
Today’s correction isn’t much like the dot-com bubble - akrain
https://www.theatlantic.com/ideas/archive/2019/10/are-we-cusp-next-dot-com-bubble/600232/
======
code4tee
There’s another often unwritten element here around companies basing their
valuation on false markets. For example, if I sell $2 for $1 that’s a false
market. Of course I can grow like crazy and gobble up lots of customers. I
could even “disrupt” existing players like those stodgy old companies (banks)
that sell $2 for $2.15 (a loan).

The VC subsidies for some of these companies are so high that they are
basically selling $2 for $1 in some cases (WeWork was basically losing nearly
$1 for every $1 of revenue!)

Ride share companies grew fast when they sold VC subsidized rides but have
struggled to maintain that market share dominance without subsidies (lots of
other players quickly move in). MoviePass sold lots of subsidized movie
tickets until the money ran out.

Thus the fallacy of the whole “it’s ok that we’re unprofitable because look at
how fast we’re growing” is that in many cases these companies were only
growing BECAUSE they were grossly unprofitable in the form of their investors
massively subsidizing purchases.

~~~
rubicon33
That's not an uncommon nor unheard of tactic in business. Fuel growth, and
capture the market for your brand, by selling at a loss.

The trick is always the transition to profitability. Generally, this comes
through layoffs and maybe price increases.

~~~
p1necone
Imo this should be illegal. Taking a loss undercutting smaller competitors in
a way that's only possible because you have piles of money unrelated to your
actual business is going to distort the market in a way that's really bad for
consumers in the long run.

Anecdotally I noticed this with Pita Pit in New Zealand. There used to be lots
of independent pita places that had decent pricing, then pita pit started
buying them out and replacing them with pita pit chains, while still competing
on price relatively well. But as soon as they'd bought out all the competitors
in the area they immediately almost doubled their prices.

~~~
K0SM0S
I know retail stores in France cannot legally sell _anything_ at a loss,
except during government-decided 'sales' periods (twice a year, usually in
January then June) which are mostly aimed at emptying stocks for the new
'season' (as if that mattered in the 21st century when most stores are a on a
bi-monthly product cycle, but hey, that's the inertia of law/gov).

Not sure about businesses in general but I seem to recall it's a general law
for commerce.

The problem is that retail is thus basically unable to compete on price beyond
a certain (very mild) degree, notably forbidden to say _" I'll sell item X at
a loss to attract customers, and then make up for it on other items they
buy"_. It's just illegal to do it in France.

A little bit too reminescent of a planned (communist) economy if you ask me,
because it applies to each and every item taken individually, not the store
overall or over a certain period of time. Needless to say this doesn't help
thwart the collapse of retail versus online shops, especially in the way of
services — and consider that foreign online businesses don't even have to
follow such regulation, obviously, so...

It's a very, very grey area to regulate, and government being just awful at
understanding how business works makes it ill-suited (often misguided) to
regulate such things. I think branch negociations (within a given sector) is a
much better approach: let actors (businesses) decide how they will compete,
and only regulate if there's anti-consumer (cartel) behavior, not prior to any
wrongdoing! — it reeks of a view that 'capitalism is bad' yadi-yada (typical
French view) and hurts consumers' purchasing power in the end.

~~~
esotericn
Wow.

So if a merchant buys in too much stock and can't offload it - they're
literally banned from selling it below cost?

I assume they can still sell it on a secondary market (just not direct to
customers)? Or do they actually have to eat it entirely and just like, burn
the stock or something?

~~~
K0SM0S
Edit after the fact: called my ex-boss, she kindly reminded me that as a
company we would store goods for months and sell them during "les Soldes", so
yeah you get twice a year a 6-weeks period to offload your stock.

Sorry for the confusion. Note that this only applies to non-perishable goods,
food for instance is treated differently. Each sector in France falls under
different regulation, it's a mess, very hard to navigate.

------
jeremydeanlakey
One perspective that I gained much later than I should have:

Suppose you have a small software company, Reinvest Software with big margins
and lots of opportunities to expand. You can take home that profit and pay
taxes. Or you can invest in growth. That investment in growth is an investment
in intangible assets with insanely good tax treatment. But it looks bad on the
financial statements.

Suppose an investor, Smart Capital, sees your business potential and invests
even though your GAAP income is low or negative. Smart Capital does very well
for itself.

Suppose another investor, Sucker Capital, sees Smart Capital doing well,
decides that profits don't matter and invests in Negative Margin Software,
which never has hope of making money.

I think a lot of people can't distinguish between Negative Margin Software and
Reinvestment Software. For many years, I didn't realize that they were
separate things and I thought tech was mostly a Ponzi scheme.

At first glance, I see more Reinvestment Software vs Negative Margin Software
compared to the dot-com era.

