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Bubble talk (samaltman.com)
263 points by dmnd on Mar 24, 2015 | hide | past | web | favorite | 202 comments

"I am pretty paranoid about bubbles, but things still feel grounded in reason."

Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006. They have a self-interest to believe that the good times will keep going. During the dot-com bubble and the housing bubble, the rationalizations that were being spouted by those in the midst of it were incredible.

The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.

The only thing keeping the valuations high are because people delude themselves into believing that Google or Facebook will pay billions for customers. If Google and/or Facebook declared they would be doing no more acquisitions, valuations would plummet immediately.

The valuations given to companies with no real revenues, or profits to justify ridiculous valuations. But the rationalizations that get spouted to justify them are what is a big indicator of a bubble to me.

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

What if they're worried about an independent Whatsapp being a threat to FB's business model? As in, maybe Whatsapp isn't "worth" $19B (whatever that means) but it's a threat to destroy $50B of Facebook shareholder value? In that case it would be rational to buy them out to ensure that doesn't happen.

Warren Buffett looks for investments with an economic moat around their economic castle. If a startup could get close to doing that much damage to Facebook, maybe Facebook's business isn't very defensible.

Facebook has a lot of business moats, but when it comes to the fleeting attention of the youth, and trends, there is no way to moat that. The second you moat a generation's trend, the next generation declares you old and busted and will do anything but use you.

Which is probably why Buffet doesn't invest in fads and social media: http://www.fool.com/investing/general/2014/01/27/why-warren-...

I actually think this is awesome. This means a few motivated individuals can put together a niche social network and have a guaranteed buyout from Facebook. Basically, if you get big enough, they have to buy you.

I think the only option they really have is to spin off new social networks to cater to new generations and become just a holdings company for them. Sort of a YC of social networking. Their main advantage would be the ready source of funding vs a random college student thinking up the next Whatsapp or Instagram.

Successful social businesses have a big moat in the form of network effects. If it were any easier to cross the social-networking moat, Facebook would not have paid $19 billion for Whatsapp. Attracting and retaining users is hard.

The numbers needed to match Facebook are big. The fact that Whatsapp, Viber, Line, etc are even able to approach those numbers speaks volumes: they have succeeded in executing on their businesses, and there is demand in the market for solid messaging products that evidently the incumbents have not been able to fill. Buying out a (exceptionally successful) startup before it becomes a potential competitor makes total sense.

Attracting and retaining users isn't hard. Attracting and retaining users that will pay you is hard. Give out free slices of cake to people on the street and you'll have lots and lots of users, and they'll probably come back. Selling marketers billboard space behind your free cake stand isn't very profitable unless the cake is very cheap - but if the cake is cheap then just about anyone can bake cakes.

> Attracting and retaining users isn't hard.

Have you tried? It is hard, especially in a saturated market with plenty of choices. For mass media (TV, news, social), the scarcity relationship is reversed: you're effectively competing for the user's time and attention. Almost zero-sum, especially when considering the allocation of advertising dollars.

Additionally, the barrier of entry is low, since anyone can make a Twitter clone in 20 lines of Ruby on Rails. So you'd be trying to carve out a niche in social, fighting against network effects and the dozen other college dropouts working on the same idea, while hoping Facebook won't decide to implement your differentiating feature. That's not easy.

> Attracting and retaining users that will pay you is hard.

For purely discretionary purchases, yes. This is what makes the success of eg, Viber all the more remarkable. They made a $900 million business by selling electronic stickers. Anyone can sell stupid stickers, but it takes sheer execution to get $900 million for it. Not easy at all.

Since it's so difficult to get paying users in social, you can hedge by relying on a (slightly) less elastic source of revenue: selling those eyeballs and clicks to advertisers. But the traffic needs to be high and consistent for a scalable operation. And again, you're back to square one. Not so easy.

Attracting and retaining users, on mobile especially, is extremely tough, no matter how good your "cake" tastes, even if it is free.

Successful social businesses have a big moat in the form of network effects. If it were any easier to cross the social-networking moat, Facebook would not have paid $19 billion for Whatsapp. Attracting and retaining users is hard.

I know of multiple ways of trying to estimate the magnitude of network effects. All come up with social networks creating O(n log(n)) value for users. If true, that result demonstrates that network effects are significant, but a better competitor does not have to have nearly the scale you'd think to be able to compete head on against the big giants.

That said, I wouldn't recommend going head to head versus FB for your next startup. But there will be no shortage of future companies posing a threat to FB like the one that FB posed to MySpace before it. And like MySpace posed to Friendster earlier on.

Let's be honest. FB has a lot of advantages here. They are the first mover, they have a ton of resources, and they have appropriate levels of paranoia about this issue. But still I'd give them substantially less than even odds of being the social king when, say, 2030 rolls around.

> I wouldn't recommend going head to head versus FB for your next startup.

Yep. The threat to FB or any similarly dominant company isn't head-on, but rather sideways, where peripheral businesses could eat into their core. So far, Facebook is doing a pretty good job of recognizing those risks.

An interesting exercise is to think of how companies have handled those risks and the effects of that. Eg, IBM's stance on software as they gave Microsoft exclusive licensing rights, only to backtrack with OS/2 and giving up. Microsoft dismissing the Internet, then playing "me-too" ever since with Bing, Windows Phone, Azure, etc etc. Google's social networking efforts with Orkut, Buzz and Plus.

> less than even odds of being the social king when, say, 2030 rolls around.

Agreed, when you're dominating a competitive industry, it's pretty hard to stay on top indefinitely. Nowhere to go but down.

If Whatsapp puts $50B of Facebook value at risk by simply existing, that means that $50B had little value to begin with.

Saying that a product used by 500 Million people (that's ~7% of the population of planet Earth) earned its value by "simply existing" is a pretty hand-wavy.

That's incredibly difficult to do.

I didnt really say that. I said that if it puts Facebook's value at risk, what exactly was that value? Why is it zero sum?

I think that so far it suggests that that hypothetical $50B was worth $31B + whatever positive value WhatsApp has.

This. Facebook did really throw startup valuation out of whack starting with the Instagram acquisition and following up to Whatsapp. They appear to have no idea what they're doing with their money, they're in a rather vulnerable spot with their core business, and their demented frenzied spending seems to have infected everyone around them.

