invest in
startups in a large and meaningful way, there isn't a bubble.

