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The Tech Bust of 2015 (samaltman.com)
562 points by runesoerensen on Nov 2, 2015 | hide | past | web | favorite | 175 comments



This is an excellent post, and I'm in agreement. I particularly like the counterintuitive point that if NO unicorns go bust in the next 2 years, that's more indicative of the existence of a tech bubble than if one or two do go bust [1]. That's contrary to the inevitable media portrayal: I expect that the first unicorn to blow up will be heralded as the harbinger of end times.

What I would like is for Sam to expand on what he thinks are some of the pitfalls of this new debt-like financing world. For instance, in the old equity-only world, it was well known that you could "never do a down round". This is because down rounds distort incentives to the point where the company might as well be dead. I suspect[2] that one downside of this "debt-like" world is that there are "implicit nonzero interest rates"[3] on all these debt deals. In the old equity-only world, having a flat valuation was bad but not a disaster. Only the down round was a disaster. I wonder if in this new debt-like world, the expectations have risen. In this world, even rising valuations could misalign incentives. I also wonder what those implied interest rates are at.

[1]: Since NO unicorns going bust means that capital is far too accessible, when statistically you'd expect at least a couple unicorns to fail.

[2]: I would prefer more expert input because I have low confidence in my suspicions.

[3]: I put that in quotes because it's somewhat an abuse of terminology.


I'd love to see an entire blog post about Sam's footnote #1. Though I find it funny that every point about why this is bad for late-stage companies I believe applies exactly the same to post demo-day YC seed stage companies with extremely high valuations.

Though I think in both cases if the company can be disciplined then cheap capital should be good, but staying disciplined is hard...


pg: "Yes, investors with preferred stock usually get their money back first. Sometimes they get a multiple, but that's considered overreaching nowadays and the more promising startups never have to agree to that. I suppose that is implicitly a target valuation in a sense. But no one views it as a target, because it only matters if things go badly." https://news.ycombinator.com/item?id=6896833

:/


when you see such high preferences, that is the equivalent of a down round. A unicorn that is doing very well would not agree to a 2X liquidation preference at late stage. Which is why I don't think it's a bubble - an indication of a bubble would be if investors gave a troubled unicorn a bunch of money without such preferences


I don't think this premise holds:

> A unicorn that is doing very well would not agree to a 2X liquidation preference at late stage.

Debt isn't always worse than equity. It is not a last resort source of funding. For example, if you are bullish, it is better to take debt than equity. It means you have to share less of the upside. If you believe you're about to experience a 10x increase in value, it's great to take money with a 2x liquidation preference and a 3x liquidation cap! You get to keep the remaining 3.33x for yourself. And startup founders are not usually the pessimistic kind...

I think late stage debt-like investments are copying the leveraged buy-out model from places like Bain Capital. They do many of these deals on the east coast: buy a company, load it up with debt, go for aggressive growth. Here is one example: http://www.forbes.com/sites/tomiogeron/2013/01/15/sevone-lan...


well, sure, but we are talking about late stage. A late stage company expecting a 10X increase in value without going public? from the perspective of the investors, they gave up a nearly worthless option on the upside, while protecting their downside quite a bit, while preserving the positive optics for the company and employees


Because they are a different class of investor, with a more conservative outlook. T-Rowe Price doesn't believe in the 10x. It just wants the guaranteed 2x. This is where the "investors are looking for a fixed-income replacement" part of Sam's thesis comes into play.


T Rowe price has a seed fund, too, by the way.


perhaps, but T-Rowe Price needs to match a benchmark. So if benchmark rises 10x and they only get 2x, they will suffer quite a bit. More likely, they expect this company to go public way before hitting the 3x mark.


If benchmarks were rising tenfold nobody would want to put money into startups.


A late stage private co is not really a startup


Put this way, it seems like a bet that tech will outperform alternatives: you're constructing a conservative investment out of startup investing.


Also - his argument that earlier stage rounds are not in a bubble gets watered down with every late-stage round that accepts a liquidation preference because those inherently make the earlier stages less valuable (except of course if whatever the company does with the late-stage financing adds enough value to the company to offset the dilution, but with 2x or 3x liquidation preference at late stage it's hard to imagine that being the case).


I agree, but when there's a cap it's just a loan. And a pretty cheap one to, in that the terms of the loan give you unlimited time to repay.


SA is saying that cheap money is still available to tech cos., hence there couldn't be a bubble? (Please correct me if I'm wrong.)

It sounds a little like circular reasoning to me.


He's not saying that. He's saying it seems like the only type of tech company that is being penetrated, for the worse, by cheap money is late stage unicorns. His argument about the way cheap money is penetrating them is that the terms of the money look a lot more like loans than equity, hence, traditional valuations don't apply.

For example Uber may have just received $100 million at a $10 billion valuation, but if the equity has a 3x cap, then how do you actually value the company from the equity just purchased? The answer is you can't, because traditional equity didn't change hands. VCs are dressing loans up as equity purchases.

People are assuming that unicorns have to hit certain valuations in order for the VCs investments to not be repaid or scrapped. SA is challenging this assumption, though acknowledging that the situation isn't ideal and highlighting that it doesn't necessitate a bubble.


The major difference between what's going on now and what happened in 2000 is transparency. Not with what's happening at companies, but what investors are thinking. That's important, because investor sentiment is the proximate cause of any bubble bursting.

In 2000, it was easy to gauge investor sentiment – you just had to look at stock prices, which are real-time, precise indications of how investors as a whole feel. That meant it was easy to tell when the bubble started to burst (arguably on March 10, 2000, when the Nasdaq peaked).

What's hard today, and maybe why there's a lot of these "is it a bubble or not?" stories, is that investors don't know what other investors are thinking. Sam and YC have consistently been open, but they're more the exception that proves the rule. The vast mass of investors are holding their cards close to their chest.

The net effect is to prolong an increasingly unsustainable situation. I think it's highly likely that most investors already secretly think we're in a bubble. And that they also believe that other investors haven't realized it (everyone assumes they're the smart one). So we're stuck in this phase of "make my last buck before all the other idiots realize what's going on."


Secrecy actually makes it more likely that terms reflect correct valuations, as long as each of the firms have independent decision making power and see a wide variety of deals. See eg. The Wisdom of Crowds, which found that a group makes better decisions than an individual iff each individual relies on their own data and comes to their own decision. If one individual unduly influences others' decision-making (eg. the "YC stamp of approval" which inflates valuations at demo day), then you get information cascades that can lead to exaggerated boom/bust cycles. If the parties left in the dark lack decision-making ability and independent information channels (eg. Theranos), you get information asymmetry and a market for lemons. But a market where each firm sees a continuous stream of deals and independently decides on each one without any regard for its competitors is pretty much the definition of a competitive market, which implies prices should converge toward accuracy very quickly. I'd argue that that's much closer to the situation now than it was in 2000.


This is a really good point, and explains why later-stage investing seems so wacky vs early and mid stage. The decisions to invest in later-stage startups, eg Uber, seem more influenced by other investors and the fear of missing out, while early to mid stage might steer closer to the independent decision making model.


That's one major difference, the other is the maturity of the industry.

In 2000 the online tech industry was fledgling, and most of it was vapor. The bubble was bigger than the entire industry. Today tech has grown across the board and the web has become a key pillar of that growth. Trillions of dollars in real value has been built and added to the economy of the world. As big as any bubble might be, the industry is so much larger and on such firmer footing today that a collapse wouldn't have nearly the same impact.


I hadn't ever really thought about it this way, but it's a good point.

Fundamentally, one would expect some relationship between total "digitized" (?) economy value (where digitized means able to be controlled, measured, and/or analyzed by software) and the value of startups.

And I don't think many people would argue computer-industry merging hasn't been happening across different industries fairly quickly.


The "web economy" isn't solely digitized though. Sure you have things like, say, youtube, but you've also got Uber, Amazon, AirBnB, etc, companies that fundamentally rely on the internet and software but which have a big dependency on physical things.


That's my point though. The degree to which "average physical thing that is depended on" is integratable with software at any point in time.

What is Uber worth with self-driving cars? Or with more granular locking standards (this car will authenticate and unlock for me because its driver added me)?

What is the traditional side Amazon worth without the ability to automatically route packages using laser readers and codes? Or with the ability of packages to self-navigate to their destination?