Instagram has turned out to be an amazing acquisition for Facebook. Facebook make >$12 billion dollars in 2014. You're saying Instagram wasn't worth 1 months revenue for Facebook? It's a double digit percentage of all time people spend interacting with Facebook's app constellation.

> maybe Whatsapp isn't "worth" $19B (whatever that means)

It means it'll give an appropriate ROI for 19B

> but it's a threat to destroy $50B of Facebook shareholder value

If you think the destroyed 50B is greater than the expected value of the next best option for those 19B, then I suppose it's justified.

But then again, that does mean that it's relatively easy to poke at Facebook's empire. I think it implies there's not a very efficient market. It means these things can keep happening over and over, draining Facebook's bank account, until it's no longer worth it for them to keep buying. (This may be what the other poster was alluding to by saying that the 50B isn't actually worth much.)

Benedict Evans has made strong points about how mobile and the open address book has changed Facebook's position significantly. Well worth reading or listening to some of the a16z podcasts about the topic.

I think it is a very positive thing for the current ecosystem that there are many mobile apps with which we can communicate and share content. Contrast this with Google's dominance of search for the past decade.

The bigger question to me isn't if Facebook wins or loses but what control Google and Apple are able to exert on communications platforms in the future. (Possibly none)

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” - Upton Sinclair

Not the hackers I know. I bet Upton was like that though [0].

[0] http://en.wikipedia.org/wiki/Upton_Sinclair

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.

I hate to pick on you, but anyone who says WhatsApp is not worth $19 bil has not seen the Chinese version of WhatsApp, WeChat. WeChat is a combination of WhatsApp and Facebook. Everyone in China uses WeChat as messenger and as a pseudo-Facebook. The risk of WhatsApp becoming the WeChat for the rest of the world was a HUGE risk for Facebook. It has a very strong hold in the middle east and was gaining a ton of traction every where else. WeChat is a less-invasive version of Facebook that many people would gladly flock to.

It's very likely a bubble when suddenly huge portion of people you knew are leaving their jobs to do startups en mass. Lot of these people hardly have anything significant on table and still get funded anyway. This is very similar to mortgage crisis where large number of people who don't qualify can easily get mortgages anyway. Accelerators have mushroomed all over places doing dozens of meetups and networking events powered by "luminaries" that no one knows because they are literally now running out of even Class-C startup celebrities.

I believe it is well know that economic condition have been very unique last few years in that there is lot of investor money in market trying to find its home. Even if returns on VC is subpar many investors wants to give it a try because returns elsewhere sucked anyway and also there is a chance of winning the lottery. As the stock market and real estate continues to gain momentum and confidence, money would start start migrating back.

My prediction is that in next 5 years, investors are going to realize that it was a good try, VC returns sucks compared to S&P/real estate and they start pulling out. This will first cause shutdown of recently mushroomed accelerators/startup schools. That would then further spook VCs causing chain reaction eventually leading to meltdown. I think more prudent VCs such as Y and Sequoia would continue as usual but many other will simply shutdown because of lack of funds. This is not to contradict Sam's predictions. Lot of the companies in his list can go big and easily double the value but in 5 years that would have much less effect on how much investment money VCs aquire.

Yes, WhatsApp doesn't have any real revenues, but Sam doesn't mention them. YC alum's are not building WhatsApp.

Uber has customers, real revenue (in the billions). So does AirBnb. So does SpaceX. So does Palantir.

Just name dropping WhatsApp is pretty low brow. There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.

>There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.

The 2000 tech bubble also came and went without every single company going bankrupt. So the fact that some companies are doing great things means squat when it comes determining whether there is a bubble or not.

The question about WhatsApp is not whether or not it was worth $19B, the question is whether or not it was worth 8% of Facebook. The bulk of that purchase was in FB shares, not cash. It just so happens Facebook is worth $235 billion dollars itself.

I can see an argument where the worlds most used mobile messaging app is worth at least 8% as much as the world's most used social network.

Maybe they're both overvalued?

I thought that for a while, but the thing is that Facebook's actually pulling in revenue. Internet tells me they have a PE of 60, which is high (20 is normal for a mature company) but not order-of-magnitude insane. If Facebook is overvalued then advertising as a whole is, and that doesn't seem likely in this age of metrics and PPC competition.

During the '00 bubble people said Yahoo's valuation was inflated because all the bubble companies spent their money on Yahoo ads. But for my money Yahoo has turned out to be worth its bubble valuation. Even if most of its value has come from a few clever investments, well, sounds like Facebook's doing the same thing.

A PE of 60 is very high. A very rough rule is that the PEG (PE to Growth, where growth is earnings growth in percent) should be about 1.0.

So a PE of 60 means the market is expecting very approximately 60% year on year growth.

That's probably what facebook is growing revenues, so maybe it's rational. this (a little out dated) chart shows that: https://marketrealist.imgix.net/uploads/2014/05/Companies-Ad...

Probably. But if you put yourself in the shoes of the executive team at Facebook, buying WhatsApp killed off a potential threat , and it was worth 8% of market cap to do that. Everyone talking about how much WhatsApp is worth vs some other company is missing that point.

>"There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money."

More "did" than can. Something is worth what someone will pay. Why was FB willing to pay $19B? The answer is somewhere between what those users are worth to FB and the threat to FB's (very real) business that WhatsApp represented. This doesn't seem bubblish to me.

Another way to look at it is that FB is dying because simpler and more appealing competitors (Snapchat, Instagram, WhatsApp) are popping up that are threatening to grab FB's users' interest more. FB is faced with a quick death by losing a major share of its users over the course of 1-2 years, and the necessity to buy up the competition while it's still able to. I think that's actually a decent strategy: buy up these other apps and establish dominance in all the niche social networking corners. It'll last them maybe a decade I think. The problem is that these disruptive social networks don't make money. Acquiring them is just a way for FB to not lose money. So eventually FB's coffers dry out while more and more niche social networks pop up to steal its users.

My understanding is that social networks are a generational thing. Even if FB was perfect in every way, no market maven teenager (for social networks the market mavens are teenagers) wants to hang out with their aunt. The next generation will stop watching Yo Gabba Gabba, grab their iPhone 9's and want to get on a social network that's separate from their parents. Because of this, I don't see a general purpose social network surviving for longer than 10-12 years and maintaining market dominance.

What if, that social network was built by 5 people, college aged, and they decided to use FB login to save some time developing because they are trying to see if this thing is worth building. A very real probability.

