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 that one downside of this "debt-like" world is that there are "implicit nonzero interest rates" 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.
: Since NO unicorns going bust means that capital is far too accessible, when statistically you'd expect at least a couple unicorns to fail.
: I would prefer more expert input because I have low confidence in my suspicions.
: I put that in quotes because it's somewhat an abuse of terminology.
Though I think in both cases if the company can be disciplined then cheap capital should be good, but staying disciplined is hard...
> 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...
It sounds a little like circular reasoning to me.
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.
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."
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.
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.
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.
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.
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.
2012: 137M; 2013: 232M; 2014: 377M
2012: 2.3B 2013: 2.6B 2014: 2.7B
So, SAFM grew ~5% while Yelp grew 100%
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.
Not necessarily, I'd say it's a valid principle, but not one that applies to yelp.
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.
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.
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.
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.
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.
It's just a different strategy, not very popular in the startup world but for more established companies it is not unheard of.
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).
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.
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.
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.
Again, insisting that appreciation is rooted in anything but what the market does, is hard to buy into.
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.
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.
There's this too:
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.
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.
> 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?
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.
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.
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.
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.
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'.
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.
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.
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.
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.
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.
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.
Both assume I can buy an asset for less than I can sell it for.
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.
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).
Maybe I am missing why Sam points Yelp out at all here...
Like, say, Amazon.
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.
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.
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.
Wouldn't P/E be a better heuristic? Either CAPE or just basic P/E?
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.
So, the opposite is true: There is reason to believe it's a 7-year economic cycle.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Edit: this link seems to explain it well http://www.businessinsider.com/how-liquidation-preferences-w...
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:
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 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 .
it sounds more like a bubble in tech press reporting of valuations ?
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.
Would love to get critiqued by this uber smart and opinionated crowd here.
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.
Free file sharing? Not a good indicator
Social platform? Good indicator
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.
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)?
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).
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.
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.
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
Maybe will downsize, but competition doesn't look as good. Will not go away until people have a better featured, less costly replacement.
but that's one use case I'm biased toward coz I see them every day using it that way.
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.
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.
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.
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.
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. :)
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.
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.
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." 
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 . So now the SEC wants to make crowdfunded equity the new way to channel middle and lower class money into risky ventures .
What's a poor young guy to do?
No matter how many rounds of QE, the Japanese economy has yet to grow in real terms. 
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.
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...)
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.
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.
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.
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.
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.
Is this a typo?
s/cheap/expensive/ would make more sense, no?
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.
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.
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).