What is an AirBnB worth with an adjustable room? I walk in, all my preferences are imported into the room: illumination amount, light temperature, room temperature, music? Or, again, if the locks know me because of my digital keys rather than swapping physical ones?

If these businesses have a heavy dependency on physical things (as a lot of tech businesses do), then the degree of integration between that thing and software defines how much value can be delivered. Obviously you can increase this yourself with devices, but that's much more expensive than relying on an increasing average.


> Companies like Yelp are trading at less than 4 times trailing revenue.

Yelp has a P/E ratio of either 213 or 80, depending on whether Google Finance or Yahoo Finance have the correct number.

So it's pretty rich of him to use Yelp as his first example of a tech company that's dramatically undervalued, purposefully ignore the P/E ratio, and then use P/E ratios for other companies in his next two paragraph to try to claim that tech is undervalued.


Using p/e to value growth companies doesn't work too well. The "E" in the ratio changes too fast.


No it doesn't.

Yelp

2013: -$19m; 2014: -$10m; 2015: $36m

I can keep up with that very modest shift to profitability just fine. For example, a boring chicken company, considered a low growth company, produces faster earnings growth than that and nobody seriously has a hard time valuing them. Nobody would claim you can't value said boring chicken company because their earnings are growing too quickly.

Sanderson Farms (SAFM) net income

2012: $54m; 2013: $130m; 2014: $249m

They're currently trading for six times their last full fiscal year's earnings, and perhaps seven times 2015 earnings. They're growing earnings radically faster than Yelp. Yelp is doing anything but growing earnings too fast to be able to keep up with it.

The idea that you can't value growth companies because things change too much, is nothing more than an attempt to get investors to pay outrageously high multiples for the same earnings they can get elsewhere for far cheaper.


Revenue is a much better indicator of growth.

Yelp 2012: 137M; 2013: 232M; 2014: 377M

SAFM 2012: 2.3B 2013: 2.6B 2014: 2.7B

So, SAFM grew ~5% while Yelp grew 100%


I think that's a pretty huge oversimplification. In terms of dollars, SAFM's growth alone is larger than Yelp's gross revenue. Apart from that, those numbers tell nothing about cost- if Yelp's customer acquisition costs rose more than the revenue, then they are just paying a dollar for $.50. Further, if the social media sector of the market rose 200% overall, then Yelp is actually underperforming the market.

There's not a single "best" indicator of growth. You have to examine multiple facets of a company's performance- revenue, costs, overall market performance, sector performance, etc. to understand a company's growth.


> The idea that you can't value growth companies because things change too much, is nothing more than an attempt to get investors to pay outrageously high multiples for the same earnings they can get elsewhere for far cheaper.

Not necessarily, I'd say it's a valid principle, but not one that applies to yelp.


> Using p/e to value growth companies doesn't work too well. The "E" in the ratio changes too fast.

In 1934, Benjamin Graham and David Dodd published "Security Analysis" which laid out the basis of modern thinking on proper fundamental stock price, both by academics and by mutual fund managers. What you're saying completely contradicts that.

Something else is forgotten - the real price is not determined by the p/e ratio but in something even more concrete - the price/dividend ratio. Enron might be fudging their books, but nothing fudges the quarterly dividends. Price/earnings is already an abstraction of what determines the real price - the price/dividend ratio. You're talking about abstracting things yet further - it reminds me of the late 1990s when people talked about price as related to "eyeballs".

It's true that a p/e ratio is meaningless when a company is very small - before product/market fit and so forth. But P/E has forever been used to value technological growth companies. Technological growth companies are not a new thing - there were companies like Cisco in the 1990s and like Polaroid in the 1970s. High growth companies have high p/e ratios. It's already abstracted from price/dividend to price/earnings.

Then there are companies like Amazon, which are a whole other tangent off this.


P/E ratios are just one factor that professional investors use to analyze companies. P/E ratios may be really high while not being alarming when it is in the company's best interest to invest in growth.

When the company can invest excess profits (contribution margin) in growth, the company can make zero money in earnings while still rapidly growing revenue. That is a really great situation and if you do not buy that stock because of the high p/e ratio, you will have missed a major opportunity.

Dividends go a step further. If a company believes that paying dividends is the best use of the company's capital, that means the company has theoretically run out of growth opportunities to invest in.

Understanding finance is a lot more complicated than reading and understanding a single book written in 1934. If you want to learn a lot more about how unimportant P/E ratios are, you can read about factor based stock analysis or financial econometrics.


There is growth investing and there is value investing. One isnt the end-all, and both have merits.

I am more of the growth side of things so i will look at a metric like price to sales or sales growth to get a better idea on what investors are expecting.

My point here I guess is if youre looking at a growth stock, you should be looking at how eps are growing and how they will grow in the future, not the price right now.

Maybe its that i have seen too many scream about p/e on something like NFLX or CRM or AMZN (because they don't back out capex)... And then the stock contiunes to run as earnings grows.


The price earning ratio is useful to compare companies in the same industry that are targeting the same growth level.

If P/E was any good indicator of value (in the absolute) the total market cap of Amazon should have been close to $0 during any of these quarters when it barely broke even.

I'm not implying that the P/E is worthless, just that it should be carefully applied and in some cases it shouldn't be applied at all.


I've heard this idea that dividends determine a stock value, but I've never believed it. I guess for some definitions of the word 'value', because the dividend, if any, has little or nothing to do with the bid or ask prices on the exchange. When dividend time comes near (for annual dividends) the stock price ramps up by the expected/announced dividend, then poof! it drops by that price after. So for most of the year the potential dividend is factored in at nearly zero$.

Also preferred shares issue dividends, right? So all the rest - what is their 'value' by this strange definition?

Folks can pretend there is some holy, true value of the stock that can be determined from the history of dividends. But good luck buying or selling your shares based on that number.


There are quite few direct roads to investing based on dividends alone and there are also a whole bunch of products directly targeting high dividend yield stocks. Surely the people buying/selling those stocks and funds are buying and selling based on that number.

It's just a different strategy, not very popular in the startup world but for more established companies it is not unheard of.


Sure that makes sense. But academics insist that all stocks have value based on their dividends. My local prof of finance (and old high school friend/poker buddy) is one. I can't fathom how the ivory tower types come up with this nonsense.


Short-term vs long-term investment. If the plan is to buy in the morning and flip in the afternoon, the dividend ratio does not matter. If the plan is to buy and hold for years ahead and generations to come, the piece of paper you paid some cash for better kick back some cash in the process.

This is, of course, pure academic abstraction. The reality kicks in and you see both unhealthy companies producing healthy dividends (for their private equity funds, usually by raising debt) and healthy companies paying no dividends at all but reinvesting into growth (AMZN).


> But academics insist that all stocks have value based on their dividends.

That's a strange statement (by the academics, not by you!) since quite a few companies stocks are traded that have to date never issued a single dividend and that may not issue dividends for a quite a while to come. And still somehow the market seems to be able to assign a value to those stocks.

I think that one way of interpreting this is that - just like with start-up valuations - as long as you're growing / adapting / investing dividends are out of the question and the value is mostly based on the story and the dream. Turnover and other numbers are useful but ultimately not as useful as money returned to investors (otherwise, why invest at all?). But once the moment of dividend arrives (and growth / investment) have stopped and the company is now in its middle age that those dividends will be the marker used to re-calibrate the value of the stock. Dividends are a lot easier to use as an input into a formula than dreams and stories which are just repackaged hope.

That's one reason why I find it nearly impossible to put a hard number on the value of a start-up, it's essentially asking for a crystal ball.


It's not a strange statement. Stocks that don't pay dividends would still appreciate because investors are pricing in either the dividends the company will pay in the future, or the value the company will have to the dividends of the company that will eventually acquire it.


Again insistence that stock traders are all about dividends, on no evidence whatsoever? Folks trade stocks because the bid and ask overlap; that's it. There's nothing else going on, except in people's heads. Fictitious future dividends are ... fictitious! Good luck trying to sell your stock for anything but what its going for on the day you sell. Any cries of 'but dividends! Its worth X!" will be drowned out by the marketplace.

And the evidence points to, there's no accommodation for dividends in the price. Stocks ramp up in the month before dividends are issued; drop that day. That's all the market does to accommodate dividends.