FB won't be the powerhouse that it is today, but it's deeply entrenched in our internet that there is value in the social data, not the "blue room" product they offer for free now. (I hate FB, but I get it.)

Funny. I can't recall where but a few days ago I overheard a teenage say something like, "I wanted to make a Tinder account but I didn't have a FAcebook, so I had to go make that first."

Mind you, it seems like a really low quality user for FB and not something I would want to hang a bubbilicious valuation on for them -- unless FB's able to track her activity off FB as well. And I think this is the case.

Actually I wonder how Facebook's user tracking is actually dealing with mobile users who only use their mobile app. It seems like they'd potentially lose a lot of tracking info unless they can track an app login through the mobile browser.

I wonder if this is part of the reasoning for their increasing centralization by offering a browser and supposedly actually hosting highly shared content.

Do you think if all they provide is the service to store credentials they'd be worth what they are worth now?

I don't know much about Facebook's current offerings, but the answer to your question might depend on what other ubiquitous services they offer now or in the future. Maybe they'll become equally entrenched in the online payment market, or things of that nature. I don't and can't know if that will leave them at their 235B market cap, or if it will be lower or higher.

The prices in every bubble are prices that someone _did_ pay. Possibly with foolish expectations; at any rate, at a level which was not sustained.

"Something is worth what someone will pay"

I've never been to keen on that statement. It approximates something about fairness. It's expresses something about subjective worth. But, we're talking about something with a fairly objective, if ambiguous value.

The price of something may be what someone will pay. For the value of something... I don't think this holds true. The value of a stock is objective, it's the future incomes discounted or somesuch. If you pay more than that you over payed.

The value of a share of a stock for a typical investor is net present value of future cash flows, but the value of an entire company to one of its competitors can be something very different. As others in the thread have mentioned, the strategic value of removing a competitor can be significant.

Only $2B out of those $19 were paid in actual cash, right? So the remaining $17B can still disappear at any time?

The remainder was in FB stock. Personally I think the amount of stock they paid points to FB's acknowledgement that they are overvalued, i.e. part of a bubble.

The valuations are crazy because investors get paid out first. So if I invest 1 billion for 10% of company x it gets a 10 billion valuation but we only have to sell for 1 billion or more to break even. Banning preferred stock for startups will result in more accurate valuations.

A "bubble" isn't defined as the absence of any irrational valuations.

Yes, but wouldn't you agree that the high profile valuations are over way over the top? Facebook, Instagram, Twitter, WhatsApp, etc. were/are valued extremely highly, I would say unjustifiably so. If there was a mechanism to go long against them and I had money to gamble with, I would.

My go to example for this is Facebook's IPO. Their valuation was at the time at $50/user. Can they extract that much lifetime value out of every user they have? It seems rather high to me.

I don't believe there is an industry-wide bubble going on. But it seems to me that if you hit the right keywords (social, sharing, advertising), you will be valued at the top of the range, not the bottom. Moreover, I believe these particular valuations will get market corrected sooner or later.

Selling Facebook's stock short would indeed let you bet against the valuation of the Facebook platform, Instagram, and WhatsApp. Keep in mind that markets may be able to stay irrational longer than you can stay solvent.

What I'm talking about is holding a long term investment against FB. I don't think they'll go bust tomorrow, but I am willing to bet some amount of money their shares will go down sometime between 2-5 years from now.

For $12 you can buy a put at FB's current price ($85) for Jan 2017.

But FB has real profits, so you may not wanna bet too much against them. They're also locking up users' Internet access in many markets, making it literally impossible to run a competitor (without negotiating the same ISP access).

Perhaps look at Splunk, which does great not only in losing money, but accelerating those losses. (Er, I mean, they "focus on top-line growth".) But hey, maybe they can cut their costs by over 2 (eliminating all R&D wouldn't be enough) but keep the revenue coming in. Then they could be profitable before other systems and hardware catch up. They're only 12 years old, so it's still very early in their long-term story.

I really enjoyed this comment. Thanks. Yeah, I was thinking of the put options. Now I just need that spare money I can gamble with and I am all set.

There are exchange traded funds (ETFs) that short. You can probably find one for the technology sector. You'll probably have to short Intel along with Facebook, but that's the safest way to do it I can think of.

It's almost as if the markets are intentionally structured such that it's easy to place a long-term bet that asset prices will rise, but relatively more difficult to bet the converse :0

You can always buy long-term put options. The premium is high, because of the time range.

That's exactly what I mean by "relatively more difficult."

There is no premium if you buy and hold, in fact that's the baseline situation from which the premium is calculated. And buy-and-hold works for arbitrary timescales, while even long term puts come only in certain flavors.

That starts to seem a lot like structurally built-in upward pressure on prices.

FB has put options listed for Jan 2017, that's nearly two years.

Not sure if you're still in the edit window, but there is a triple negative thing going on that makes this statement both confusing and less interesting (if there were no irrational valuations, no one would call it a bubble).

None of the six companies he mentions (Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX) are publicly traded.

So, one reading of the tea leaves is that something like 100B (of non-existent money) is locked up out of the hands of the people who could benefit from trading it. This, at a time when wealth disparity is not far from the Gilded Age.

There's a bubble, all right--just probably not the one the author is thinking of.

Yo got funded for $1.5m.

Secret raised $35m, including $6m of founder cashouts (one bought a ferrari.)

Is this a bubble? Dunno, but that's pretty frothy.

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

But isn't that the most important metric? I would argue there is also no metric by which a Coach purse is worth thousands of dollars but people seem to keep buying them.

> The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

I think it is just too easy to say things like this. Number one, how can anyone know this?

Number two, if not 19B then what? 18B? 5B? 500M? What? Was it overvalued by 2x or, like, 10x? If it was too much, then how much too much?

> Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006.

Except he's the person dictating the flow of money. It's more like a housing buyer saying there's good investments despite signs of a bubble.

But it isn't his money: VC funds raise money from other investors (aka limited partners). It's like asking a banker or hedge fund manager if there's a stock market bubble. They won't say yes because if investors pull their money out of equities, the banks and hedge funds are screwed.

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

Let's observe that WhatsApp besides just being a popular app, is a scalable and high performance messaging app, meaning to emphasize that you can't hit this level without some amazing engineering feats [1]. I think that we can also agree that a company that can build something of this sort might be valuable in itself without generating any sort of revenue. If it can make Facebook more productive/efficient over the coming years, it very well might be worth its weight in bitcoin.

