
Steve Blank: 'VCs Won't Admit They're in a Ponzi Scheme' - jackgavigan
http://www.inc.com/zoe-henry/steve-blank-tech-bubble-burst-ponzi-scheme.html
======
erikb
More tiresome than the current state of the valley is how people react to it.
I'm here since it started. I was reading on Venture Hacks and Hacker News
before Y Combinator was really a thing. People where actually talking about
what a Y combinator is, the Lisp one. The moment it started to hype everybody
above the age of 20 should know how it would go since it is like every other
hype. It starts optimistically, everybody happy that somehting is actually
happening. Then the euphory spreads. Then people start to do ridiculous
things. Then everybody knows that it's ridiculous but nobody knows how to get
out. Then it starts to die, slowly or in a burst. That's how life is. No
surprises here. But despite that most people seem to act like they have the
biggest conclusion of their life: The valley is a bubble. Wow.

In business as in IT the basic rules stay the same. If it is healthy to go
public with five consecutive successful quarters, then aim for that with your
business. If you are editing text better spend time learning vim or emacs than
the newest flashy text editor. No need to hype the explosion or burst of any
hype.

Thus, I'd rather see us discussing about how to make a business work. And I'm
really disappointed that Steve Blank, who always was about core marketing
values, participates in such a attention seeking article.

~~~
Stryder
The voice of reason.

------
cehrnrooth
What are ways this can be bet on since these are non-public companies?

So far I've identified:

1\. Commercial real estate. Could take a short position on any public
companies (ex. CBRE) though they're likely too diversified to drive them down
to zero.

2\. Hiring. Could bet against LinkedIn? Most local recruiters / agencies are
privately owned and the public ones are diversified.

3\. Ancillary services. Seems like start-ups serving start-ups so there's no
publicly available position to take.

4\. Tax Revenue. Assuming a contraction, can you bet on local municipalities
being short on budget / revenue with a smaller tax base?

Might be a fools errand to short these if the excess capacity can be picked up
by all the behemoths (Google, Facebook, Apple).

I wouldn't dare take a short position on SF residential real-estate although
outlying areas might see a larger contraction.

~~~
api
A short position on SF real estate is probably good from several angles:
possibly overheated tech market, geographic diversification of the tech
industry, and strong movements to build more residential capacity.

Geographic diversification of the industry seems to be a thing. A few years
ago the major SF/SV VCs were pretty much restricted to investing in Bay Area
companies only. Today I see a lot of non-Bay Area things in their portfolio.
YC is a stubborn holdout here but in general I see the industry diversifying.
The real estate costs are a factor-- in our own case moving to the Bay would
about double our burn rate. That doubled burn rate would be going _only_ to
real estate (by way of higher salaries to afford it and higher office space
costs).

Investors should just start cutting checks to real estate rentiers directly
and bypass the middleman.

~~~
adevine
Shorting SF real estate seems like a really, really bad idea to me. There have
been a lot of articles recently about the research that SF real estate has
been going up 6.6% a year for 60+ years now. Of course, there have been some
downturns along the way, but the only way to profit from these downturns with
a short position is basically perfect timing. I'm sure someone will do it, get
lucky, make a killing, and be the subject of lots of "look how smart this
person was" articles, but we probably won't see any articles about the tons of
people who tried to do the same thing, were unlucky with their timing, and
lost their shirts.

~~~
api
Can you actually have a city where nobody $150k/year salary can actually
afford to live there?

Of course your argument does boil down to the old "markets can defy reality
longer than you can short them." Shorting is high risk.

~~~
mmanfrin
Because people buying homes tend to not live alone. And 150k is pretty middle
of the road for established tech workers in SF, so in reality you're looking
at two people making 200k each.

400k/yr can buy you a home in the Bay Area easily.

~~~
nugget
I think I'd probably say it's possible rather than easily done. But why force
young couples to ante up such a huge buy-in just for the opportunity to work
at all the local companies? Even the YC partners are starting to point out,
correctly I think, that expensive housing is becoming a significant headwind
to Silicon Valley's future.