Nobody is arguing that stock traders are "all about dividends". The argument is that the intrinsic value of a share of stock is ultimately about dividends.

Stock traders buy for appreciation. But that appreciation is fundamentally rooted in dividends, either of the company itself, or of some other dividend-paying company that will eventually acquire it.


Ok, we can start qualifying what 'value' means. Adding 'intrinsic' distances the conversation from the common meaning of value, which is 'what you can get for it'.

Again, insisting that appreciation is rooted in anything but what the market does, is hard to buy into.


I'm a little confused; this isn't stuff I just made up. Again, think about what a share of stock actually gets you. People trade stacks because their price fluctuates... but why do they fluctuate? Because the company is earning more? Why does that make a share more valuable?


Because people think it does; nothing more. Really, stock shares (most of them) are like baseball cards. Famous players with a good season have cards worth more. But there's no reason for that, than, people believe it.

I'm sure you didn't make it up; this notion has been around for a while. Its just a curious quirk of human nature to believe in things that don't quite make sense.


It's likely talking about all future dividends (discounted for time value). Startups will naturally reinvest their earnings to grow, but at some point, pursuing growth will be too costly and the best use of their earnings will be to return it to the owners as dividends.

If a company were guaranteed to never return anything to owners, then it would be more like speculating in the future value of a baseball card than an actual investment.

It may not be a practical way to calculate value, but it's not crazy either.


Indeed. Microsoft paid it's first dividend only in 2003, a good 17 years after it IPO'ed. http://www.nasdaq.com/symbol/msft/dividend-history

There's this too: http://www.nasdaq.com/symbol/goog/dividend-history


That needs to have been taken out of context.

Probably what they insist on, is that there is this Gordon valuation model, which, long-term, should apply to any company that gives a dividend, and it's based on this idea that for a company to be worth anything for a minority investor without any control of the company, it needs to have a dividend - which is the only return on investment that such investor will receive, apart from profit for selling in the future.


Nah, simply blind insistence that there every stock is worth only what its dividend pays. I don't know why he thought that; but apparently the idea has currency. Look at the comments to this thread!


> But academics insist that all stocks have value based on their dividends.

Makes sense to me. If everyone knew a company would never pay any dividends there why would anyone pay for any share of the company? It would be worthless.


Except it happens all the time, and the shares are not worthless.


Dividends can underwrite the value even if never issued, the same way a government guarantee can make debt 0-risk even if the guarantee is never exercised. Contrast with a "tulip economy", like bitcoin, where there is no intrinsic value — only investor sentiment/expectation. Bitcoin and gold are worth money because you expect others to expect others to expect etc it to continue to be worth money. Time-discounted expected future dividends act as shared knowledge: everyone knows that if the price dropped below a certain point, the company can start issuing dividends and the price would immediately recover. Because everyone knows that, the price never has to drop that far, and it's never necessary.


Not really, it's the expected future value of dividends (plus the value in assets of the company and in voting rights, but these are normally much smaller than the value of the future value of dividends). People buy growth company stocks based on the belief that in 10 years, the company will be huge and they'll start paying dividends.

> Also preferred shares issue dividends, right? So all the rest - what is their 'value' by this strange definition?

Common stock can pay dividends as well.

If you still don't believe me, let me ask you - if tomorrow Google announced that they would never ever pay a dividend ever, how much would their stock be worth? Why would anyone buy Google stock in that case?


Google did say that, when they first went public. The markets ignored it (and it seems they were right to; Google may not technically have paid a dividend but they reverse-span-out Alphabet which has, which is economically the same thing).


Financiers are perfectly happy to value things quite abstractly. I mean, you can buy CDS on Kazakhstan - that is, insurance on bonds that don't exist. And they trade, at reasonably stable prices.

Exactly how much is in this year's dividend doesn't really matter most of the time - if they pay a penny less this year that's one more penny in their vaults for them to pay out next year (or invest in the business and pay out further down the line). I mean, what else are they going to do with it? (The exception is generally poorly managed companies who might waste the penny instead - and in those cases activists often can dramatically increase the price by encouraging the company to pay a big dividend right now and keep less cash in the bank).

But the dividends are where the rubber meets the road, the foundation on which any valuation ultimately rests. And in the long run companies either die or become the kind of stable, dividend-paying stock that makes less headlines and is valued pretty directly on PE that actually makes up most of the market.


Have you ever heard that price is what you pay, and value is what you get?

The people who understand this look at dividends. The rest buy companies like Amazon for silly multiples.

P.S. Preferreds may or may not pay dividends. The preferreds that VCs get almost never do. If you own preferreds that do, you probably value them the way you value anything else: present value of future payments.


Dividends is just one way of returning money to shareholders. It's preferred by investors buying stocks for recurring income, as it allows for a simple buy-and-hold strategy that kicks back some income on a regular basis.

Stock buybacks is another mechanism, and is preferred by growth investors buying equities out of taxable accounts, as it gives greater control in regards to capital gains, tax loss harvesting and various other tax events.


Stock buybacks by definition cannot by themselves reward shareholders. They are by their nature an enticement to become an ex-shareholder, and a reward to those ex-shareholders.

The fact that remaining shareholders are, ceteris paribus, "entitled" (but not really) to a larger share of the company's profits as a result is moot if the board never distributes the profits to them. In reality, you're entitled only to what the board decides to give you. For my part, if the board wants to buy me out, I'm happy to take them up on it. The incentives favor becoming an ex-shareholder, so ex-shareholder I shall be.


That sounds like 'sour grapes'. Sure, folks can pay crazy prices but not me! I won't participate in all that profit nonsense.

The only value you usually get from most shares, is what you sell it for. And that depends only upon the market. Not some academic definition of 'value'.


> That sounds like 'sour grapes'.

Believe me, it isn't. I'm no trader and have no interest in speculation. I'm perfectly happy collecting my dividends (that profit "nonsense", as you put it) while you boys do your thing.

> I won't participate in all that profit nonsense.

Riddle me this, then. A company is founded. Takes a few rounds, goes public. Billions of its shares are traded for years. Then it goes bankrupt, and all those shares are canceled.

Who profited? Trading is a zero-sum game by its nature. The profits, if any, accrued to those who were paid dividends. For every trade, show me a winner and I'll show you a loser.

It's fine to bet on the horses. Good fun, fresh air and a pleasant day at the track. Nothing wrong with it. Maybe you'll even get lucky! But if you want to make the sure money, you're better off owning the track... or the horses.

> The only value you usually get from most shares, is what you sell it for.

This couldn't possibly be more wrong. As I just explained, the true and total value (using your definition of CASH MONEY) of any corporation is the dividends it pays. Otherwise, there's a loser for every winner in the trading game. If you only own shares that don't pay dividends, I can understand how you might fall into this way of thinking, but that doesn't make it right.

This is a product of various cognitive biases, among them the Dunning-Kruger effect, the bandwagon effect, recency, groupthink, survivorship, and many others. It feels good to believe that one is a better-than-average trader, that one has skill in trading and can consistently and reliably make money doing it. Because it's often possible to make money without skill, even for periods of time that are large fractions of a human life, it's easy to draw that conclusion, especially when it seems like everybody is making money trading as is often the case in bull markets. Because one is making money trading (or believes he is; it's easy to overlook the bad trades if you don't keep a good accounting, and even easier to imagine unrealized market price gains as if they were CASH MONEY when in fact they are nothing), it's easy to assume that it's the result of skill. But most traders have zero or negative skill, and like the gambler who always lets it ride, will eventually go broke.

I don't really care whether you trade. I don't really care whether you make money or lose money trading (the odds are not in your favor). I certainly don't care what assets you choose to own. But don't tell me that the income I receive from owning -- not trading -- solid businesses isn't profit, or that your way is better than mine. When people start talking like you, I begin to wonder if we once again have a generation of traders in the markets who have never experienced a crash or a secular bear market. Those unrealized gains can turn into losses and margin calls awful fast when things go to shit. Yet shockingly often, even while prices crater, the dividends keep coming.


Trading, as in "people crazily trying to profit from a dumber / slower counterpart" is zero sum.