[1] http://highscalability.com/blog/2014/2/26/the-whatsapp-archi...

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

The only good metric to determine how much something is worth is how much someone is ready to pay for it.

I can see why Facebook would pay top dollar for a company that can monetise its user base, but why buy a company that will always lose money and can only take eyeballs away from your profitable platform?

Whatsapp is a poor example to use to argue that there is a bubble. I haven't heard anyone try and justify that price beyond that Facebook was desperate and had the money. It's an outlier.

if im not mistaken, whatsapp already monetizes their users, charging $1 / year after the first year.

with 700m active users, they potentially could be generating ~ 3.6% of their sale price in annual revenue.

Are you a user? If so, and you've been such for over a year - have you paid? I've never been charged, and to my knowledge nobody I know has either. I don't get if we should be getting charged but they just don't seem to bother. I get an annual notification saying I've been extended and no more information.

They do price testing, if they believe there is no better option for you, and you will pay, they will charge you.

They will not charge you if, for example, you're someone living in the USA. There is far too much free competition.

For their non smartphone market (don't have numbers but its large), there is very little if any at all competition, and people in places like india gladly pay the $1 fee for a years access on their dumbphone.

> people in places like india gladly pay the $1 fee for a years access on their dumbphone.

I am in India and I have never been charged for Whatsapp. Every year, whatsapp decides to add more free months.

Also, there is significant competition in the messaging space in India, and Indians are not comfortable paying for anything other than their phones.

They might base it on who's likely to pay. It might be better, in their minds, to keep you as a user than to potentially send you away.

Has anyone ever actually paid $1 / year for WhatsApp? I know in several places they claim that is their business model, but I've never come across anyone that has paid for WhatsApp.

Part of that may be due to the fact that WhatsApp grows so fast that most users haven't been around for a year, but I'm under the impression that after a year, if you don't pay, the app continues to work and you never lose access.

Jan Koum actually stated at Startup School that whatsapp started monetizing to REDUCE load because they were acquiring users too fast and that it backfired, ultimately leading to profitability. From a strategic standpoint, whatsapp puts facebook in a great mobile position in a lot of emerging markets outside the US.

>that it backfired, ultimately leading to profitability.

On what planet can the act of becoming profitable be considered a "backfire"?

I believe Facebook reported in their financials though in their first quarterly earnings report after the acquisition that Whatsapp was losing $100mm+ annually. I'm not saying that won't change, but their business model still needs some tweaks.

Generating revenues is not the same as making profit. If their infrastructure costs more than $1 / user to maintain on an annual basis they could very well still be losing money. To compare their price to something you'd have to compare it to dividends to the parent company or net profits for the division if it is integrated.

Revenues don't mean a thing.

take 25+ cents off for cc processing... 700m * .70 = 490 million. Not everyone will do it, but assuming most, maybe $350 million in recurring. Certainly nice, but does that justify $19B? That's something like a 2% return, if my calcs are close.

Even if he is right about his bets, it does not prove that there was no bubble. A lot of times when bubbles burst, many small competitors are whipped out of the market, while the ones that have been successful up to that point have a better chance of surviving. Not only survive, but once the dust settles they are the few left to soak up any new investments.

Boom/bust cycles can be thought of as a redistribution of bad investments, which often time results in the demise of fresh competitors or, at best, the assimilation of "failed" capital (human, tech, infrastructure) of those ventures into the companies which successfully navigate the transition at a very low cost.

The bubble that different parties speak about when talking about the tech world has to do not so much with the amount of money flowing into that sector as an aggregate, but the near-exponential growth in new companies and the unfathomable valuations of some of them which are hard to justify.

You say larger companies survive crashes, but their valuations still take huge hits. Look at the last dot-com crash: MSFT crashed from $59 to $21, AAPL crashed from $4.90 to $1.00, CSCO crashed from $79 to $14, and so on. 1 of these companies (AAPL) took 5 years to recover and double its market cap peak of 2000, while the 2 other companies never even recovered their market cap peak. So betting on Sam's metric in 1998-1999 would have been a very reliable indicator of whether or not a bubble would follow these years.

>>> Of course, there could be a macro collapse in 2018 or 2019, which wouldn’t have time to recover by 2020. I think that’s the most likely way for me to lose.

Macro collapse = Bubble Bursting. The performance of YC's personal portfolio is irrelevant to the idea of bubble bursting if there are other investors running a pump and dump on the industry at large.

I took "macro collapse" to mean some tumultuous event independent of existing market valuations, such as natural (or man-made) disasters, epidemics, war, etc.

I've never heard the term myself, so I am speculating.

What then would you propose as a decision procedure for whether we are in a bubble?

Bubble bursts are generally large-scale psychological phenomena. Nothing can be done to avoid them, and boom bust cycles will continue in small sectors, larger sectors, and the entire economy for the foreseeable future. As investors slowly start struggling to find valuable places to put their money, an idea that it isn't worth while begins to circulate through the investment world.

The best advice is to always invest wisely. It makes no difference whether you are in a bubble or a contraction. Doing so will put you in a better position to succeed even when the bubble bursts.

The big question I debate with a friend is, if it's a bubble what would it look like if it burst?

If the latest startups couldn't raise new funds (because of investor panic), then suddenly the market is flooded with developers, do salaries, real estate, etc, go down?

Is the startup economy entirely reliant on outside money? (Especially outside of SV money - money like pension funds and other institutional investors)

Or would the Googles and Facebooks of the world - huge profitable companies that they are - absorb the ones that failed, the downturn would be modest, and soon some of those developers would be right back out there starting new things?

I'm inclined to believe the latter.

People decry a bubble for other reasons than valuations, like San Francisco real estate and how high dev salaries are getting. Companies that don't have any revenue but can still raise lots of money.

I do wonder how high dev salaries can go - I think it is tied to how much value a developer can fundamentally produce. It may well be far higher than the current average salary (perhaps multiples of it), so I don't see anything wrong with that.

But you could also say developers are themselves in a bubble, and that the proliferation of app academies and their like will soon catch up with the demand.