------
haliax
Is this taking into account the terms of these ridiculous valuations?
According to [http://www.fenwick.com/publications/pages/the-terms-
behind-t...](http://www.fenwick.com/publications/pages/the-terms-behind-the-
unicorn-valuations.aspx) these come with "significant downside protection" and
other terms that make these deals more akin to debt than equity funding.

If you stop thinking about the valuation being the price of the company, and
instead being the price of a financial product which includes shares AND these
protection mechanisms (e.g. liquidity preferences) do these valuations still
seem irrational?

~~~
poof131
There’s little downside protection from bankruptcy or from a fire sale to
strategic investors who are waiting for bankruptcy. A friend recently left a
startup that had raised over $100M where the whole executive team was
celebrating an $800 revenue deal. He didn’t even wait to vest. Lots of mid to
late stage startups are in big trouble, and it will take time to flush it out
and see who’s all hype, who’s unit economics are upside down, and who are the
real companies.

------
green_lunch
I think it was worse in the late 90s early 00s. There is this documentary
called 'e-dreams' that came out in 2001. It documents a delivery startup that
didn't charge anything to deliver products to customers.

They had virtually no business model (and lost money on every order) and got
millions in startup capital. The whole company imploded within a year, but
some of the interviews with the executives of the company are pretty telling:
they never intended on making a profit. The intent was to either get bought
out by a larger company or get an IPO and bank the proceeds.

E-dreams is a really good documentary for anyone interested in seeing a small
sliver out of the early days of the first .com boom/bust.

I watch it once-a-year to remind me of the craziness.

~~~
pekk
This really doesn't show that the situation in the late 90s was more
ridiculous than today.

First, this is a very carefully selected story, not a representative sample,
so it's anyone's guess how bad a measure it is of the absurdity of the overall
situation in the late 90s. If we are selective we can find similarly crazy
stories from last year, so that it is only a matter of selling the story that
the craziest stuff is representative.

Second, the problem is not merely that people take silly risks, the problem is
when too much is staked on those silly risks. If everyone thought the market
was wacky and outrageous, they wouldn't stake very much. The really serious
situation, where too much is staked, is one where everyone is saying things
like "can't lose" leading to a system which is structured for catastrophe.

Third, to say it was worse back then implies that we know how bad it is now,
which really drives us to the heart of the issue - what evidence we have
today. It doesn't really matter about how crazy we think it was in the late
90s.

------
muench
Even a broken clock is right twice a day. Steve Blank has been saying this
since 2011 when the economist hosted a debate between Blank and Ben Horowitz.
All respect to Steve Blank though for his other work.

The Economist seems to have broken the link to the content on their site, but
below is a video the Economist posted on Youtube and the articles posted on
the personal blogs of Blank and Horowitz.
[https://www.youtube.com/watch?v=AfX9VLsUWwc](https://www.youtube.com/watch?v=AfX9VLsUWwc)
[http://www.bhorowitz.com/debating_the_tech_bubble_with_steve...](http://www.bhorowitz.com/debating_the_tech_bubble_with_steve_blank_part_i)
[https://steveblank.com/2011/06/15/the-next-bubble-dont-
get-f...](https://steveblank.com/2011/06/15/the-next-bubble-dont-get-fooled-
again/) [http://a16z.com/2011/06/17/debating-the-tech-bubble-with-
ste...](http://a16z.com/2011/06/17/debating-the-tech-bubble-with-steve-blank-
part-ii/) [https://steveblank.com/2011/06/17/are-you-you-the-fool-at-
th...](https://steveblank.com/2011/06/17/are-you-you-the-fool-at-the-table/)
[https://steveblank.com/2011/06/22/the-internet-might-kill-
us...](https://steveblank.com/2011/06/22/the-internet-might-kill-us-all/)

~~~
geofft
Given that Steve Blank is usually correct about startups, not incorrect,
wouldn't a better analogy be "even a working clock is wrong twice a day"?
(Which of course is a nonsensical analogy.)

It seems like a bubble could take more than 5 years to pop. Blank makes an
analogy to the housing bubble, in which housing prices grew somewhat steadily
from about 1970 to a peak in 2007. Economists started claiming a bubble in the
early 2000s, and housing prices after the bubble popped only went back down to
about where they were in the early 2000s.
[https://en.wikipedia.org/wiki/United_States_housing_bubble#I...](https://en.wikipedia.org/wiki/United_States_housing_bubble#Identification)

~~~
joe_the_user
The thing about the housing bubble is that while housing prices didn't decline
to a normal level, the way that decline was prevented was through the massive
injection of money into the system as whole (qualitative easing) and
government loans to the largest banks.