But trading, as in, go to market and exchange money for another thing, can be a positive-sum game. If both participants in the exchange have different risk profiles, the exchange might make both of them happy - that's why they go to market, and expect not to be ripped off.

An easy example are future markets (the risk of high prices is good for the guy that has oranges, bad for the guy that makes juice).

Another example, with stocks, is putting your money in diversified assets. If all I have is stocks from company A, and you have only company B shares, and even if both companies are exposed to the same risks, it's good for both of us to interchange stock. If the CEO gets a heart attack, neither of us gets impacted wholly.

The point being: as you can't predict the future, the fact that one party ended up winning is not sufficient condition for the whole thing being a zero-sum game, unless you restrict "the game" to be something smaller than the intentions of the agent, which is dumb.


Yet the stock market goes up 15% every year (on average) for the last century. Where does that come from? The 'zero-sum game' fiction is ridiculous urban legend. The price depends upon a market, and I sell to a different agent than I bought from, at a different price - the transaction is nothing like 'zero sum'.

Most stocks don't issue a dividend - yet they have solid, stable prices. Folks use a variety of valuation techniques, but mainly the present value of expected future value. Which means what you think you could sell it for in a year.

Have a nice time with those dividends - but my retirement stock portfolio is worth something when I sell it for income when I'm retired. The dividends are a tiny part of that.


If the P/E ratio had been very low, I think he would have used it.

The problem with using P/E for an eleven year old company like Yelp is that E is still very small or non-existant and hasn't been changing fast, so the P looks ridiculous.


> No one seems to fervently believe tech valuations are cheap, so it’d be somewhat surprising if we were in a bubble.

I'm nitpicking a great post here, but I'm not sure this statement is right.

During the real-estate bubble and the dot-com bubble, seemingly few people actually thought houses or internet companies were cheap.

I think people felt that they were expensive, but they bought them anyway on the assumption that they would sell to the greater fool.


I agree that it's a cryptic statement, but I think he meant that bubbles are characterized by investors believing irrationally that an asset class is cheap and buying it. Therefore, investors believing that an asset is not cheap indicates that there is no bubble.

Another way of saying it is that if people are generally skeptical about the valuation of an asset class, it can't be in a bubble. That does leave one wondering why said investors would continue to buy the asset, though.

With many bubbles, the thing that breaks them isn't investor worry about valuation, but the sudden cascade of failure of mechanisms built on top of the valuations. In the case of the real estate bubble, this occurred because huge numbers of bad loans suddenly stopped being paid when interest rates went up. That broke all the financial instruments built on top of them.


The problem with this circular logic is that it is an EXACT symptom of what happened in the housing bubble "Bubbles can only happen when people believe the price will only ever go up. Look, there are a bunch of people saying housing prices are too high. Thus, we can't be in a bubble, so I'm safe buying this shack for the market value of a million dollars."


I see what you did there.


Aren't the greater fool theory and 'cheap' the same idea, just from different reference points?

Both assume I can buy an asset for less than I can sell it for.


Good article, and I agree with the main points. However, you have to be very careful comparing PE ratios between companies with different capital structures, it is wrong. For example, lets take two companies that are exactly the same, A and B and lets say they should have an enterprise value of $100 and have the same earnings before interest.

Company A is all equity and has a PE of 10 ($100/$10). Lets say company B is half equity value and half debt ($50 and $50). Lets also say the company is paying 4% on its debt. Its earnings are lowered to $8, however the PE ratio is actually 6.25 ($50/$8).

This company isn't "cheaper" it just has a different capital structure. No measure is perfect, but at least use EBITDA or Unlevered FCF for comparisons. This is especially important now with the large number os stock buybacks.


Totally agree on using unlevered FCF as the comparator.


static analysis is always problematic. If a company B is using debt, it should be able to increase its earnings with the debt and increase equity value. if it's failing to do so, it should be cheaper because it is riskier


I don't think you can lump all technology into the same group anymore. There is a big difference between materials science technology, robotics technology, big data and analysis, and your run of the mill internet startup.

To me, I would say the industries closer to STEM are far undervalued, and the internet companies are generally overvalued, mostly because of one other industry: advertising. These days it feels like the standard model is to get as many users as possible, secret sell their data to third parties, eventually start advertising to them, and finally selling out to some corporate management husk which will take the company under the same name and run it into the ground capitalizing on the advertising potential, until it collapses or, if it's lucky, it gets turned into some sort of monopoly (eg, reddit on posting, facebook on social, linkedin for business social, google for search and email and big data, amazon for cloud services, twitter for immediate/short blurb social, etc)

Maybe it's just me, but it seems like most of the net startups just want to suckle on the teet of big advertising because they have are still so willing to give that teet out, and I'm hoping eventually this model collapses because it corrupts some of the important functions of society (eg, journalism).


Case in point, Tobii -- market leader in pupil tracking tech valued at only $775m. People have no imagination.


Very few people would agree regarding Yelp. Almost no financial analyst worth a lick would use trailing revenue (instead of net earnings) as a way towards finding value in a company.

Maybe I am missing why Sam points Yelp out at all here...


How do you think companies with lots of revenue and zero earnings are valued?

Like, say, Amazon.


Amazon's earnings are not zero: http://www.nasdaq.com/earnings/report/amzn


They have been for much of the existence of the company though. And their current earnings might as well be.


Trailing revenue makes more sense than net earnings when a company has proven profitable unit economics but hasn't yet saturated its market. At this point, it always makes sense for the company to reinvest any profits into additional sales & marketing rather than bank it, because it earns a predictable return on capital > the market as a whole. A company in this stage will show zero or negative earnings during the entire growth phase (see eg. Amazon.com), but future DCF will increase in proportion to CLV of the whole customer base. Assuming stable CLV, trailing revenues is a pretty good proxy for this metric.

Yelp seems like a fairly good candidate for a business at this stage; its unit economics are probably known to Sam, but it's doubtful that it's saturated all local businesses out there.


I think Wall Street is now learning away from treating Yelp as a high growth company. The question they are asking themselves is whether Yelp is reinvesting profits or if Yelp just can't be profitable.

Yelps business is a competitive one. Their main revenue generation is selling ad space to local businesses. They are a yellow pages of the internet.

User growth is slowing. I'd fear that Yelp just can't grow past any profitability issues. There is only so much money you can make from advertising.


Saturating Yelp's target market is labour-intensive work though, with high churn inevitable due to the nature of their customer base. Selling and renewing classifieds to a mass of small business is costly. Sure, you can eke out more profit even if your costs scale proportionately to revenues, but there's good reason to believe the CLV will actually decline and acquisition costs rise as they aim for higher saturation. With their brand and reach well-established for some time, it's the restauranteurs who aren't digital marketing-savvy (or think Google offers better ROI...) they're now looking to sign up.


You would still never use trailing Revenue. You would want to use y/y revenue growth rate if you are going to use it as indicator for value.


This is a pretty solid argument for why tech isn't out of bounds, at most any stage.

On the other hand, we've had 7 years of 16% growth in the S&P. At some point, that will correct, and it will have a real effect on tech. We'll all declare the bubble "popped" at that point, and totally reasonable investments will fail, or at least become painfully illiquid for a while.

7 years feels like a long time to have a run like this. Just like every other time, nobody knows when we'll get that correction.


One thing that often gets lost in the analysis is the distinction between changes and levels. Yes, S&P has been rising for 7 years straight ( changes ), but it is not at particularly egregiously high levels relative to GDP or relative to whatever metric you prefer, since 2001


My math going back five years says it hasn't been 16% by a decent margin?

Wouldn't P/E be a better heuristic? Either CAPE or just basic P/E?


I've got some serious end point bias going on, but the bottom was ~700 in March '09, and it's currently at 2,100. Triple in that time is actually 18% annualized (6.5th root of 3).

There's definitely better ways of measuring "are we near a top", but "length of bull market" isn't meaningless. There have been a few longer ones, and only one ('49 - '61) that was nearly this productive at the 7 year mark.

http://greenbackd.com/2013/04/17/bull-markets-since-1871-dur...


7 years ago was the middle of an economic crisis, I don't think it's abnormal to be going up for a while after that.


Except that you forget 7 years before that was the big 2001 crisis.

So, the opposite is true: There is reason to believe it's a 7-year economic cycle.


If only the market were that simple.