Right now there is a scandal going on somewhere, we just don't know where. Maybe Facebook, maybe LinkedIn, maybe Yahoo, maybe even Google. Maybe someone else, who knows. It always starts with a scandal. WorldCom, Enron, Lehmans, AIG, etc.. When a company can no longer meet growth targets to stay competitive they start lying to keep the capital flowing. They build a bigger house around the main house, but it's built out of cards and eventually it crumbles. This is what no one wants to believe, but it always happens. "It's different this time.™" It's never different. There's always going to be that incentive to cheat, and multiple people will take that bet. Someone eventually gets caught.

Once one of the titans fall, investors get scared and pull back. Companies like Google and Apple, with huge cash positions, are okay. Everyone else runs out of capital in a few months. The fallen firm lets 10,000 people go. Everyone else either does layoffs or initiates a hiring freeze. Now you've got 10,000+ locals out of work who can't get jobs. Now you've got 10,000+ people who are a few months away from defaulting on a mortgage they could barely afford in the first place because it was so expensive to live in an area propped up by cheap money and heavy leverage.

People start defaulting, and things get even worse. You've got a bunch of people in San Francisco who got $200,000 no interest downpayment loans from the city. They can't pay them back and the city gets stuck with the debt. Now there's public crisis.

Everyone and everything attached to the real estate market starts to freak out that home prices might decline. More panic, more layoffs, more defaults.

The dust settles and we start over.

One of the most bubbly signs (to me) is I hear people I consider reasonably intelligent saying it's impossible for real estate to lose value, especially in SF. Now's the time to buy, since it's only going to go higher.

Of course I heard the same lines in 2006....

Well if you look at bay area real estate since 1984, if you buy 1 or 2 years before the peak, it never drops below the point 1 year before the peak occurred. Except on the 2007 US real estate bubble pop, which was 2 years.

Then you have places where I am from, like Vancouver, for which the past ~15 years has been rising quite a bit, and now staying at very high price levels. $1 million dollar houses are pretty average, and whats even worse is people don't make nearly enough income to live there.

So this recent rise is pretty worrying from my perspective. If I want to buy a place, my savings will be wiped out. I personally wish it didn't cost so much.

People keep using the word "never" and "always" to describe periods of time that are relatively short.

We wouldn't say "never" with a sample size of 5 in any other scenario, but with finance we seem to look at small samples and confidently say things like always and never.

How does this make any sense?

I qualified my use of never with a specific time span. Within that period of time you never see X. Any other word I could think of would just be more complicated and thus harder to read.

And my timespan was 31 years. That is after several booms and busts. If the pattern holds for even a decade +, that is a pretty significant part of my life span and something I have to consider.

Also on a more personal note, my father was basically forced out of Vancouver due to not buying a house when he had the chance 10 years ago, so it's a very real possibility that I might be forced out too here.

So the reason why people use 'small' samples is because those timespans are not small for a human being!

The added difficulty over the (for instance) Enron scandal is that this time, we don't have a nice set of publicly available SEC documents to look through (obviously not talking about GOOG/FB/TWTR). But with so many firms growing huge on private capital, we don't have the same opportunities for investigation that were available with many of the previous scandals. Most of Enron's malfeasances were documented, everyone was just so exuberant they didn't bother to look that closely. Once people did (a key short seller and a few journalists), Enron collapsed in about six weeks.

Finding the scandal will be much harder this time, but I agree it's out there. Cash prize to the one who finds it.

Weren't there a lot of accounting irregularities at Groupon?

There was never a stock I wanted to short as bad as GPRN when it first floated, but my broker wouldn't let me, and it was too new for options. So frustrating.

It's not the failed IPOs like Groupon and Zynga you have to worry about. Those are actually good outcomes.

It's the ones that are "too big to fail" that you have to worry about. And it might not even be explicitly accounting this time.

I've had this strange suspicion for a while that a lot of the companies selling ads are doing some bogus stuff. I mean, we all know there's a lot of fraud happening in terms of ad serving/tracking and accountability, but I suspect that it's been institutionalized somewhere.

Or it could be any number of things. The amount of bullshit I've personally witnessed by startups to close a new round is staggering. The number of times I've seen people find creative solutions to adding an extra zero to "monthly active users" is just too damn high. Investors keep investing, established firms keep acquiring, and no one cares.

Worse, Facebook makes a lot of mobile advertising money from app install ads. If startup investors cut back the flow of money, that advertising revenue dries up. There will be a glut of unemployed developers just as Facebook starts reporting declining revenues. Facebook will need to start reducing costs, not hiring, and definitely no acquihires (startups with viable business models might be a different story).

Google might clean up with their pick of the best surviving startups and the best devs going cheap, because they have more diverse sources of advertising revenue, but they might also be under pressure to control costs if investors panic and flee tech.

That Facebook makes money from mobile advertising is a good point: In the dot com era, many dot coms made money very briefly selling ads or services to other dot coms, who were willing to pay way too much. Now many companies are valuable because other companies will pay too much for user acquisition. If they stopped, their would be repercussions for a lot of companies in the middle (not Facebook) who see their business model go away.

If the base of the value chain isn't making money (and I think honestly in the current case even the middle isn't) the whole ecosystem will probably contract.

Everything is connected. If there's a collapse in private equity funding, you could see consequences such as a decrease in advertising on major platforms such as Facebook, which would hurt their earning and market cap. I definitely think it would have some systemic consequences, but not at the magnitude of early 2000s unless it's triggered by a general equity market crash or some sort of global debt crisis.

If there is going to be a crash my money is it being on Student loans

While I agree student loan debt may be unsustainable and start defaulting, I don't think it's as disastrous as the subprime crash because (from my understanding) most of student loan debt is on the books of the Federal government, and is not being monetized in anywhere near the magnitude that subprime mortgages were being sold on a global market.

The student loan situation is bubble-y, but one big difference is that the loans can't be discharged in bankruptcy. That makes the situation fundamentally different from most bubbles.

I'm not saying you're wrong per se, because I think the way student loans are heading is almost bound to be problematic, I just can't picture that bubble "bursting" like we usually think of it.

A couple outcomes I could think of would be a law making student loans dischargeable in bankruptcy again, a government bailout type program, or a law greatly reducing the availability of student loan debt. Any of those would have drastic consequences, but I'm still not sure it'd be right to call any of them a bursting bubble (except maybe the first).

Ads are the one thing that folks focus too much on in quest of bubble quarry. I run a large boutique display ad platform, and I'm reasonably confident that advertisements change form, function, and price -- but advertising never goes away. Even the display ad markets in post-Great Recession 2008 were not too bad.