This permanently broke the house-buying process as a whole to various degrees
in that most people can no longer afford to buy a home to live in.

But also, it's plausible that the flood of money coming into VC is a part of
this general flood of money - a flood that supports the US economy but not a
"healthy" condition but with jobs around growing these inflated capital assets
taking up a large number of well paid jobs, etc.

------
api
I think it's possible to draw a line between angel/VC with sane valuations and
the "unicorn" phenomenon.

The former does not seem to be in a bubble per se, though we have seen a cool
down. A "hot" market is not a "bubble" and a cool down is not a "crash."
Bubbles are violent and insane and that's not what we've seen in seed/series
A.

The latter may well be a bubble.

What I'm hearing about right now is that it's getting a lot harder to raise
money in later stages if you don't have great revenue numbers and real revenue
growth. Earlier stages have cooled a bit but not catastrophically.

~~~
stcredzero
_A "hot" market is not a "bubble" and a cool down is not a "crash."_

Then instead of a bubble, how about a "Foam?" It occurred to me about a year
ago that an "ecosystem" where you had a lot of startup companies serving the
needs of other startup companies would be the perfect place for one to pump-up
the size and perceived potential of the "ecosystem" in a way which attracts
yet more money and increases the perception of further value creation in a
positive feedback loop. However, since no one company, no single investment
instrument is involved, there is no single perpetrator to blame.

It's exploiting the same social proof dynamics, but in a highly distributed
fashion. It's technically and legally not a Ponzi scheme, even though it's
powered by the same mechanisms.

So this should probably be the next frontier in the startup world --
preventing or at least mitigating this form of corruption. Or is it just to be
adopted as the "startup business cycle" \-- justified by the minority of
companies that come out of such foam-swells that actually create value?

~~~
rory
> Then instead of a bubble, how about a "Foam?"

"Froth" is the standard terminology for this concept.

~~~
stcredzero
That works. It also works with "hot" markets. The market gets so hot, it
starts boiling then foams over.

------
educar
Yeah, probably the worst thing about the valley culture is that organic growth
has lost it's charm. There was value in bootstrapping, making revenue, then
profits and then seeking funding as a way of increasing profits by growing.

My understanding is that silicon valley VC culture started out because people
were building hardware and this required some investment to get started.
Software is totally different and with AWS and the like, building software is
so cheap. But no, now it's basically: take money, give out stuff for free and
take more money showing the free customers and get even more free questions
and take even more money and so on. In the end, nobody knows the true value of
the company - the founders, the VCs or the customers. True money is made by
either ads, selling customer data or lock-in by making migrations to another
service very expensive.

What irks me is that this scheme overly favours VCs and to some part the
founders. The thing is the stream of founders who are willing to do this is
never ending (same thing about privacy. the number of people willing to give
up their privacy _consciously_ is never ending). Even YC thinks of the whole
thing as a game (if you followed the snapchat thing). I am cynical but this is
really about rich people having fun and everyone else (customers, employees)
is getting suckered. None of these companies are being built to last.

~~~
arbuge
>> Yeah, probably the worst thing about the valley culture is that organic
growth has lost it's charm.

With the cost of living there, particularly the real estate component, you
could also argue it's lost alot of its feasibility. Getting started there
isn't cheap if any part of your plan requires hiring people or finding space
to accomodate them early.

~~~
sinak
I'm currently faced with this. We have a bootstrapped company with offices in
SF and Southern California. Office space in SoCal is easy and cheap, but
trying to find just 3 desks for our new SF office has been a nightmare. Places
like WeWork are asking $2500 for a tiny office with 4 desks.

(Obvious plug: If you happen to have a few desks or a small office spare,
please email me.)