Sam is right in saying that equity deals are more like debt. But the reason for this to happen is because the interest rate have been held at 0 for a very long time, and in an economy that has recovered well.

Because of the low interest rate in a healthy economy, every investor would be ill-advised to invest their money in safe low-yielding instruments such as treasury bonds. That is why we have seen a dramatic shift of capital from the traditionally safe rates market to higher yielding sectors, such as tech and real estate.

That is especially true since there are enough tech companies to pool investment together in somewhat diversified portfolios, which give a false impression of safety (remember the CDOs?).

The BIG question is what is going to happen when the Fed hikes the rates in the course of next year. And what will happen when the US passes a law to increase taxes on marginal gains.

It is likely that there will be a significant drain of money from the tech sector, and when the money starts to withdraw, it tends to do so in a pretty unorganised manner.

We may not be in a bubble that will burst. But we may very well be at the high point of a market cycle. The problem is not the high valuations, it is the high appetite for risky investment.


Excellent post, and the "investment as debt" theme is spot on, who cares what the valuation is if you get 2 - 3x your money back right? However you do need some sort of liquidity event for that and I worry that some Unicorns will become Ponzi-corns as early investors contribute their shares to be re-sold to the later investors as a way to cash out their 2X and move on. Then its "last one in, loses everything". Of course a couple of take out re-capitializations will probably put a damper on some of that zeal.

Mostly the people being screwed here are employees with 100% common stock. That argues that high value employees should be negotiating for preferred stock grants rather than common stock ISOs. That will come with a bigger tax bill but has a better chance of providing a return on their sweat investment.


The only "last ones in" will be the retail investor when they eventually go IPO. That's always been the case, just like with GroupOn, Zynga, etc. The VCs and IBs will hype up the company, and then they get their mutual fund buddies with huge piles of cash to pay up for the IPO in exchange for early access to the next awesome company, and these crappy companies get unloaded to the retail suckers.

That's how the industry works, but no one seems to care, because there are no consequences, and the incentives are such that no one cares if the retail investors lose a bit of money, and VCs and IBs get massively wealthy.


Except that the future of Unicorns is not an IPO, its being sold to BigCo for a fraction of their Valuation which pays off some of the investors but fails to trickle down to the common stock. Or like with companies like SilverSpring there is a massive reverse split to get the the number of Common Stock shares down to a number that represents what the current market might pay leaving employees with pre-IPO stock options where the strike price is above the IPO price. How is that not a ponzi scheme?


Reverse split happened to Hortonworks as well. Lots of employees got completely screwed by this because the sheer number of their options were cut in half.


> I saw terms recently that had a 2x liquidation preference (i.e. the investors got the first 2x their money out of the company when it exited) and a 3x liquidation cap (i.e. after they made 3x their money, they didn’t get any more of the proceeds).

But doesn't the 3x liquidation cap only come into play if the total exit is less than 3x? In my understanding, if the exit is greater than 3x the invested value, they then convert their preferred shares to common shares and receive their >3x proportional share in common stock thus retaining the upside of the investment.


No, that's when the 2x comes into play. In this scenario, the investor gets the first 2x, and then after 3x doesn't make any more money.


Oh wow, that is unique and very debt-like. My experience was closer to a 3x participating preferred.. Thanks for the clarification.


Isn't that wrong because the preferred shares always have the right to convert into common?


Do you think most entrepreneurs who take these debt structures realize the risk to their paper wealth? Or is it simply a matter of "we need the unicorn status to grow and hire" at any cost?


I feel like the lofty valuations of very early-stage companies these days really creates an unfair dynamic for early employees. I've seen people claiming $5MM valuations for fancy powerpoint slides and no product, which seems really high to me.

The founders then recruit people and give out equity based on these sky-high valuations despite no product or real offerings. Early employees end up sacrificing significant pay in exchange for equity that is priced far higher than it actually should be.


> "No one seems to fervently believe tech valuations are cheap, so it’d be somewhat surprising if we were in a bubble."

Is this true? I know that high valuations are getting tons of press and shock in the public, but it seems like VCs, Wall Street, and the general population are racing to get their money into startups despite the high valuations everyone is talking about. So to me, that would indicate that many people do fervently believe tech valuations are cheap.

I think where we put our money is probably a better indicator of what we believe about a market than what we say, and I get the sense that many of the people who are saying valuations are high are the same ones pumping millions of dollars into every startup they can.


> 2015 has seen the lowest level of tech IPOs as a percentage of all IPOs in seven years.

Healthcare and finance are leading the IPO percentage. That seems to reflect new opportunities created by legal changes (ACA + Dodd-Frank). I'm not sure you can draw much of a conclusion about tech bubble status because regulatory changes have fostered growth in other industries.

> The S&P Tech P/E is lower than the overall S&P P/E. Neither of these facts seems suggestive of a tech bubble.

Overall tech P/E may be low, but the recent names are filled with companies that are not making profit, and don't appear on a path to do so over the next few years. Examples: Pandora (-0.65 eps), LinkedIn (-1.15 eps) and Twitter (-0.86 eps), Zynga (-0.20 eps), Trulia (-1.82 eps) and Zillow Group (-2.47 eps), Box (-1.66 eps), Etsy (-1.02 eps) and Shopify (-0.23 eps).

(To be fair, there are "winners" Facebook, Kayak, GoPro, Fitbit).

I'm not sure you can draw a conclusion about a tech bubble by looking at entire sector. Recent names seem to justify the "unicorn" meme.


Call me a cynic, but is it not in the best interests of Sam to tell us everything is alright? Obviously any kind of tech bubble would affect Y Combinator and some of the startups they have invested in.

When was the last time a bank was honest with customers and told them that things were bad? Bad news causes panic and panic makes things worse.


I wonder what the thinking is behind deals like that (2x liquidation preference/3x liquidation cap).

On one hand, it strikes me as incredibly beneficial for the founders if the company is a runaway success.

On the other hand, the VCs are essentially throwing away their unlimited upside potential, and in doing so signalling they don't particularly believe in the company.

There's also the fact that the terms are very unfavorable for founders if they exit at anything below a stellar valuation, though one could argue the entire point of the game is to achieve an incredible exit.

Still, when incentives aren't aligned it's disconcerting.


These are specifically in late-stage deals, like Uber's recent rounds.

The investors aren't traditional VCs, but companies like Fidelity. They don't want a 5% chance at a 100x return; they would much rather a near-guarantee of 2-3x with downside protection. That's why Sam compares them with fixed income.


it's not clear why Fidelity would want a cap on the upside, since it needs to beat an index. Most likely, it doesn't think it's giving up any upside.


I would imagine ceding the cap makes it easier to get the 2x liquidation preference.


They give up the upside because they have protection from the downside (they get their money back first).


I understand, I'm saying I don't think they believe they are giving up much upside at all


No-one wants a cap on their upside, whether or not they need to beat an index.


Perhaps it has to do with the amount of money that's being invested in these late rounds. When you're doing 10k angel rounds, you spread the money around and hope one of the companies take off. When you're investing tens of millions of dollars at nine and ten figure valuations, you do so more conservatively in a way that is more likely to guarantee a return. They're not saying they don't believe in the companies at this point - in fact, you can almost argue that they're saying these late-stage companies are definitely good for the money - but more so that the companies at this point are less likely to make astronomical gains.


Can't capped preferred still convert to common? As long as they can do that, the upside is still unlimited (though perhaps reduced compared to uncapped participating preferred).


"I saw terms recently that had a 2x liquidation preference (i.e. the investors got the first 2x their money out of the company when it exited) and a 3x liquidation cap (i.e. after they made 3x their money, they didn’t get any more of the proceeds)." Can someone explain mechanically what this means? i.e. What is the payoff under each scenario?

Edit: this link seems to explain it well http://www.businessinsider.com/how-liquidation-preferences-w...


This is a very good piece, particularly: "In a world of 0 percent interest rates, people become pretty focused on finding new sources for fixed income"

The amount of money coming to pay up for growth/quasi fixed-income is almost certain to increase as there are a lot of investors who need to hit 7-8% nominal returns in a 0% rate world: http://www.ecstrat.com/research/why-large-funds-are-piling-i...


And I think that the entire public market is likely to go down—perhaps substantially—when interest rates materially move up, though that may be a long time away.