~~~
sfilipov
What are good examples of Reinvest Software? My guess would be Amazon, but
what others?

~~~
Retric
Facebook was a good example. They avoided excessive advertising in their
growth phase, effectively spending potential profit for a huge user base.
Critically, the profit was intangible as was the investment as the IRS does
not care about money you never collected or the number of users you have only
cash.

YouTube is another, as far as we can tell it’s currently extremely profitable
yet people looking at their financials where laughing at the sale price when
Google Snatched it up. Part of this is from ever more advertising coupled with
ever lower bandwidth costs.

~~~
chii
google derives much more value from youtube's viewership data than the profit
in ads it makes imho.

Youtube's profit model is only profitable at google scale - imagine the
capital expenditure to build out such a large video platform (not very many
other tech giants have been able to build video, and have it be free).

~~~
sharkjacobs
I always understood that the viewership data was valuable because it enabled
Google to earn more money selling ads.

What is the value of viewership data apart from advertising?

~~~
PeterisP
I read the parent post as asserting that the value of ads _placed on youtube_
is not as large as the incremental value to _non-youtube ads_ (which is a
much, much bigger market) from better targeting enabled by youtube data.

I don't know if that's true - youtube ad revenue seems to be ~10% of total
google ad revenue; so for that to be true youtube data would have to provide
10% revenue boost to existing ads over all the other (many!) data sources that
google has, and I'm not certain if it's realistic.

------
hn_throwaway_99
The article touches on this, but I don't think it really addresses the root
cause of the difference between 2000 and now. IMO the main difference is
really just timing. Companies are staying private _much_ longer than they did
in the .com bubble. Back then, the IPOs still occurred during the "only thing
that matters is eyeballs" phase, and when markets eventually expected
profitability, the emperor was shown to be pantsless.

Now, though, companies that are going public are already large and have
gobbled up a lot of their market due to VC funding. What's happening is that
they are at the point where that profitability signal has to be in view - you
can no longer say "it will be just around the corner". This flamed out most
spectacularly with WeWork, but it's a bit of just desserts that private
investors wanted to gobble up all the big early gains, only to find that the
additional time just gives public investors more reason to be skeptical.

~~~
jacquesm
Punting a risky investment is a fine line between the dream still being alive
and the bad news starting to roll in. For some investors - and sadly, even for
some founders - this is during the earlier stages, which is why it is a huge
red flag if founders or early investors insist on cashing out during later
rounds.

------
dredmorbius
There's a fantastic book that just came out in ... 1954 ... that I'd highly
recommend. John Kenneth Galbraith's _The Great Crash, 1929_.

[https://www.worldcat.org/title/great-
crash-1929/oclc/3136579...](https://www.worldcat.org/title/great-
crash-1929/oclc/313657908)

The tech and land booms of the time involved Florida real estate, railroads
(a/k/a airlines), airlines (actual aircraft involved), "Radio" (RCA), new
alternative energy source and distribution plays, and of course, Goldman
Sachs.

I'd first read it following the 2007-8 global financial crisis. It's still
relevant now. Short, highly readable, entertaining, and informative.

~~~
TheOtherHobbes
See also Anthony Trollope's The Way We Live Now.

Which was written in 1875. About the financial scandals of the 1870s.

------
mtts
“ The problem with tech today isn’t so much that software failed to eat the
world, but that the most celebrated unicorns weren’t actually software
companies. They have struggled to achieve liftoff because their feet are stuck
in the mud of the physical world”

This sums it up nicely.

Investors got deluded enough to think that if they threw enough money at a
non-software company it would magically start making software company levels
of profits.

