Back in the 90s I was sure there was a bubble happening, and was
notorious for telling everyone to sell. And yet I remember that
even I thought it was dangerous to have money sitting in bonds. I
don't think that now, and I don't think anyone else does either.
What's happening now is a lot more localized. A few professional
investors are paying higher valuations for startups than they were
a few years ago. But the number of participants and the amounts
of money moving around are both very small compared to the 90s.
Plus the companies are better. In the 90s, it was the dumb leading
the dumb: smooth-talking MBAs were raising money from hapless LPs
and investing it in startups run by other smooth-talking MBAs. Now
it's Yuri Milner investing in a company run by Mark Zuckerberg.
The smooth-talkers of today can code: that's great! But maybe it just helps them sell the kool-aid...?
Twitter is apparently doubling in value every few months, although it has yet to figure out a business model: does this sound reasonable?
Mark Zuckerberg is not a smooth talker who can code. The reason investors are interested in Facebook is their growth.
It makes sense for Twitter's valuation to grow proportionately with its traffic, whatever that is.
Groupon valued at 15B
Instagram: 7.5M raised, 0 revenue
Foodspotting: 3.7M raised, 0 revenue
Path: 100M offered, 0 revenue
about.me: acquired while in beta
Hipster: not yet launched, rumored to be acquired by Groupon.
The way you make money investing in startups is to make a lot of bets that each have a small chance of paying off big. So while I'm not saying anything about the specific companies you list (most of which I don't know anything about), a list of recent startup fundings should always include a lot (perhaps a majority) that investors will ultimately lose money on.
The problem is, you don't know which the winners will be. They usually tend to look very unpromising. If you'd made this list 5 years ago, it would have included a web site for college students, bizarrely thought to be worth tens of millions of dollars.
Ok, not "exactly", but come on: "the majority of startup companies will end up losing money" sounds like a very bubbly thing.
In that sense, "majority of startup companies will end up losing money" is actually not a bubbly thing at all. Bubble mentality would be "most startup companies will IPO for huge valuations within a few years."
Mark Suster: What Angel Investing & Florida Condos Have in Common
Fred Wilson: The Dot Com Bubble Is Back http://www.secondshares.com/2010/11/18/the-dot-com-bubble-is...
The Trouble with Bubbles (talent, angel & incubators… oh my!) http://calacanis.com/2010/11/18/the-trouble-with-bubbles-tal...
Some say the about.me acquisition has an excellent team and that's where the money went. myonepage.com is one guy. So you really gotta wonder how great that team actually was.
There's a lot of startups going crazy valuation at the moment with some serious hand waving about business models.
And Facebook will be one of the first to pop, I'm tempted to bet serious money on it. My Dad just joined, he's been a reliable harbinger of death for any popular website.
I believe OnePage was a "growth first" type of startup, though I could perhaps have introduced pro accounts I don't believe it would have scaled. There is much more customer development I need to do in order to fully understand what the problem is and come up with a solution which resonates with people. I think the space is interesting and the problem is worth solving and will reward the person who does solve it, but I needed a way to try and get out of the freelance work lifestyle and fully into startups without taking funding or joining another startup, so the only real option was to build a SaaS type offering and charge from day 1. Buffer is working out well in that sense and could free my time soon. Once I reach that stage, I will need to decide whether to build Buffer further or use some of my time to rethink OnePage. Not sure which route I will take yet.
Very interesting indeed. I think something like OnePage is more suited for me after I've had some success with another idea or if indeed I had funding, but like you say even those with funding are not making much progress in that space.
I definitely agree that the about.me case was very different from the norm - the founder had previous sold a startup to AOL and worked for them for some time, so that was obviously a key factor.
So I think maybe About.me is an unusual case.
Fans and tweets are obviously the currency of the new millennium.
1. The key distinction: when investors invest they think "I'm gambling and I hope I win, but there's a chance I won't." When bubble people buy assets they think "I'm buying something that is guaranteed to go up in value. Free money!" If bubble people aren't buying then it isn't a bubble.
2. When sophisticated investors make wild bets in first rate companies (amazon, ebay, facebook, twitter) and those bets payoff in a big way it might lead to less sophisticated investors making wild bets in more mediocre companies. That would be "irrational exuberance" and we're (maybe) not even there yet. THEN when those bets payoff in a big way then non-investors might start buying to get some of the free money. That's the bubble.
tldr: Valuations are irrelevant. All that matters (for bubbleness) is the psychology of the buyers.
The original bubble: http://en.wikipedia.org/wiki/Tulip_mania
People said there was irrational exuberance in 1996, but it took 5 years before the bubble actually burst, and it went up a lot in the meantime.