Always this talk about valuations. Never about revenues and profits. Reminds me of the dotcom days when people used every other metric when they couldn't talk about profitability. Like eyeballs, clicks, etc. There will be a few winners but a vast many will do down in smokes or get acquired for pennies on the dollar.

Business vs startup When Twitter went public in 2013, it was valued at $24B — 12 times higher than Times market cap. Twitter was losing money while Times earned $133M the same year. Why do startups have such big valuations?

The answer is: cash flow. It is different between high-growth startups and low-growth businesses. Startups would usually be profitable in the future. Startup’s main metric is growth. [1]


> This bet is open to the first VC who would like to take it (though it is not clear to me anyone who wants to take the other side should be investing in startups.)

That sentence misses a 'why' I believe.

As for the subject matter: bubble or not, who cares? Those that will not invest for fear of being in a bubble would do better to keep their money anyway, and those that look at individual companies rather than the market as a whole will always have a huge edge over the investors that simply follow the herd. It's the followers that really get burned by bubbles, not the originals, they'll survive one way or another on their own merits rather than on endless capital being poured into their corporate coffers.

Bubbles are bad, corrections are good news for the real movers. In a bubble you can find yourself with a whole slew of competitors trying to go after the same market polluting pricing and models by using investor money to prop up their essentially broken propositions. Right after a bubble pops is when the real fortunes are made, that's when all the nonsense goes away for a couple of years.

It's a saw-tooth like curve and even though we're not technically in what I'd call a bubble we're definitely no longer on the ground floor either. It's not a binary thing.

I believe that sentence is grammatically correct without the "why".

I think you mis-parsed.

I think Sam intended "(though it is not clear to me [that] anyone who wants to .... should be ...)", with the word "that" elided.

"House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."

-Ben Bernanke, circa 2005.

I couldn't help myself. I really admire Sam and the current tech bubble(if there is one) is nothing like the credit crisis. Funds existed in 2008 whose sole investment strategy was to buy the opposing side of credit default swaps just so the bears had something to buy. Just wanted to poke fun :P

Your example is actually quite good: Are there people who think they are better informed than the chairman of the Federal Reserve?

And to amplify: This was Ben Bernanke's assessment as late as March 28, 2007

> At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.


Bear Sterns went to firesale less than a year later. To actually make money off of the market situation then (both on the long and short side), you had to also recognize the Keynesian wisdom: Markets can remain irrational longer than you can remain solvent.

I don't begrudge Sam for talking his book, but pretending to have knowledge about what constitutes "bubble valuations" is tricky at best.

Of course we (or better: silicon valley startups) are in a bubble, fueled by cheap money and short memory.

And of course the VC-ecosystem is denying that for as long as possible. Nobody is saying that the 1bn+ club startups are not adding value, just that it's magnitudes smaller than valuations would imply. They are driven primarely by VCs and because they constantly push it as a valid success metric.

Investors have to deny it because they're betting their money on it, if they show doubt - their money is gone before they can flip it. The startup kids have to deny it because they want a shot at the big payout.

Where are the future profits/dividends that validate those insane numbers? User growth was a ridiculous measure in '99, it's a ridiculous measure now.

Once the cheap money dries out, the bubble will burst. AirBnB and co will probably survive but i doubt in 5years that many of them are valued >1bn. Once weakened / no longer hip, regulatory pressure will increase by a lot and bring down convenience & margins.

I respect YC for what they have built over the years, especially how they can attract top talent. But boasting with valuations is insane and had me lose all respect. Let's see what's left once its portfolio rides out more than half of a economic cycle.

Of course we are in a bubble, it's impossible to agree with the fact that Uber is truly valued at 41 billion and Google only at ~364 billion. It's hard to swallow that Uber is roughly 10% of Google in value.... That goes for all these companies many who still are not really profitable.

Of course SamA is going to say we are not in a bubble, when his company's only goal is to take 1 penny and turn it into 4 pennies based on valuation and further outside investment and growth.

The tech bubble will burst, but likely will not hurt society at large, but it will likely dent the VC ecosystem.

>only goal is to take 1 penny and turn it into 4 pennies

That reminds me of what he said about "the thing that feels least reasonable is some early-stage valuations." His interests lie in driving early stage valuations down and later stage values up. And that's exactly what he's saying here.

If you're so sure, why don't you take the bet that Sam offered? All this cheap talk on HN and no one wants to put their money where their mouth is.

1. $100k is a lot of money for most of the folks here. Simply put, I can't afford to lose $100k on a bet but Sam can.

2. Even if I won the bet (impossible because I'm not a VC), I would not gain anything financially. So what's in it for me?

3. If he changes the terms to $100 a pop and winner gets to keep loser's $100 then I'm game.

Well you have a lot of people chipping in for Uber to be valued at $41G. While that doesn't tell us much about each actor's rationality, it does indicates that some people think there's value in the company's future. I can personally imagine a world where I don't own a car and pay 300-500$ a month to a company such as Uber so that a robot comes drive me from A to B whenever I want.

Let's try to convert all this navel-gazing into something usable by your average HN reader. How can the average dev best exploit the current market conditions, whether these are considered "bubblicious" or not?

Should we all high-tail it out to the Valley and get funded now so that we can cash out with billions for something very airy and non-substantive that we "made" with VC money? What kind of self-marketing and self-promotion needs to be done to ensure that we are seen as something hip like Whatsapp and bought at a massively unreasonable price?

What are the less invasive ways for Joe Developer to take an appreciable slice of the pie, meaning getting something more than long-shot lottery tickets as options and/or kind-of OK salaries? How can a developer make $1 million for himself/herself this year without founding a company? Surely that lowly sum is attainable by the humble developer what with the current valuations being "grounded in reason" and VCs going gangbusters.

Yeah, if I'm going to live in a culturally dessicated Bay Area I'd at least like to be getting a piece of the pie. Other reasons for living here are getting chased out at an accelerating clip.

I think its laudable to back firmly held beliefs with a large bet. One of the nice things about making a bet is that you need to be precise about the terms, in this case what everyone means by "bubble".

The terms in this bet imply that it would not be a bubble if most of the companies went to zero but 1-2 dramatically increased in value.

That makes sense if you are an investor in all of these companies, like YC (nearly) is. But most VCs hold only 1-2, so if there is a wide variance in outcomes (which is characteristic for startups) and the rest of the VC's portfolio are not quite as great as the listed companies (i.e. much more likely to go to zero) then there is a big risk of large drawdowns in VC funds. I think that is a reasonably likely scenario, which many people would call a bubble, but which wouldn't be reflected in the bet.

