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Are We In Inflationary Part of Internet Financing Bubble? 2011 = 1997? (eladgil.com)
72 points by eladgil on Feb 10, 2011 | hide | past | favorite | 35 comments

One difference is its all private equity. These companies are not IPOing yet. There isn't a mad dash by the masses to buy tech stocks (or buy and flip their houses for that matter.) All these gains and losses are pretty well contained by venture funds and Angels - it certainly could be a bubble for them, but it will have nowhere near the wide ranging affects of the tech bubble from a decade ago because there are so few people involved and its orders of magnitude less in total valuations.

Very important distinction, but I think we're already seeing these lofty valuations being passed to individual investors (via "special vehicles," secondary markets, limited partners, etc.)

Most bubbles trickle down. VCs will gladly partner with companies at high valuations because eventually banks, accredited investors, and secondary markets are let in on the deal to drive the valuation higher. The first two groups pray for and/or plan an IPO to dump an even higher valuation on the public market.

Boom is the transfer of wealth from the bottom 95% to the top 5%. Bust is when that transfer is complete.

Most all of the special vehicles and secondary markets I have heard of require you to be an accredited investor to participate. You have to be somewhat wealthy to be an accredited investor ($200,000/year income or $300,000 if married)

I've heard these arguments a lot, but I've never seen anyone point to a specific case where someone with under a $50,000 a year income ends up with these stocks. Other than employees of course.

Correct, most secondary markets only allow accredited investors. My point above is not that secondary markets are allowing the general public to buy shares, but rather, that secondary markets are a path to an IPO - i.e. if you were an accredited Goldman investor who bought in at a $50b valuation, you're likely hoping for a FB public offering to drive the valuation up to $75-100b so that you can dump your shares and double your investment.

Totally agree. I address this in the section "Ways this inflationary period (if it exists) is different from 1997-2000". I am sure I missed a bunch of other ways it is different.

I think this inflationary period is probably closer to past ones (e.g. microcomputer/peripherals in the early 80s) then the wide spread financial asset bubble of 2000.

Very thoughtful piece, thanks a lot for sharing this. It seems so far that M&A valuations are following up serie A valuations (see Google & Path for instance). The bubble, if it exists, is no longer limited to the seed ecosystem.

Yeah, I think that is indeed the case - it is moving into series A territory. Big question is if it will go upstream to series B/C/D where the big $s are ... :)

The Goldman Sachs/Facebook deal makes that distinction a bit murky. I hadn't heard whether or not they allowed investors into their deal that weren't playing with their own private equity. It's quite possible the reality isn't so open-and-shut.

And if we hear about more of these 'special purpose vehicles', the public/private distinction may well be on its is way to irrelevancy.

It's still small potatoes, though. This level of investing does not compare to the levels seen in 2000. That's what makes this post just another Chicken Little.

If that 'special purpose vehicle' move flies, it won't be small potatoes for long at all.

Further, the article is a very well-thought and argued piece that doesn't remotely veer into hyperbole. Even if you disagree with its conclusions, it strikes me as incredibly disingenuous to dismiss it as "just another Chicken Little".

I see it as just another well-thought and argued Chicken Little. Unsubstantiated speculation != a bubble.

One scenario I've heard is that Sarbanes-Oxley might be partially repealed to make it easier for these sort of companies to go public.

I'm not sure whether it's the S-O that's actually keeping companies from going public now.

An alternative scenario is the rise of a hypothetical trend in listing on non-US exchanges.

I still don't see how this should really change how an entrepreneurial hacker behaves, at least very much. Yes, money is cheap now, and might get more expensive later. It's a good time to start a company for that reason, but bad because there's a lot of competition for other resources with those dollars. Maybe raise a little more cash now than you otherwise would, and make sure you have a plan to get to profitability or exit in some form if you can't get follow-on financing. If the market declines, it's cheaper to hire people, rent space, etc. and a lot of firms will want to find lower cost alternatives to products. Running a tech company in 2000-2002 was interesting in a lot of ways.

Still, build something people (with money) want to buy.

The big thing right now seems to be that the overall economy (at least in the US) seems much weaker than the tech economy, so there may be opportunities to arbitrage this somehow ("offshore" development using non-internet programmers from industrial companies in the midwest?).

IMO no one is going to be a more successful tech entrepreneur because he's better at predicting macro economic trends. Those cycles are better spent learning something worthwhile in your problem domain, or actual tech or entrepreneurship skills.

Overall I agree with your points - in general people should stay focused on building something useful that people want.

I think the macro trends become increasingly important depending on the stage of your company. E.g. Paypal raised $200 million at the peak of the bubble, and this money saved them from burning out in the downturn when raising capital became very hard. If you are 2 people bootstrapping this does not impact you as much. If you are a later stage company that is not yet profitable, and you need to raise money, macro trends are incredibly important.

That's definitely true, and I guess it does feed back into decisions at earlier rounds (i.e. will you accept liquidation preference and a high series A valuation which means your only future exits are at bubble valuations?).