Ask me in 5 years, and I think then we'll be in a bubble. Now, we're just in a recovery, but not everybody knows it yet.
Me too. Ergo it could produce another bubble. But here's why I'm doubtful:
1. Wild prediction: our free money era will be over in 3 years. Last time the money got cheaper as the bubble got bigger, due to the fear of Y2K.
2. No thundering herd of new retail investors. And it wasn't just that etrade and datek opened up the stock market to thousands of novices. They were novices who had watched the market rise for decades and never really go down.
Look at the price of gas. Last time it was this high, it was february of 2008. In 4 months, gas shot up to its peak, and we all know what happened right after that.
Second dip is coming. Lots of layoffs, even in tech industry.
dogs and cats living together
the coming of Gozer
In the past couple of years, Toll and his deputies have begun analyzing European housing data to see if they hold any lessons for a maturing American housing market. Toll has been talking up the research to stock analysts and the financial press for the past year. His conclusions carry a whiff of new-paradigm thinking, but he nevertheless seems convinced that Europe's present-day reality is America's destiny. I asked Toll what our children - my kids are both under 8, I told him - would be paying when they're ready to buy. "They're going to live with us until they're 40," Toll said matter-of-factly. "And when they have their second kid, then we'll finally kick them out and make them pay for the house that we paid for. And that house will cost them 45 to 50 percent of their income."
I grew alarmed. Was he kidding? He assured me he was not. "It's all just logic," Toll said. "In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half." The British get 330 square feet, per person, in their homes; in the U.S., we get 750 square feet. Not only does Toll say he believes the next generation of buyers will be paying twice as much of their annual incomes; in terms of space, he also seems to think they're going to get only half as much. "And that average, million-dollar insane home in the burbs? It's going to be $4 million."
One idea that shapes the outlook of real-estate economists is the notion that cities, in a rough conceptual sense, are replacements for one another. A city is founded, and residents and industries settle there; over time, that city and its metro area might reach a population of a million residents. As demand to live there increases and the supply of good land diminishes, housing gets more expensive. But lo, another city arises nearby, where land is cheaper and jobs are plentiful. Residents can now leave the first big city, if they choose, and move to the second, smaller city. Until, that is, the second city becomes large and crowded and expensive as well. Then another city grows nearby, and so on. As pressure on prices and land builds, a new city can act as a pressure release.
It's possible that this model has broken down over the past few years. A small cadre of economists, in fact, has begun to ask whether the irrepressible inflation of home values in many coastal metro areas actually reflects a deeper logic based on the straitened land supply in these cities. Boom-time rationalists always run the risk of earning a black mark of infamy like that worn by the Yale professor Irving Fisher. (Just before the 1929 stock-market crash, Fisher declared that stocks had reached "what looks like a permanently high plateau.") And it is virtually impossible to find an economist - or a home builder, for that matter - who thinks the recent growth rates in home prices are sustainable; even the most sanguine among them predict more moderate appreciation over the long run. Yet almost without exception these thinkers, though they come from different political persuasions and even different research specialties, have attributed high home prices to zoning. Further, they have amassed a fair amount of data to support their arguments.
This was the mark of the housing bubble (otherwise my parents wouldnt have told me to buy a house almost immediately after I graduated college) and is why people invested in Ramps.com and petfood.com at the time of the dot com boom.
That's the type of behavior that is the mark of a bubble, we're not seeing this happen yet.
We're seeing the saplings of a similar movement now, though. This time, people are talking about online advertising as if the Internet is the second coming of television, even though there are serious doubts about the persistence of revenues going to the Internet's second-largest advertiser (Facebook).
Some other companies: Groupon sells coupons to millions, but small business have mixed reviews of their experience and might be engaging in questionable pricing schemes. Quora is a question-answer site with no revenue model in sight, and they're already valued at eight figures.
If there is any evidence of a bubble, it can be found in how people wave their hands at the future revenue streams of these companies. They're great products, but if their click-through rate sucks how will they make money?
Books were written about the supposed phenomenon.
"[There is] an increasing conceptualization of our Gross Domestic Product – the substitution, in effect, of ideas for physical value."
When you start hearing quotes like that from people in charge, then you know we're really in big trouble.
Another data point to consider is the general internet savvy running around these days. Consider all the kids coming out of college these days that grew up with the Internet. A lot of them had cell phones when they were 10. Basically, all young people understand the Internet at a very natural level now; it's not just relegated to computer geeks and technology fetishists. This means a lot more ideas, and a lot better design, to say nothing of the improved tools we have today (REST vs SOAP, Rails vs ColdFusion, etc).
