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I was here in the Valley for the original Bubble, and the situation now is nothing like that was. Back then people were saying there was a "new economy" driven by the Internet, and that productivity was going to go up like a step function, which justified higher p/e ratios for any company that could claim to be a participant. If you had money to invest you felt like you had to have most of it in the stock market, because money parked in bonds would miss out on all this growth that was coming.

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 question is not whether we're re-living the exact same bubble as in the 90s; the question is: is this A bubble?

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?


Startup valuations will go up and down in the future as they have in the past. So they could go down. But it seems very unlikely that anything so dramatic is happening now that people will be calling this "the bubble of 2011" in the future.

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.


What about:

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.


Startup investing is not based on revenues, like it would be if you were investing in a part share of a restaurant or something like that. When a startup is valued at $10 million, it doesn't mean that the company, as is, is worth $10 million so much as that it has a 1% chance of one day being worth $1 billion.

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.


Isn't that exactly what a bubble is?

Ok, not "exactly", but come on: "the majority of startup companies will end up losing money" sounds like a very bubbly thing.


"The majority of startup companies will end up losing money" is a tautology: true no matter what the inputs are.


A bubble is when investors are making lots of money off other investors by trading stuff that isn't worth anything. Risk is being grossly and broadly mis-assessed (deliberately or inadvertently). The bubble pops when people realize this.

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."


All of what you've said is true. However, there is still a trend in rising valuation (near bubble level), of which many other investors have noted as well.

Mark Suster: What Angel Investing & Florida Condos Have in Common http://www.bothsidesofthetable.com/2010/11/14/what-angel-inv...

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...


There's something crazy going on in the american start up world. I was astounded that about.me was worth acquiring after listening to the founder of myonepage.com virtually declare it a bit of a disaster as he couldn't monetize it (he's now moved onto bufferapp.com). myonepage.com is practically identical to about.me, founded at pretty much the same time, same idea, good execution. And yet we've got the founder admitting he can't do anything with it.

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.

Bubble.

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.


FWIW, I wouldn't say I've "given up" on OnePage, I have just chosen to focus on Buffer to reach ramen profitability. I still believe it could do very well. I applied to a few accelerator programmes with OnePage and wasn't accepted a few times, I believe partly due to a tough space and partly due to my lack of experience or track record.

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.


FWIW, the founder of About.me had really good connections--he'd already had a previous company acquired by AOL, for instance. And some have argued that About.me fabricated their initial user numbers.

So I think maybe About.me is an unusual case.


Revenue is so Web 1.0. It's all about engagement now.

Fans and tweets are obviously the currency of the new millennium.


Actually, Web 1.0 was all about eyeballs. Revenue is for real estate guys.


Haha, agreed. We'll just keep giving away valuable things for free, and keep selling advertising to each other. Nothing bad can come of this :)


Calling this a bubble would make the word bubble meaningless. Alan Greenspan said "irrational exuberance" in December 1996. He may have been right, and we may be in a similar period now. But when most people talk about the bubble they mean the period of total insanity from around 1998-2000. I think "rational exuberance" better describes today.

Two things:

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


This feels a lot like 1995 or 1996 to me. New technology (WWW then, mobile phones and cloud computing now), just beginning to get mainstream adoption. Coming out of a recession that had been a 4-year funk. Fairly loose monetary policy. A couple hot stars beginning to IPO, but nothing terribly crazy.

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.


This feels a lot like 1995 or 1996 to me.

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.


The Fed's the giant wildcard today. Bernanke claims that he has a plan to mop up the excess liquidity in the market. If he starts tightening, I'd predict a sharp double-dip (like 81-82), followed by sustained 80s-style prosperity. If he doesn't tighten or tightens too late, I think we'll get another bubble like the late 90s.


Nope. 4 MONTHS.

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.


Sorry, I don't understand your message. What's going to happen in 4 months?


the end of the world

dogs and cats living together

the coming of Gozer


Aside: Here's an example of what "new paradigm" language actually sounds like. This from the real estate bubble (and Bob Toll is Bertrand Russell compared to what the "new economics" people were saying in the tech bubble). New York Times:

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.

http://www.nytimes.com/2005/10/16/magazine/16brothers.html?p...


We're missing the one thing that makes a bubble a real serious bubble which is "Well, let's invest in this because there is literally no way to lose!"

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.


Important to note that venture beat also made a great post exposing PG's point of view:

http://venturebeat.com/2011/02/17/graham-y-combinator-no-tec...


Back then people were saying there was a "new economy" driven by the Internet, and that productivity was going to go up like a step function, which justified higher p/e ratios for any company that could claim to be a participant.

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?


No, it was different. People were saying that the very nature of the entire economy had changed permanently. And that that change came with dramatic, almost overnight increases in the value of everything due to increased communications.