Hopefully the real economy won’t be affected too much when this bubble finally
bursts.

~~~
corporateslave5
The thing is I don’t think investors got deluded, I think investors new
exactly what they’re doing. They were hoping some greater fool would take the
investment off their hands

~~~
ivanche
That's not investing, that's speculation.

~~~
fooker
"Venture"

------
muglug
The obvious counter-example to this is Slack, a "pure-tech" company whose
value has halved since IPO, and there's a similar story with Snapchat (though
its value has recovered somewhat in the past year).

~~~
empath75
I don’t think there’s fundamentally anything wrong with slack though.
Investors just don’t understand it, I don’t think. I’ve read so many articles
about how Microsoft is going to crush it with teams and it’s so obvious to
anyone who has had to work with both of them that they simply are not
competitors — really the only thing close to it is Discord and it’s not going
after the enterprise market.

~~~
NotSammyHagar
The barrier to entry to compete with slack is fairly low. And Discord can just
decide to start focusing on enterprises. Microsoft is just one company with
the leading office suite that happens to be really kludgy. Slack has its
pluses and minuses. So just because slack works great and is fun to use, and
has lots of companies giving them money, doesn't mean they are worth their
huge valuation. They aren't getting enough money, and another hipchat like
competitor can come along and do even better. The best thing slack has is they
are the default safe choice.

I say this as a slack stock holder who lost money, so I clearly know what I'm
talking about ;-)

~~~
AlexCoventry
The only way slack's valuation makes sense to me is that it could be used as a
covert business-intelligence tool. I tend to think of github the same way.

------
code4tee
All that’s happening is that the market is calling BS on companies that lack
sound business fundamentals. The days of valuing companies sky high that are
deeply unprofitable but “it’s OK because we’re a tech company so it doesn’t
matter” are over.

This is ultimately a good thing for companies with real businesses that were
for much of recent history valued far less than those that had no clear
prospects of making a profit. See all the writings about IWG vs WeWork on some
of the previous insanity there.

~~~
Scoundreller
It still works for taking over highly fragmented industries. And always will.

------
janoc
That article seems to harp on the fact that it is "not-com bubble", basically
that the companies are getting punished because they are not "pure
tech/software companies". Quite a way to miss the point, IMO.

As if delivering pure software was a sign that the company is worth investing
in. Just look at all the cryptocurrency/blockchain startups from about two
years ago. Most of them literally didn't have anything else but a whitepaper
and some hacked up "coin" \- a derivative of the open source Ethereum code.
And 99.9% of them has gone bust already, disappearing with all the investor's
money.

This is about investors finally wising up that a start-up with no path to
profitability is not a viable business, regardless of the explosive growth
fueled by cheap VC dollars and undercutting the competition ("disrupting the
market") by ignoring existing laws (Uber, ...).

At least not for public investors - it is still immensely profitable for the
founders and early investors of those "unicorns".

However, their goal is not to make a profitable company but to grow fast,
attract a lot of VC money and then recoup the investment in an inflated IPO
when the entire Potemkin village gets sold off to a lot of naive suckers who
end up footing the bill once the house of cards finally collapses.

This is what needs to called out, not some BS talk about "not-com" bubbles.

~~~
wool_gather
> This is about investors finally wising up

Well, _this generation_ of investors, at least. ;) We had much the same thing
happening 20 years ago, and I have no doubt that we will again.

------
lordleft
Something I've been wrestling with is the perceived 'unsexiness' of certain
technologies, like C#. When I joined this industry, I thought that anything
that wasn't powered by Rust or Python or Haskell was irredeemable, that C# was
a dinosaur not long for this world, and that tech unicorns would be set the
tone of our industry going forward. Now that I'm a bit older I've begun to see
that something like C# isn't going away anytime soon - that people still use
.NET and other technologies because the enterprise endures, and companies like
Microsoft are continually investing in their tooling. This article reminded me
that sometimes unsexy technology powers the world, and if you can bring value
and or mastery of that technology you can greatly benefit.

~~~
oldmanhorton
Dont forget that even if C# feels old and stodgy, F# gives a very fresh and
"cool" experience on top of .NET

~~~
np_tedious
Agreed. Also the recent C# language developments are themselves pretty good,
as are the runtime / SDK improvements in dotnet core.

With mostly a Linux, python / slightly FP background I "should" be the
skeptic. But a recent project had me on a dotnet core app developed mostly on
OSX and deployed on Linux. It was honestly pretty neat and while I no longer
work on it, I am bullish on this space.