Can someone EL5 this? Arguments that seem plausible (to me):

1) higher interest rates make borrowing more expensive

2) higher interest rates make less risky investments more attractive

3) something hand-wavy about inflation and the role higher-interest rates play in combating it (or, more precisely, the signal that sends to the market)


The conventional wisdom is your #2. The idea is that for the past 6 years, interest rates have been close to zero, and as a result, people who would traditionally want to park their money in bonds have been forced into equities just to get any (non-zero) return. This is particularly true for investors like pension funds that need to show a certain return each year or else the manager gets fired or does not receive a bonus.

The other issue is that Fed monetary policy tends to work with a lag of ~18 months. In other words, once the Fed starts a cycle of raising rates, recession or slow growth are the expected outcome -- not immediately but within 1-2 years following the rate increases. (Why? The reason is because borrowing costs increase for businesses -> they hire fewer workers -> more unemployment -> recession, etc.)

These are general rules of thumb, not hard rules, obviously. Also, the conventional wisdom that reigned supreme between the 1960s - 2009 may or may not hold in the future. Monetary policy has changed dramatically in recent years, and I think it's safe to say that no one is quite sure what will happen when the Fed raises rates. Some question whether they even can influence market interest rates anymore [1].

[1] http://www.nytimes.com/2015/09/13/business/economy/the-feds-...


if people aren't buying the late stage common stock at high valuations, then how can it be a bubble in late stage valuations ?

it sounds more like a bubble in tech press reporting of valuations ?


"There is a massive disconnect in late-stage preferred stock, because if you’re using it to synthesize debt it doesn’t matter what the price is."

Actually, price is crucial with this weird 'debt' since you're betting on the cumulative probabilities of hitting your liquidity preference and liquidity cap numbers. (Really it's an integral over that range, but whatever.) Whereas in equity venture investing the power law distribution of returns dominates linear optimizations of price.

Thanks for reporting on this. I don't think many people knew about this insane liquidation straddle instrument. I sure didn't.


Tech companies, no matter how large, are so incredibly founder-dependent. You are not buying into Facebook but into Mark Zuckerberg. You are not buying into Google but into Sergey Brin or Larry Page. With Steve Jobs gone, you are buying into a total lack of vision, called Apple. There are no tech bubbles or tech busts. The type of persons mentioned are entirely oblivious to them. Bursts or bubbles do not affect their vision or their ability to execute in the least. Avoid investing in a weak personality at the top, and then you can ignore the entire market.


To be honest, Apple was able to make a profit before the iMac: http://investor.apple.com/secfiling.cfm?filingid=320193-98-1... (and yes I think most of the listed stuff was doable under Amelio)


The equity structured so that it's effectively a debt point is a really good one to make. "Valuations" and "venture rounds" are often not really comparable between companies.


This is a bit of shameless plug but i think quite aligned with Sam's post but makes a slightly different argument. https://www.linkedin.com/pulse/we-have-been-bigger-tech-bubb...

Would love to get critiqued by this uber smart and opinionated crowd here.


I’d argue on-premise software, as a category, was a bigger bubble than what we have today in tech. It delivered little value to the end-user but the companies that sold them were commanding huge valuations for years because of the huge margins that they were able to charge.

Wow. Well that's a pretty strong claim. I'd really like to see some kind of proof.

Unless I misunderstand you, you are claiming that companies like Microsoft, Oracle and SAP were (are?) overvalued.

You are also claiming that their software delivered little value.

Those are some pretty bold claims, and I don't think you've made the case well enough for them to stand up.

I think that you point about usage being a good indicator of future revenue is somewhat correct, but the really valuable analysis would be to show the types of services where usage is a good indicator of future value and ones where it isn't.

Eg:

Free file sharing? Not a good indicator

Social platform? Good indicator


I think my points are made at a macro level and not at a specific company level. There is no fool-proof proof to any business/economic hypothesis. Oracle, MSFT and SAP aren't the only companies that make up on-prem software. But even with these companies shelf-ware is rampant. It took large internet companies to come up with competitive stacks to break these virtual monopolies. Having said that your point on making a stronger case is well taken. My bigger point is that the the current trend is less of a bubble than the era of on-prem software - this is a macro level observation. There were company level bubbles then and there are now. I am not commenting on specific companies here at least.


A business model that has been overtaken by technology changes isn't a bubble.


1. JP Morgan will allow retail investors to buy at the IPO price on deals they lead. 2. Big mutual funds etc.. are buying in at later stage private financing rounds. 3. Many tech stocks are off their IPO price. 4. There is preferred stock, ratchets and lots of other ways to get a specific return at a specific IPO price or to even support an IPO. 5. In regards to #1 one has to think about who the greater fool is.


2015 has seen the lowest level of tech IPOs as a percentage of all IPOs in seven years

I'm thinking back to the Economist article of a few weeks ago about the future of corporations, discussing how much easier it is to raise capital and stay private these days, so there's not that much incentive to IPO and have to deal with all those quarterly earnings calls and so on.


I think we are going to witness harder times for unicorns, in general, in the up-coming years. I agree with Sam with most of his points, but I do think there are few startup valuations that seem crazy at this moment. Those valuations will be self corrected in the course of few years or so.


> Many of the small cap public tech companies have taken a beating this year. Companies like Yelp are trading at less than 4 times trailing revenue.

Could someone explain what this means please? Is Sam saying that the stock price of Yelp is lower than what is actually should be (based upon revenues)?


True. I am cautious to say this, but if one of these over valued unicorns like Uber dies then I think the psychological effect would be similar to a bubble burst. It would tight up the capital flow to a great extent even for solid companies


Any time you see Fidelity, Morgan Stanley, Coatue or T. Rowe Price names in the funding rounds, 1x liqudation preference is usually a bare minimum for those guys to get involved. Their investors will get their money back, and even if after all is said and done it's 1x, hey, we're in a low-rate environment.

Funds tout access, investors have downside protection with a potential of upside surprise, few people that do get nasty surprises are employees of those companies finding themselves staring at the ever-increasing number of newly minted shares to satisfy ratchet conditions and subsequent dilution of everyone else (case study on this is NYSE:BOX).


Maybe the problem isn't the companies or industry but the markets themselves. Going public isn't needed anymore. So why bother? Using publicly traded companies as a market radar is flawed.


The point about the late-stage investments being not-really-equity is a great point. So my question is: why do financial journalists just about always miss it when they write about tech unicorns?


I've ridden two tech bubbles up, down, then up again. I wish I was able to time the market, but alas, I am not and so settle for patient long term investing.


I might want my wealth in tech stocks. But I sure as hell wouldn't want my wealth in advertising-funded stocks. How many tech companies have any other revenue stream? What does the landscape look like if 2016 is the year that Twitter finally runs out of other people's money?

If you'd invested on demo day you'd be happy with current valuations, sure. But that just means the valuations are as high now as they are then. How many unicorns have repaid their investors in terms of dividends?

Altman is right that there's been a cooling off in 2015, and right that it's a positive sign - we may yet avoid a dramatic crash. But that doesn't mean there isn't a further contraction to come. We could just be seeing stagflation finally catching up to the tech industry.


This is a weird thing to say. Look at the Fortune "Unicorn list" (the first Google hit I get for [unicorn list]):

1. Uber (not ad-funded)

2. Xiaomi (not ad-funded)

3. Airbnb (not ad-funded)

4. Palantir (not ad-funded)

5. Snapchat (ad-funded)

6. Didi Kuaidi (not ad-funded)

7. Flipkart (not ad-funded)

8. SpaceX (not ad-funded)

9. Pinterest (ad-funded)

10. Dropbox (not ad-funded)

11. WeWork (not ad-funded)

12. Lufax (not ad-funded)

13. Theranos (not ad-funded)

14. Spotify (not ad-funded)

15. DJI (not ad-funded)

16. Zhong An (not ad-funded)

17. Meituan (ad-funded)

18. Square (not ad-funded)

19. Snapdeal (ad-funded)

20. Stripe (not ad-funded)

It just keeps going like this. These aren't even ad-ecosystem companies. I'm not sure how far down the list you'd have to go to find an adtech firm.


Meituan is not ad-funded. Spotify - eh, that's one's a 50/50. I think more people use the free version of Spotify with ads than people who pay for it.