Books were written about the supposed phenomenon.


I've cleaned up my comment for clarity's sake, but I basically argue that we might be seeing the same phenomenon again with online advertising.


What Damoncali is saying is that the hysteria wasn't focused on particular companies or business models really, it was that people believed we were in the middle of a one of a kind economic paradigm shift rendering valuation concepts like 'profitability' obsolete.

"[There is] an increasing conceptualization of our Gross Domestic Product – the substitution, in effect, of ideas for physical value."

-Alan Greenspan

When you start hearing quotes like that from people in charge, then you know we're really in big trouble.


Sorry, you both make great points. What's the context surrounding that Greenspan quote, though?


Say what you will about sarbox, but the fact that the public isn't able to get carried away in hype severely limits the size of a potential bubble.

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.


Crucially, nobody was calling it a bubble, until at least a year after it had, in retrospect, popped. Proper bubbles are a product of the madness of crowds, and are impossible to call in anything but hindsight. If we are in the middle of a bubble at present, by definition, almost none of us know what the bubble is in.


I disagree- Knowing it's a bubble doesn't mean you aren't contributing to it. In any bubble there are people who know it's a bubble but think they can make a ton of money in the meantime and then shrug their shoulders when it pops.


I'm not so sure that nobody was calling it a bubble. I sure felt it was, but didn't have a lot of money in the stock market then, so I wasn't personally concerned. I just billed my skills out at crazy rates and loved every minute of it.

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?


That really isn't true at all, it was a common topic of conversation well before the markets peaked.


All due respect, but I think that's retrospective bias talking. It feels obvious in hindsight that it was a bubble, so those conversations with bearish people are amplified in your memory. The fact that some bears existed proves nothing; no matter what is going on in the macro-economy, at any time in the last 20 years Nouriel Roubini et al. would have been happy to explain how it's all an illusion, we'll all be eating out of trashcans in two years, just you wait.

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).


It's pretty easy for me to sanity check - I sold a large block of YHOO in '99 because I was convinced it was strongly over valued, several friends congratulated me on my wisdom. Of course I spent over a year feeling like an idiot, but it does make for a clear memory.


There was one of the well-known columnists for Infoworld / EWeek / Computer World / One-of-those-magazines, that was calling it a bubble quite a while before it popped. My memory is telling me it was Bob Metcalfe, but I couldn't find a citation to back that up during a brief search. But, at any rate, there were definitely some people recognizing the bubble a bit early.


Beyond being an expert I have some intuition, may be the money moving around is smaller but the craziness is high and probably will be higher than 90s because it's easier to get some small money and die in a shorter cycle. Just looking at AngelList I am impressed.

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.


Is this a full-on bubble? No, it's probably nothing like the 1990's. But I still think the truth is that today's monetary situation is creating an incentive to chase yields, and it is not out of the question that this is showing up in VC valuations just as it is showing up in commodities.

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.


That's just exactly right. Back in the 90's there were companies IPOing 6 months after having raised a first round, which was usually in the millions of dollars range, and without a shipped product, without any business model, etc.

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.


I called the late-90s tech bubble (ask my friends and family!), and I called the last decade's housing bubble (ask my wife!). This doesn't make me Nostrodamus, but it does give me more confidence in my ability to see (really big picture) macro-trends.

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... :)


I agree with you, and as someone who gained an interest in startups before anyone started calling this recent trend a "bubble" I ask myself one question:

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.


I'm not so sure about that. It's a fact that raising money now is way easier, and you tend to get high valuations, so many founders should probably fundraise as long as the current hype stays up. It may easily be that next year valuations will be way lower for web startups.


Very good point. There are certainly tactical moves that will change due to conditions, such as fund raising. But the general "run for the hills" attitude I see in many of these posts isn't productive. It's almost as if I see people hesitant to start because they fear that things will fall apart in short order. Maybe I'm reading to much into it.


Whether something looks like a step function or not depends on the time scale at which it's observed.

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.


GeoCities was $3.57 billion. I'm not sure how that stacks up against Facebooks $50 billion. Facebook has a different business model, larger market, and people use it more intensively.


How much is GeoCities worth now?

What about MySpace?


It's interesting to be reminded of the productivity step function messaging. I would say that's happened, massively. What it seems to have done, though, is drive down the total cost to achieve something, rather than drive up the final value of an organization. That's definitely a surprise.


Is the valuation of FB, Twitter reasonable or is there a lot of money moving in based on self-fulfilling speculation that this is "the next big thing"?


Thanks a lot for chiming in.


Whether it's MBA raising money from LPs or Yuri Milner raising money from individual investors/on london stock exchange, it's still stupid money, though.

And yes, the money moving around is smaller compared to the 90s. But the economy is way smaller compared to the 90s as well.




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