Put another way, the bet is like saying YC's portfolio (or at least the synthetic portfolio described in the bet) is undervalued in aggregate, not that many specific companies are.

So long as Google, Apple, Facebook and Microsoft are there to acquihire failed startups and return money to VC and seed stage investors, everything's peachy.

The whole "valuation" thing is dumb anyway... saying that if you buy 5% of a company for $5, the company is worth $100 is incorrect because value is defined by how much you can SELL a thing for, not how much you paid for it.

Given the fact that, if you buy 5% of some company in a seed stage round, you can probably not sell it at all, your share of the company is valueless, so the value of the company is whatever the owners can sell the remaining 95% of the company for.

Every time you sell more of the company, it reduces the value of the company unless the remaining percentage is increasing in value quickly enough to offset what you've already sold.

It's not that valuations are too high, it's that we're calculating the value of a company inaccurately.

I appreciate Sam's perspective. He has much more experience with startups and identifying businesses that solve real problems. My perspective is somewhat naively stuck in the viewpoint of a software engineer who used to deliver pizzas.

When I was a pizza delivery driver I made under-the-table minimum wage, $8 per hour. It was very clear to me where that money came from. People would order an everything pizza for $20, we'd subtract the cost of ingredients (mainly cheese), absorb some profit for the business, and pay our salaries out of the remainder.

As a software engineer making upwards of $50 per hour, I question where my salary comes from. If I worked for FB, Google, or Pinterest, surely it'd be from advertising revenue. But isn't there AdBlock Plus, AdBlock, and uBlock? I install uBlock immediately after downloading a new browser. I think anyone in tech does the same.

Which makes me worry about Twitter, Reddit, and Snapchat. These apps are mostly used by people under 40 who are tech-savvy. They are all in the red (maybe Twitter is green now?), but they plan on making money through advertising. Their prime user base knows about AdBlock. What happens when ad blocking is ubiquitous?

That's one way the bubble could burst. Here's another. I work for a company that's venture-backed. My salary comes from venture capital. We've spent the past few years building a healthcare product that's finally gotten some traction. There are currently major incentives for hospitals to adopt emerging technologies. These governmental initiates have made it easier for us to approach customers. Federal funding fluctuates rapidly and while it may be advantageous to start a health tech company today, that could change depending on election outcomes and other spending.

Our investors are keenly aware of this situation. Should the environment shift, they would be unlikely to perform another investment round. Venture capital is not a sure footing to build a business on - at least not as sure as selling pizzas. And I think this defines my idea of a bubble. Too many venture-backed companies with extreme evaluations that are planning on making money someday using strategies that worked in the past (e.g. advertising), or assuming that the next round of capital will be there should their plan fail.

The use of the web has continued to expand at a much greater rate than the use of ad blockers, even if it were true that everyone in tech installs one (they don't). And now mobile web grows at a great clip each year as well. I imagine use of ad blockers is much lower on smart phones; in particular given the large share of market non-jailbroken iPhones have. I gather it's possible for Android, but I haven't seen enough folks talking about it for me to believe it's that common.

The vast majority of software engineers work for boring enterprises or small businesses that supply software/services for boring enterprises. These software engineers are creating real value in exchange for their salaries, often only a few degrees removed from the buying and selling of real physical things.

If you are working for a advertisement-backed, consumer-facing company wondering why you have such a lofty salary, part of the reason is simply because those companies need to compete with these more boring businesses to attract and retain engineers.

I know that doesn't reply to all of your comment, but it's a good thing to consider that I often forget myself.

> Venture capital is not a sure footing to build a business on - at least not as sure as selling pizzas.

You're right, of course, in that technology is not as predictable of a need as pizzas. But pizzas also aren't very hard to make or sell. They're a commodity, which means demand is always there, but it's tough to differentiate and make real money in them (because competition drives prices down).

Google and Facebook, on the other hand, are monopolies of sorts. (Don't believe that? Ask Google Plus).

While there are many different factors involved (and there are companies on much-less-secure footing than Facebook, Google or Pinterest), I think it's dangerous to extend the anecdote of, "I download adblock" to the rest of the human population. I don't use adblock, and I'm relatively tech savvy. Nor do most of my friends.

So let's look at the ad-supported companies right now, but let's talk real numbers, not speculative ones.

Facebook brought in $3.85B in revenue during the last quarter of 2014. Google reported consolidated revenues of $15.42 billion for the quarter ended March 31, 2014. Those aren't hand-wavy "maybe someday" numbers, that's cold hard cash.

Reddit, while much more nascent as far as making actual money goes (they would argue they're playing the long game and not optimize for earnings right now) brought in just over $8 million. They're not quite profitable, but they're not far either.

There are a lot of forces that change whether or not something is valuable and what the venture financing market look like, but this time (as opposed to 1999) there are a few companies that are bringing in incredible amounts of real revenue.

This post scares me in the way that most bitcoin journalism does. There is no shortage of press talking about the start ups themselves (as opposed to the state of the capital markets). For many people, the state of the markets really does matter. If if you're looking to raise capital, it helps to know that these are historically favorable times. If you're looking to invest, it's important to consider whether things may be overheated. This article advocates silence (I'm tired of hearing about [insert topic]). This head in the sand talk is alarming in the same way that it's scary to hear people say "I'm tired of people saying that bitcoin is a pump and dump scam". Generally, it's a bad sign when a viewpoint is suppressed. Having lived through the dot-com bust (in which my father's "bubble" talk fell upon deaf ears) and the subsequent housing bubble in which people were similarly dismissive of "negative" voices, I'm wary of this rhetorical style.

I would take this bet.

I'll put 3 caveats:

1 - I don't have 100K lying around to allocate to charity bets.

2 - I'm not an early stage investor.

3 - Perhaps because of 1 and 2, I'm not in Sam's position to take the bet.

But Sam has laid 3 very aggressive goals. His position is that the market is significantly undervaluing all 3 stages of investment. The odds are that at least one of these will be wrong. (And it won't take a bubble to prove that - all it will take is just 10% returns in one of the 3 phases of investing rather than 15+%.) If it were a cash bet, it would be worth taking just as a hedge.

Net - any true naysayer should take Sam up on it, as it's a good bet for even folks who think we are in for just modestly good times.