Also, I love uselessly speculating! So, here's the list with speculation as to whether the unicorn will last in the next 5 years or wither away:

     1. Uber         -     will be alive and be doing extremely well
     2. Xiaomi       -     will be alive and doing moderately well
     3. Airbnb       -     will stay,  regulations will put a damp on its operations
     4. Palantir     -     will downsize; other companies will emerge and compete with it
     5. Snapchat     - (ad-funded) will fail to find a sustainable monetization model
     6. Didi Kuaidi  -     (Chinese 'Uber' clone) will be alive and well
     7. Flipkart     -     (Indian e-commerce site) will be alive and well
     8. SpaceX       -     will fail
     9. Pinterest    - (ad-funded) will stay just barely, will downsize
    10. Dropbox      -     will fail
    11. WeWork       -     (home:AirBnB::office space:WeWork) will be alive and well
    12. Lufax        -     (Chinese finance marketplace) will be alive well
    13. Theranos     -     will fail
    14. Spotify      - (~ad-funded) will fail
    15. DJI          -     (Chinese company that creates unmanned aerial vehicles) will downsize
    16. Zhong An     -     (Chinese online insurance firm) will be alive and well
    17. Meituan      -     (Chinese retail service site) will stay but not strongly
    18. Square       -     will fail
    19. Snapdeal     -     (India's shopping site) will be alive and well
    20. Stripe       -     will be alive and be doing extremely well
edit: formatting


Dunno Dropbox has really low friction in usage and a premium tier that's actually being paid by professionals.

Maybe will downsize, but competition doesn't look as good. Will not go away until people have a better featured, less costly replacement.


Dunno too : why would you pay for Dropbox when you have OneDrive if you're on MS ecosystem, iCloud when you're on Apple ecosystem and GDrive when you're on Google ecosystem. They all offer more than Dropbox (better integration, Office suite etc).


I know designer use it because it's dead easy to collaborate, whether with other designers (mac on mac) or clients (which may or may not be on macs)

but that's one use case I'm biased toward coz I see them every day using it that way.


And switching is a pain in the ass. Dropbox looks very strong.


I'm not sure I understand how WeWork is anything like Airbnb. They seem like basically a value-added reseller of commercial leases. (We're in a WeWork space in Chicago right now).


Yeah I think you're right, my analogy is bunk. I'll leave it up for context.

For the benefit of others, here's the founder of WeWork himself explaining WeWork:

    WeWork takes out a cut-rate lease on a floor or two of 
    an office building, chops it up into smaller parcels and 
    then charges monthly memberships to startups and small 
    companies that want to work cheek-by-jowl with each other.
Also, wow, you work in a WeWork office? I'm surprised. Surprised because you seem like a smart guy who'd have made a really great company that could afford to get the swankiest office available. Or maybe, you have a company that's doing well but you just choose not to spend big money on office space?

Sorry for being intrusive, I'm really just surprised is all! I was visiting some startups in Chicago not too long ago and I saw many spending a lot of money on office space -- some that I felt probably should not have been.


1. We had office space in Oak Park, blocks from where we live, for a cheap 1-year lease, but we rarely used it; we might as well just work from home. But working from home hurt our productivity and quality of life.

2. The WW space we're in is in one of the best and most accessible locations in Chicago --- west loop --- this is a strategic thing with WW: they can buy space in bulk and for long-term commits and thus get reasonable prices in places where we can't.

3. Crucially: WW offers m-t-m leases. The 1-year lease for OP space wasn't a great use of our funds, and a 1-month lease de-risks it for us.

4. There are only two of us actually in Chicago. Matasano would never have used WW space; we had a series of offices in The Monadnock Building in south loop.

5. We have a private office in the building.

6. Office space in Chicago is extremely cheap. The WW space is nicer than any SFBA office space I've been in, includes utilities and Internet, and is price-competitive with the crappy space we leased in Oak Park.

Long story short: WW is much swanker than anything we could rent at the same price. That could change, especially if the space fills up.

The downside of WW is that it's incredibly douchey (ours seems to have a Kanye West theme). I can get over than in exchange for comfortable couches and fast Internet.


So WW comes and buys up space in bulk... and manages that space and gets a nice profit.

And they do indeed seem to be making a nice bit of profit.

Don't you think though that real estate moguls are seeing this and getting tempted? I think pretty soon they will learn and decide to "push out this middleman" and take on some of the responsibilities that WW is doing. Or maybe not, because most real estate moguls are too oldschool and will fail to successfully do what WW is doing.


Serviced offices have long been a thing. I think WW's big advantage is that they're part of the same culture as their clients, so understand what they want much better than your typical office manager.


Month-to-month at a reasonable price in desirable neighborhoods isn't easy to get.

I have no idea if WW will succeed or not; the nice thing is, since our commit is only a month anyways, I don't have to care. :)


Mind explaining why you believe Spotify, SpaceX, and Dropbox are all going to fail?


Spotify: will lose to Google Play and Apple Music. Sadly Spotify is not helping itself. Its desktop application is bulky and difficult to use. And so is the app. Poor integration is also annoying. When you're driving and want to put on a song, you can do so with a voice command, a modern Android phone (with Google Play) or iPhone (with Apple Music) will do a stellar job of quickly finding the song and playing it. Spotify, on the other hand, is a total pain to deal with in such a situation. I really wish they'd do a better job, but every next update is suckier than the last. A lot of people really like Spotify I understand, but they'll gradually part for alternatives in the coming years.

SpaceX is not about to take over the space of Lockheed Martin et al. that easily. Its goals are maybe laudable in some sense, but I don't see it getting an appreciable revenue stream in the foreseeable future.

Dropbox: Reasons to use it are quickly dying. It lost a lot of good will by having Rice on board (and retaining her after the uproar) from a lot of the tech savvy, they don't even do their own storage... they use Amazon's services, Google Drive is getting more and more convenient to use (integration with gmail a big plus), etc. I just don't see it being able to compete. And all of the things they've recently tried to do (creating office software, atempting to be a photo host, etc.) have been pitifully bad. I used to find Drew to be an impressive guy with a great acumen, but after witnessing one mistake after another, not so much.

On a more positive note, I think Stripe is an extremely solid company. It's unstoppable and will keep surprising people with what it can achieve.


SpaceX has a great revenue stream. Unlike ULA, it has a big commercial business. It also has government contracts that ULA can't win due to pricing. If SpaceX didn't take over any of ULA's business, SpaceX would be fine.


Snapdeal is an indian e-commerce site. Competitor to Flipkart. Not ad-funded.


I think he's talking about GOOG, FB, & TWTR.


> I sure as hell wouldn't want my wealth in advertising-funded stocks

Where do you expect advertising to go? It looks like about half of all clicks are fraudulent one way or another, but in spite of that, if advertising didn't yield a positive return, I wouldn't expect it be so popular.


I think adblocking is finally going mainstream,and I think that's going to feed into a cultural shift in how much we tolerate advertising in general (see e.g. recent articles about the possibility of banning billboards).


On the whole, it seems harder than any time in the past four years to raise mid-stage rounds. This is also not suggestive of a bubble.

It's suggestive of the end of a bubble, when the music stops and the last investors who have not yet exited are left without a chair. If any part of the path to exit breaks down, the whole system will start to fail.

There are real problems with these distorted "valuations". Employees these companies hire often think of them as real valuations. It also often makes the company think of itself as much bigger than it is, and do the wrong things for its actual stage. Finally, too much cheap money lets companies operate with bad unit economics and cover up all sorts of internal problems. So I think many companies are hurting themselves with access to easy capital.

Sounds like Sam has (unwittingly) become an Austrian. Friedrich Von Hayek on inflation (1970): "The initial general stimulus which an increase of the quantity of money provides is chiefly due to the fact that prices and therefore profits turn out to be higher than expected. Every venture succeeds, including even some which ought to fail. But this can last only so long as the continuous rise of prices is not generally expected. Once people learn to count on it, even a continued rise of prices at the same rate will no longer exert the stimulus that it gave at first." [1]

Sounds a little bit like QE stimulus which has been channeled into the private financial markets. I wonder why it hasn't translated into higher salaries.

But no matter what happens in the short- and medium-term, I continue to believe technology is the future, and I still can’t think of an asset I’d rather own and not think about for a decade or two than a basket of public or private tech stocks.