All that said, every bubble is different, and by definition happens because of what people aren't expecting. So I'd say there could definitely be a bubble brewing. Consider for instance, a future in which Facebook executes amazingly, but at the end of the day we discover that all that social activity is actually as worthless as Google hopes it is. The valuations are high because outcomes are unpredictable on this stuff, not due to irrational exuberance.
For example, people knew there was a real estate bubble and were trying to flip houses to make as much as they could before it popped. My mom has a neighbor that didn't plan on being her neighbor, but he bought right before the real estate crash and couldn't sell in time.
It's a mix of exuberance, ignorance and hubris that seems to lead to this sort of fall.
But what if this is a "bubble" Who will get hurt when it pops, especially if it pops before major IPOs happen. Lots of private investors will lose out, but will the general public get hurt?
While the music was playing in the late '90's, the cautionary voices weren't any louder, or taken any more seriously, than they were at any other time. They weren't even all particularly focused on the Internet boom; much, much more pessimistic sentiment at the time was focused on Russia's sovereign debt default, the currency crisis in Asia, or the LTCM bail-out.
As for the Internet stock valuations at the time, many people reasoned that if you looked at the entire investment in "new economy" companies, all that was required for those investments to reward their holders' level of risk was one Microsoft. This was essentially true, by the way, and if you stuck to your guns and held onto Amazon from its local peak on 3/31/1999 ($86) you would be up about 120% today ($188).
But what really changed is the level of dependency on Internet services around the world and this is where it's different than the 90s. In the 90s the major sites had some more specific purpose (buy books), now we have Internet completely engaged in our life workflow and even our microtasks (e.g.: copywriting, having a form) can be "outsourced" to some site and this is the opportunity. In the past I feel stupid if I didn't set up my own SMTP/POP3 server for my domain (it's free, open source, blah), now I realize that it's cheaper to pay for a lot of more things, even if it takes just a few hours of my day.
The fact that these valuations seem to be stemming more from the money others have put in (or said they would be willing to put in) rather than the revenue of the company itself ought to arouse deep suspicion. Yes, I understand part of a valuation is examining the pricing signals being sent by the market, in this case VCs, for the particular company. Still, look at Twitter. Some valuations for it have come in at $10 billion when it's been admitted their yearly revenue is $150 million. If Twitter were to IPO at that valuation, that means 99% (+/- for whatever other assets they might have) of their float would be pure leverage. For many other tech start ups, the same sort of situation exists even if the magnitude is not as great.
For those down the line in the thread talking about the better development tools/programming languages/hardware in relation to this topic, let me ask: how do better development tools justify higher valuations? Certainly, I'd rather be developing a web app with Python/Django today than in ASP in 1995, and running it on today's server hardware with today's replication and load balancing strategies. There's no doubt the development cycle for many kinds of applications has been radically shortened. Yet, the revenue model for many of these internet companies is only slightly clearer than it was in 1998. That is not true of every company, only some; but it is true of enough that I think it is cause for concern.
Experimentation is a wonderful thing. It is the only way the economy advances and people's lives become better. Part of the "startup industry"'s job is to provide that experimentation, and by its very nature most will fail. The problem is when the investment community begins to pay a large speculative premium for that. Even if the resulting "bubble" is not an economy-destroying one as it was in 2000 or 2008, it can still do a great deal of harm.
Now said companies actually do have disruptive business models, and are actually adding value to the world and creating wealth.
It's true that some of those are overvalued, but that's not a bubble at all.
And to me, what we're seeing today is in no way comparable to a bubble. Maybe some companies are being purchased at inflated prices, but there a ton of startups out there that really could change the way things are done. Most of the individual startups may fail, but I'm pretty confident that overall, many sectors of the economy are ripe for disruption. The economy will be changed.
That or somewhere around 2008, my mental habits went from skeptically pessimistic to irrationally optimistic. Could be the case; these are happy times... :)
Will this change what I'm doing with my startup right now?
And the answer for me is a simple "no," as it should be for virtually any founder.
It seems to me that today there is a "new economy driven by the Internet" and productivity has greatly increased in the last decade (which is probably one of the reasons for the current unemployment problems).
I don't think we even understand the impact that having all of human knowledge just a Google query away has had on our activities.
My bet is that 100 years from now no one will think of the 90's as a bubble. They'll think of it as the beginning of the Singularity.
What about MySpace?
And yes, the money moving around is smaller compared to the 90s. But the economy is way smaller compared to the 90s as well.