~~~
x0x0
wework is shit, btw

I work in one of their offices and it's horrid.

One of two elevators in a 15 floor building was left broken for 6 weeks at the
end of last year. The second elevator still breaks for a couple days every
month. I hope you enjoy a 15 minute wait to get in or out of the building.
Alex is the smarmy liar who runs it, and all he can say is, "So sorry! Not my
problem!" while declining to have WeWork give a damn about the building's
terrible maintenance.

These morons can't get the lock on the floor to work reliably; you badge in,
the reader turns green, and the door lock doesn't unlock. This has been going
on for probably 5 months. We now just leave the door to the whole floor
unlocked all day, which is awesome, since there's street trash all over and
eventually we're going to have stuff stolen.

They can't make the A/C work; I hope you like wearing blankets at work in the
winter and working in 75+ degree weather in the summer.

These idiots built a bathroom with _no exhaust fan_. Since our floor is full
of men, imagine how it smells by the end of the day. I'm surprised there's
still paint on the walls.

The only thing WeWork is competent at is cashing your rent checks.

Oh, and the offices themselves are ludicrously loud. They are giant square
boxes with no sound insulation, so enjoy a total lack of productivity the
second your officemates, or people in offices near you, start talking.

ps -- those phone booths they talk about? Busy most of the day.

Avoid them at all costs.

~~~
untilHellbanned
Agree that WeWork is overpriced junk. 2 bathrooms on each floor for like 200
people. Should be so easy to beat these bozos as all they are really selling
is image.

------
_yosefk
"Nowadays, most of the liquidity is happening for large companies paying for
startups and hedge funds buying into the latest round. So when this crash
happens, it's mostly going to affect the later-stage investors," Blank says.
That's different from what happened when the bubble burst previously, inasmuch
as "It [the '99 crash] destroyed a lot of public value, not just private
capital. Your grandmother got hurt as well."

Newspapers were complaining about the public being unable to invest in
unicorns, with all the benefits going to wealthy private investors. Then
people on HN started echoing these sentiments (the part where stuff from
newspapers gets planted into the heads of normal people and becomes their
opinion is really scary, I guess it must be happening to me, too. Really scary
to watch this happen though, reading some weird idea in a newspaper and then
reading/hearing it repeated by people the next month.)

Will newspapers remember to thank wealthy private investors for taking the hit
when the bubble pops? (BTW, what AFAIK doesn't exist but could is a VC fund
with publicly traded shares. Of course the average VC produces below-average
returns.)

------
jorblumesea
The reality is that some VCs invest in smart but risky bets and some just
throw money around like it's free. Uber and Tesla are risky bets, but also
have solid thinking behind their business and target specific market demands.
There are risks in execution and a whole host of other problems, but the idea
behind it is fairly solid.

What is not a smart investment is funding some company that is planning on
making "the next social media analytics platform". There are what, 200+
companies all doing that?

The issue is mostly one of perception: What happens when investors realize
this and want their money back? The house of cards comes crashing down, and
might take out some smaller, legitimately innovative places in the process.
Money flows out of the industry, it is no longer seen as viable. Investors see
VCs as some kind of get rich scheme, it's only a matter of time before reality
intercedes. When that happens, it may even take out the biggest players. VCs
are a great idea but often poorly executed, basically due to greed.

------
vonnik
Startups are just illiquid investments, like real estate or even like chunks
of public-company equity so large that the market can't absorb their sale.
Every single investor who ever existed has talked their own book; i.e. they
promote the assets in which they have a stake. This is not a Ponzi scheme,
it's a market. And unlike Ponzi schemes, in venture, there is an underlying
asset, which is the company that's growing. Growth and profit are two
different things. Profit and valuation are two different things. Valuation, or
market cap, are based on the expectation of future revenue. With tech
companies, these expectations can be very high, and rightly so. Even if they
are grounded in human psychology, and subject to projections, distortions and
the like.

------
traviswingo
He's correct. The economy will only support "fluff" for so long. At some
point, no one will be willing to acquire these companies for their price, and
the public won't support an IPO at their price also. Revenue and cash flow are
vital to long-term success. Increasing your sticker price just by saying your
company is worth more doesn't hold up in the real world. Find a problem, solve
the problem way better than anyone else is, and create a monopoly with real
profits. It's not easy, but that's where the real wealth is created.

------
SocksCanClose
This is an interesting thing to trend, especially since it has been just over
a year since @sama put out his famous bet ([http://blog.samaltman.com/bubble-
talk](http://blog.samaltman.com/bubble-talk)).

I think the author may be conflating (as most do) VC investments at the left
side of the power-law curve, and those on the right side. Meaning that the
investments on the left (that produce at least 100x returns) are likely valued
correctly, whereas investments on the right (at the tail end of the power law
curve -- or even those in the center) are supposedly overvalued.

Even so, the Inc author's insinuations about Uber and Airbnb are not exactly
the smartest things I've ever seen written. Since I fully expect that within
10 years Uber will be running a massive network of electric, self-driving cars
and busses (and perhaps even long-haul networks?) in every major and even
minor city in the world. The global transportation infrastructure is
absolutely worth MUCH more than $50bn.

------
eternalban
Devonshire Research Group had a very interesting analysis of Tesla. Related to
OP, I found their high level matrix of identifying probable ponzi schemes
interesting.

[https://news.ycombinator.com/item?id=11769775](https://news.ycombinator.com/item?id=11769775)

------
mathattack
When was this article written? I'm a huge fan of Steve Blank, but the attached
doesn't seem current.

 _For entrepreneurs, Blank warns, the future is clear: "Startups are going to
find it much, much harder to raise money, and the liquidity pipeline will
bounce back to the good old days -- when you actually had to make money to
have some liquidity event [go public]."_

I don't see many companies going public nowadays, so it isn't like there's a
mad dash of premature IPOs. If anything it's harder than ever to go IPO. Due
to Sarbanes-Oxley companies are getting much larger before the exit. Due to
activist investors, companies want to have the future 5 or 6 quarters in the
bag (in addition to the past 5 or 6) before going public.