I'd rather own real estate than a basket of private tech stocks, especially if that basket includes Facebook, Twitter, Snapchat, or really any company where user growth rates and advertising revenues are heavily informing valuations.

Users can and will migrate between tech platforms pretty easily - homes, offices, businesses - not so much. Plus, the government has been very pro-landlord lately, soaking up trillions in mortgage debt at the federal level and allowing insane housing bubbles like SF and NY to continue to grow unabated at the state level. Looking for fixed, usury income in a ZIRP and QE-infinity world? Look no further.

The only consolation one can take in this situation is the fact that less and less people are even able to play the investing game anymore. Only 26% of individuals under 30 are investing in the stock market, as compared with 58% between the ages of 50 and 64 [2]. So now the SEC wants to make crowdfunded equity the new way to channel middle and lower class money into risky ventures [3].

What's a poor young guy to do?

[1] http://www.marketwatch.com/story/why-most-millennials-dont-i...

[2] https://mises.org/library/denationalisation-money-argument-r....

[3] http://www.nytimes.com/2015/10/31/business/dealbook/sec-give...


There is a country that is the poster child of fast and loose monetary policy - Japan.

No matter how many rounds of QE, the Japanese economy has yet to grow in real terms. [1]

This is further exacerbated by the fact that the younger generation are not marrying and having children, which leads to a demographic nightmare.

Overall, the USA's future is looking a lot like Japan's present day situation.

The solution is to return to the original Bretton-Woods system, where countries had a fixed interest rate regime tied to gold (or cryptocurrency, whatever commodity works best in this modern era) instead of the dirty float systems that are routinely used around the world.

[1] http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG


That's just not true. Japan had extremely low inflation for 20 years, showing that the central bank wasn't expanding the money supply anywhere near fast enough. If the central bank really was increasing the money supply, but not real GDP, there would have to be inflation due to the velocity-of-money equation.

Japan's real problem has been a failure to deregulate the economy. It's essentially trapped in the 1970's, but without the inflationary crisis and political moment that produced the Thatcher and Reagan era reforms.

(Source of inflation data http://inflationdata.com/articles/historical-inflation-rates...)


I may not have been clear in my earlier reply, but I am not really talking about inflation.

Rather, I am providing an example that demonstrates the futility of expansionary monetary policy when an economy hits the liquidity trap.

I agree that Japan's economy is not deregulated in the sense that there is a high degree of nepotism between politically-connected families (especially those that have ties to organized crime or right-wing nationalist groups) and elected officials.


Does anyone know what the common stock valuations (or 409a valuations) even are for the big, later stage companies?


Tech companies in general are underated.

One of the things that is going on IMO is that the media in constant need for something to write about started honing in on startups because their growth is much more steep and create a lot of notable events they can write about.

And so when we hear about companies being overvalued it's a specific group of companies who give us that impression.


The post comes across as biased (and wrong).


Excellent post. Confirms my original vision.


Whenever I see a Top Dog defending their industry--I worry.

I don't know if it's a bubble. I'm so bad at predicting the financial future, I looked onto something called a Contrarian Investor. If I had money to invest, I think I would do the ablosute opposite of what the experts advise. While I terrible about predicting bubbles; I, along with most people predicted the last tech bubble. I know certain tech companies are very different today.

I don't want to argue with anyone. I'm a nobody. These are just my uneducated/novice inner thoughts. I do know the people around me are underemployed, and too many just stopped looking for work. They haven't benefitted from this recovery. They didn't benefit from low interest rates. The low interest rates just hurt guy's like me. The bank charges me for everything. Rent is always going up. Fines, and fees go up, while my salary stays stagnant. I make nothing on my savings account. I am greatful we don't have much inflation though. I am greatful for health care, but it's not what I thought it would be. I'm not knocking Obamacare, just the enetites that are exploiting it. I couldn't imagine being in a state where the governor declined funds from Obamacare.

Yes, tech is booming, and I hope it stays booming. Being in the Bay Area, I see the amount of money tech is bring in. I see rents skyrocketing. I see houses being bought up for outrageous amounts. (I'm not claiming tech is the only reason housing is going up in cost. I see REIT's and foreigners buying residential properties with a phone call.)

I just don't know. It's Monday, and I don't feel great. If it is a bubble, I pray it leaks, and doesn't burst. Sorry, about this post. I'm all alone today, and this is my port hole to others. I know--I'm pathetic.


Can't we both be in bubble and bust? They are not mutually exclusive. We have just too much money and excess capital chasing limited investment opportunities - so this creates bubbles.

On the other hand the increased inequality and concentration of capital in fewer hands means that a lot of financing strategies are performing worse and capital is less efficiently allocated.

For example - if the optimal allocation of $1B USD is 1000 investments of $1M - we could have that outcome if the capital is split between 300 people each having 3.33 million.

But a single billionaire will prefer to make 10 100M investments, because the cognitive overhead of taking so much decisions will wear him down.


An individual doesn't have to be rational for the system as a whole to be.

In your example, that billionaire's 10 $100M investments will underperform. Meanwhile, some of the 300 people who each invested $1M will overperform. As a result, in the next round of capital allocation, the billionaire is no longer a billionaire while some of those single-digit millionaires are now billionaires.

This is actually not all that far off from how things are actually working right now - a number of people from humble middle-class backgrounds are getting phenomenally rich because they understand tech and make smart capital allocation decisions, while a number of rich billionaires who can't be bothered to update their mental models are riding their companies all the way down.

All of this is capitalism working as intended. It's only a "bubble" if everybody is a winner; it's only a "bust" if everybody is a loser. Normal operation in capitalism is for there to be both winners and losers.


"No one seems to fervently believe tech valuations are cheap, so it’d be somewhat surprising if we were in a bubble."

Is this a typo?

s/cheap/expensive/ would make more sense, no?


The implication is that bubbles require optimistic groupthink. I.e., if everyone thinks it's a good time to buy, then it's a bubble.

Sama's point is that because so many people are saying tech stocks are expensive then there isn't the mass delusion required for a bubble.


Wow, okay... the first sentence reads so straightforwardly and the following one is like some kind of reverse judo takedown maneuver. The essential point is to correctly interpret who exactly the "no one" in question is referring to.


Literally nobody. Sam is saying most people think tech valuations are expensive, i.e., they are overpriced.


Not quite. There's a difference between an overpriced market and a bubble.

A market can be overpriced when the consensus view is that stocks are more valuable than is actually realistic. When more sober judgment sets in, stocks go down to more appropriate levels.

In contrast, a bubble is when stocks are going up, and so everybody wants to buy stocks because they're going up, and so stocks continue to go up because everybody's buying them, and so people continue to want to buy them because they're going up. It's not a bubble until you get that positive feedback going.


If you think the value will continue to rise, then the price you pay now is "cheap" compared to the future value. It's a really weird way to phrase it though.

I agree with your point about "cheap" being used more traditionally in that an investor may think the price they're paying is high compared to what the stock price should be based on fundamental analysis. That situation isn't the same as a bubble (although it might happen in a bubble).


Thanks for clarifying that sentence -- I was confused by it as well, but this viewpoint makes sense.


No. In a bubble, everyone believes something is undervalued and is desperate to get in. 'I need to buy Pets.com at $100 because in a month it'll be $1000!' Or 'I need to buy Bitcoin at $350 because it's taking off to the moon!' This causes the general surge in prices where everyone buys in because now it's cheap ('the Communist Party has guaranteed stocks as an investment, so I can't lose by buying now'), eventually leading to the crash when suddenly people begin fervently believing everything is way too expensive (and so they should sell).


Well anyways, I don't think the question of "cheap" vs. "expensive" is really appropriate when talking about market dynamics. Many market participants think explicitly in terms of how much momentum they think is left in the given trend.


I'm not sure I agree with this sentiment, but it doesn't seem to be a typo. If people _did_ think that tech valuations were cheap, then he's saying that would be a sign of a bubble, because it would mean that people think these companies are undervalued [when they potentially aren't undervalued].


I don't believe so. In a bubble, people think that the current climate is more favorable than it is in reality. So they view assets as cheap when in fact they may be overpriced.


The market has some sort of bipolar disorder.




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