------
firasd
I was getting insecure that my side-projects/hoped-for-businesses are things
like a social news app and a podcast discovery app while Uber, SpaceX etc are
changing the world but now that the software-is-eating-the-world companies are
getting massacred in the stock market I feel at least some slight relief about
my choices. Near-zero-marginal-cost is a magic that only pure-software (and
other IP-based?) businesses have...

(Of course I'm overlooking that most new software biz that is doing well is
B2B unlike my projects... but still.)

~~~
jacquesm
SpaceX is real. Uber, AirBnB, WeWork and all the other 'lawbreaking as a
service' and 'subsidizing transactions with massive VC' companies are not.

~~~
firasd
I think the word 'subsidy' is kinda questionable here. (This writer's previous
article used the same word to discover many companies[1])

If a company is not losing money on gross margins--if they are losing money in
total 'unit economics' because the customer acquisition cost is high--does it
really mean they are subsidizing usage?

An example is Casper, the mattress company. They are still selling mattresses
to consumers for more than the mattresses cost to them. They are losing money
on ads. If I see/hear a Casper ad, is that ad really a subsidy to me?

PS. Saw an interesting Twitter thread from Tren Griffin: "Whenever you read or
hear the phrase 'losing money' you should ask yourself: what does this person
mean?"[2]

1) [https://www.theatlantic.com/ideas/archive/2019/10/say-
goodby...](https://www.theatlantic.com/ideas/archive/2019/10/say-goodbye-
millennial-urban-lifestyle/599839/)

2)
[https://threadreaderapp.com/thread/1184981449172144128.html](https://threadreaderapp.com/thread/1184981449172144128.html)

~~~
mdorazio
In my opinion, customer acquisition cost should be baked into your effective
margin calculations. If you're selling things "for a profit", but it costs you
more than the entire profit on the sale to make the sale, your business model
still sucks and is being subsidized by _something_ , debt or otherwise. This
is a common trap online sellers fall into - gross margins are kind of useless
if your selling costs are through the roof.

~~~
ghaff
See also Blue Apron et al. If you're selling something to a customer base that
is almost certainly going to have a lot of churn, that acquisition cost _has_
to be built into your business model. _Maybe_ if churn is low and the main
cost is initial acquisition you can sustain losses for a time but not if it's
ongoing.

ADDED: And a mattress is an example of a product that people buy very rarely
so the marketing/advertising to acquire a customer is mostly a cost of a unit
sale. Yes, maybe they get some residual word of mouth but it's mostly
effectively part of the product cost.

------
arbuge
"You might not have heard about these “real tech” companies—like Zscaler,
Anaplan, and Smartsheet—because they mostly sell business-to-business software
or cloud services. But all of them are trading more than 100 percent above
their listed IPO price."

All of those are also down significantly from their all time high though.

~~~
SpicyLemonZest
Sure, but that isn't relevant to the IPO dynamics. Investors threw hundreds of
millions at Zscaler, heavily subsidizing their growth, because they drew some
charts saying they'd be profitable in the future. I'm sure that in 2014 you
could have written an explainer about how suchandsuch Zscaler product is only
competitive with Symantec because of VC money - or you could have written the
reverse explainer, about how the Zscaler product isn't really competitive at
all and they're duping people into using it using VC money and modern
buzzwords. Both those genres are pretty popular about consumer-facing
unicorns.

But it turned out the charts were right, and Zscaler is now profitable,
although they still aren't making as much as investors at the all-time high
expected.

------
daxfohl
One could argue the cloud services companies aren't really pure software as
alluded to in the article, but a software veneer over a gig economy for the
underlying hardware. This perspective would allow for a bit deeper of a
comparison between what's working and what's not.

~~~
wbronitsky
I don’t understand this argument at all; it seems to be only buzzwords.

What is the relation of the gig economy to a cloud hosting service, other than
most gig economy apps are built on cloud servers? Also, how does looking at
the problem this way enlighten us?

~~~
rossdavidh
I think the idea is that a cloud company is primarily renting hardware.
Therefore, it doesn't scale like a software company; as its number of
customers goes up, its number of employees and amount of capital equipment has
to go up as well. This would mean it should not have a multiple like a pure-
play software company, where the costs go up little if any as the number of
customers goes up, because almost all of the software's development costs are
up front.