~~~
vonnik
It looks like it was published two days ago, if you google the headline. It's
totally stupid that Inc. doesn't give the article a time stamp...

------
jgalt212
Of course, it's a ponzi scheme. How else can you explain such behaviors as the
same VC investing in the same company's Series A at $10, Series B at $100,
Series C at $1000, etc?

~~~
laxatives
No doubt its unsustainable or exaggerated growth, but is it still a Ponzi
scheme if it lasts a decade and most participants exit with more money than
they started?

~~~
abduhl
Ponzi schemes do not have a set time line and any successful Ponzi scheme will
have most participants exit with a profit until the Ponzi scheme collapses and
then the remaining participants will be holding nothing.

------
iambvk
As an outsider, what is the best way to measure or identify the bubble?

Is a "VC firm filing for bankruptcy" the only indicator?

Can someone more knowledgeable share some thoughts on this?

~~~
w1ntermute
A drop in ping pong table sales is a leading indicator[0].

0: [http://www.wsj.com/articles/is-the-tech-bubble-popping-
ping-...](http://www.wsj.com/articles/is-the-tech-bubble-popping-ping-pong-
offers-an-answer-1462286089)

~~~
onion2k
That only indicates startups being more prudent and reducing their burn rate.

~~~
carapace
Right. Which they only do when..?

~~~
onion2k
...they realise they aren't getting value for money, which can happen at _any_
time, not just during a bubble.

~~~
carapace
Ping-pong tables.

In enough numbers to make the graph deflect.

------
elevenfist
It's odd for Blank to continually be tooting this horn when his ideas on "The
Lean Startup" are part of the problem. You can't walk into a business not
knowing how the business is going to work. That's not something TBD. Sure,
some "startups" manage to make it through, but if we're talking about ponzi
schemes here...

------
blahblah3
even companies with little intrinsic value (i.e no ability to generate future
cash flows for shareholders) can trade at high valuations for a long time (see
the tulip mania)

------
Aelinsaar
I think "Ponzi Scheme" is both too harsh, and too generous.

~~~
arcanus
Triangle opportunity?

~~~
ryguytilidie
Conjoined triangles of opportunity.

~~~
jcomis
They teach that in business schools now