More ominously, we may be entering a broadly inflationary new cycle where nearly all assets are priced higher, but in dollars that are decreasing in value. Commodities prices seem to indicate this. With a zero percent fed funds rate, there's no where else for the money to go...

Last I read, the spiking commodities didn't have expanding inventories. i.e. It seems an actual lack of supply is behind those prices and not people stockpiling to guard against inflation.

Wages also remain stagnant, which would exert considerable drag on any other inflationary pressures.

> "With a zero percent fed funds rate, there's no where else for the money to go..."

Japan battled deflation, not inflation, despite a near-zero rate throughout their Lost Decade (which is now more like a Lost Generation). They also saw considerable wage stagnation.

Our crisis, half-responses and dialogue are almost note-for-note recreations of Japan's experience. But I guess that old yarn about "those who don't learn from history" is around for a reason.

The promise of the internet has always been real. The only issue is trying to get too far ahead of what the current technology can deliver.

Just now (in 2011) we are living up to most of the tech promises made in 2000. I'll get worried about another bubble when money starts chasing technology that is obvious vaporware.

Like Qwiki? ($7m, I believe)

I don't think we're in a bubble for one very simple reason: people keep insisting we are in one. There's more to bubbles than overvaluation. There's a psychological component to it that blinds people to that overvaluation. To me, the only way to effectively determine a bubble's existence is in hindsight.

For instance, how many times did you hear anyone talking of a housing market bubble before it popped? Little to none. Right now, there's just too much talk of a tech bubble for there to actually be one. And it's not just on sites like HN. You see it in the MSM too:





Sorry, but I just don't see it happening just this moment. A year or two later might be a different story. But I don't see it happening now.

I agree about it only being clear in hindsight. Part of the problem is that many people who write about bubbles have a vested interest one way or another (not implying anything about the OP as I'm not familiar with the author). Real estate in Australia, where I live, is in a similar place right now. Lots of statistics show it is significantly overvalued; there are lots of counter-arguments why this level of house prices is "sustainable". "This time it's different," etc. Often the same statistics are used to support opposing conclusions by different authors. Unsurprisingly, most of the people who argue that housing prices are sustainable and Australia is not experiencing a real estate bubble also have an interest in selling houses. Arguably those on the other side have an interest in selling equities...

There was actually concern about the housing prices for a while. There were also many guests on MSM TV shows who talked about the meteoric rise in housing prices. However, what you missed is the fact that the housing bubble lasted for a good decade or so. Bubbles aren't necessarily hidden and unknowable. The problem with bubbles is element of timing. People can spot an abnormal increase in asset prices, but predicting the timing of the reversal is impossible.

After a while, some people thought that the housing price increase was a paradigm shift towards more housing (i.e. a natural phenomenon because the price increases were seemingly sustained.

In order to succeed, all these start-up companies will have to sell a lot of product (whether it be advertising, services, apps or tee-shirts). However, the general economy looks like it will be in a sad state for years to come: the unemployment rate is still around 10%; it will be years before the housing market works its way through a glut of inventory; consumers are saving more and spending less and have sharply reduced access to credit; etc. It's a pretty difficult business climate even for established companies, let alone companies that are starting from scratch with no paying customers at all. Who's going to buy all this new stuff?

If the new stuff replaces more expensive old stuff, a recession can make it even easier to grow a new business.

Software that makes a person 2x more productive is very attractive when everybody is trying to do more with less.

That's a valid point, but most of the start-ups I've seen mentioned on Hacker News don't seem to be selling business productivity tools. I don't hold out hope that all those iPhone and Android apps are going to have a big positive boost on employee productivity. And who knows how much productivity Facebook has cost the world so far.

Often these startups sell services and products that reduce costs and save time for their customers.

It seems inevitable to see massive burn outs though at the later stage rounds in a year or two. Surely even the hedge funds will see the failure to gain traction soon enough when these companies need another $10M for a Series N+1 in 12-18 months, at which point one can expect them to either fade away or sell for pennies on the dollar. In that case the PE firms and HFs are the losers and things are mostly contained elsewhere in the overall ecosystem. And with the $10's of billions in cash companies like Google are carrying on the books, that leaves a nice buffer to contain the damage.

Yeah, that is the question - what is the "endgame"? Of the 3 scenarios I outlined, which is most likely?

> "To me, swings in MBA aspirations seem to track to a perception of 'where the easy money is' or, in bad times, 'where the safe jobs/career paths are'."

Interesting statement. Anyone else thinking the same (or differently), and can back it up with numbers?

Yes ... and Amazon is the new Sun Microsystems. They are profiting by selling the spades and shovels bought by the gold rush enthusiasts.

if(2011 == 1997) { System.Threading.Thread.Sleep(1000 * 60 * 60 * 24 * 52 * 3); Bubble.Burst(); }

You're probably missing an *7 in there.

no, he clearly just wants to sleep for 3/7 of a years.

one theory i have as to what's contributing to this is the fact that the returns on safer investment alternatives are so low. example, savings accounts that earn 0.5% annually. i remember when i could easily get 6%. so now taking a risk and spreading a large gob of cash across say 20 startups looks more appealing because even if the overall return for the group is a mere 5% that's much better than <=1%

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