~~~
wbronitsky
I assume you mean that these companies are in the business of renting
hardware, not that they themselves rent the hardware they are using.

I believe the virtualization they are offering allows the service to scale a
bit more like software, but I do agree that these cloud providers don’t have 0
marginal cost.

Either way, thank you for de-buzzwording the original argument. It makes much
more sense in English

~~~
daxfohl
Sorry for all the buzzwords....It was 6 AM PST and coffee hadn't kicked in
yet.

Interestingly the de-buzzwording of the argument makes sense for the actual
thing called "gig economy" too. It could just as well be called the "human
rental business".

~~~
wbronitsky
Hey it happens, no value judgements really; I do it myself all the time. The
problem lies in my misunderstanding more than anything else.

“Human rental business” absolutely makes whatever economy that is sound much
more like the reality these workers live in. We should use it more instead of
the euphemisms we all use now.

~~~
daxfohl
In fact it highlights the difference too. Cloud services companies own the
hardware they rent. Human rental services are pass-thru accounts. Cloud
services are more financially successful.

A similar thing happened with eBay and Amazon: Amazon owned the products they
sold (initially anyway) and eBay was pass-thru. Amazon was more successful.

So Bezos is currently thinking, how can we own some Amazon humans and provide
them for rent?

------
buboard
Ctrl-F "Interest rates" not found. That's what's different. Where is money
going to go if not in the most hopeful investments, in bank accounts? If there
is a bubble it's the fault of central banks

------
sabujp
The part about stock prices for non-tech and tech isn't entirely true, what
about stocks like PD? Here's a company that's trying to posture itself as an
enterprise grade ops system, stock is in the gutter

~~~
o-__-o
Nothing sexy about monitoring. You or I could build our own overnight. Twilio
is the true leverage and why they command a much higher P/E multiple

~~~
hunterloftis
I agree with you but I’d phrase it differently. Perhaps that neither
monitoring nor sms is “sexy,” but that you could reasonably hack together a
monitoring MVP over a weekend but not a telephony MVP. There’s a natural
barrier from the underlying problem domain.

~~~
bydl0coder
Of course you can put together an SMS sending service over the weekend. It
just won't scale to the whole world and will have limited throughput.

------
puranjay
It's an incredible mix of hubris (on the startup's part) and delusion (on the
investors part) to call some of these "tech companies". Like WeWork. It's a
real estate company that should be valued like a real estate company.

But somehow everyone concurred that it is, indeed, a tech company. How or why,
no one bothered to ask.

~~~
easytiger
To be more specific it's a real estate company, that started out with a low
asset ownership position.

Then it got into the asset game leveraging their revenue, but mostly
leveraging some meaningless sociological/technological gibberish to skewer an
investor.

I think this speaks to the state of the kind of people making decisions about
things they don't even try to understand.

~~~
hurrdurr2
This is what amazes me; that there are so many supposedly intelligent
individuals throwing money at shitty ideas.

Google investing in Juicero comes to mind.

It's like any semblance of due diligence is just an afterthought.

~~~
SpicyLemonZest
I think calling Juicero a shitty idea is too strong. It didn't end up working,
and probably it was knowable in advance that it wouldn't, but the difference
between early-stage Juicero and early-stage Keurig is smaller than most people
gave it credit for. There's a strong and robust market (at least in the SF Bay
Area) for weird expensive juices.

~~~
jjeaff
I agree, fresh juice on demand is a good idea (besides the fact that the
amount of sugar is usually terrible for you).

But they had to have found out very early on with Juicero that squeezing the
packets by hand basically produced as much juice as their expensive machine.

~~~
bydl0coder
Well, even if you can do something by hand, there's a market for a gadget that
will do it more conveniently. There is a market for food processors and rice
cookers. I don't think Juicero is a good example of "stupid money" craze.
Theranos is.

~~~
jjeaff
Were that the case. But squeezing the juice out of the packet was far easier
and quicker than putting it in the machine letting it get scanned, phone home,
and then slowly squeeze the bag.

------
sabujp
uber needs to shift to self driving taxis quickly

~~~
bydl0coder
How they will be better at making self-driving cars than established
electronics and auto-manufacturers?