Well, there's an additional tax on the negative bet: if you lose, you lose $100k. If you win, you get no money.

The first question for this bet is "How much would I pay to make Sam donate $100k to a charity of my choosing." Would you pay $10k to make that happen? $1k? $50k? $100k?

If Sam donating $100k to charity is only worth $20k to you, and you think that Sam is 80% likely to lose his bet, then the bet has an expected -$4k utility to you.

EDIT: Sorry, my model above does assume that paying $100k to a charity of Sam's choice has 0 utility to you. If, for example, you strongly expect to donate $100k+ to charity in 2020 anyway and aren't very choosy about which charity, then obviously the bet is a pretty sure winner to you.

The issue is we work in a field that has had a bubble in the past so until it inevitably happens again, the doubters will look for every sign that a bubble exists, contrary to the truth of the matter. In a similar manner to the housing market, technology will always be seen as "bubbly" and every high valuation just feeds the rhetoric. Ebbs and flows in economies is natural and known to anyone that studies macroeconomics even at the basic level, but truth doesn't sell: fear and doubt does unfortunately. It's annoying, but not quite as destructive as the other fear mongering happening with other news around the world.

I respect putting in writing for all to see your predictions for the future on a controversial topic. Not easy to do.

However there are a large number of companies lumped in together which sort makes this a hard metric to measure definitively. The logic seems to follow in the following way:

"A lot of people believe there's a bubble." -> "Those people believe all new techy companies are part of this bubble." -> "Those people think all new techy companies are overvalued."

I don't think that that logic is accurate. I think it's totally possible for somebody to believe (as I do) that a large number of tech companies are overvalued (Pinterest), while simultaneously believing that there are some that are not (SpaceX). So predicting that that entire group will exceed $200B in value in five years is making a broader argument that some tech companies that have already exhibited an unambiguous amount of success will continue that trend in the next five years. But what if four of those companies go belly-up or drop in value by 50%, while one outlier becomes the next Google? Is the argument correct? Technically speaking, yes. But I think in that case the overall point would be proven wrong.

Ultimately I think the entire "bubble" conversation centers on the argument of whether private tech companies that are < 5-10 years old who's primary product is a captive audience of users is overvalued when a single group of VC's choose to value them in the 9-10 figures. It isn't bubble in the dot-com/real estate sense that actually has a meaningful negative impact on the economy, but more or less a disagreement on whether that value would be proven on a public market after a meaningful amount of time.

Man with vested interest in avoiding bubble says there is no bubble, more at 11...

Not sure if you read the whole post, but he's willing to put $100k on the line...

... and bets $100,000 of his own money on it.

$100k might be a big bet or a small bet for him, depending on what his net worth is. In any case, he's probably not betting his IRA on this, so I'm not sure the amount really matters beyond getting people to pay attention.

[1] For context, this may be in response to the twitter conversation between Sam Altman and Chris Sacca


Content aside, there's something to a blog that ends with: 'I'm pretty confident that I'm right. If you disagree, I'll bet you $100,000.'

Altman has 10X'd the bet that made Mitt Romney seem "an out-of-touch rich guy"! [http://www.politico.com/news/stories/1211/70246.html]

Interesting proposition. I've got a counter offer, invest $100,000 in the named companies (It would require a bit of financial juggling to make that completely work but it could be done) and liquidate in 2020, with whatever you get back going to charity.

But that sidesteps the issue of bubbleness or not. Really the question is whether or not the private valuations of these companies is in excess of their "fair market value" (like Box's was) and so the private investors are over paying for participation. Sadly we can't just convert these privately held companies to publicly held ones to its hard to run the experiment.

Bubbles don't happen when everyone says "we're in a bubble".

Bubbles happen when everyone is excited, they all want in to the next pets.com no matter what, and the general consensus is "this time is different".

Bubbles BURST when everyone says "we're in a bubble."

His three propositions can occur even though a bubble bursts and may even have a better chance to do so because of it. i.e. The amount of money a company is worth becomes insignificant when the value of money decreases due to the fed dumping it from helicopters to avoid a depression.

That's the reason why bubble talk is not boring... because the very unnatural successes that occurred post 2008 (due to market manipulations by the fed) now being set to unwind. It's become a game of jenga, with everyone watching the fed make its moves.

Like it or not bubbles will burst and when they do lookout below!

Typically the thing to look for at the top is a falling marginal utility of capital. That is, capital can't find a place to invest itself so it starts chasing after dumber and dumber investments. The high production cost oil sector (e.g shale) is probably going to be the first thing to go.

It's amazing how quickly Sam went from founder of moderately successful start-up to public intellectual.

I have nothing against Sam, but just because he took over for Paul doesn't mean I'll read and mull over everything he says with the same intensity I did with PG's writings.

>Investors that think companies are overpriced are always free not to invest.

Not to detract from the general point, but during the last bubble crash, we ended up being forced to invest via bailouts.

You have a large amount of workers who are paid to invest. They can't put it in the bank, and count on the interest. In order to keep their job they need to invest. They will invest until it crashes? (When it does crash, I hope the haves will take pity on the have-nots; just a little, and not just to the obvious ones.)

> The gleeful anticipation of a correction by investors and pundits is not helping the world get better in any meaningful way.

So very true. I think it is important for us all to remember that quotes from sources in a marketplace are often about forwarding their own interests, as opposed to being realistic or dispassionate and truthful.

This is often something people do unknowingly, especially well meaning people that are discussing a subject of great import to them. Something to keep in mind.

Successful examples don't change the fact that how much money is wasted unnecessarily. I see startups spending lots of money on fancy offices with massage rooms, when you can't find anyone around if you try to find donation for a village in Cambodia where people living with 5 dollars monthly budget. Some startups do good things exceptionally but how do people feel good about hundred thousand dollars monthly office expense for a startup that doesn't generate any revenue ? I don't know much about bubble and stocks etc since it's kinda not my focus in general, but when I see something like Yo valued as 10 million... There is something wrong with this culture because you know this planet we're living on, I can point you hundreds of cities where the currency is a package of baby food. Millions of people struggle accessing water and food but here we see 300 million dollars are thrown to the table for a dating site. I don't know what exactly bubble refers to but as an engineer honestly I feel bad about being a part of this culture and I'm waiting for the first chance to quit this industry completely.

Fallacy of relative privation. [1] Just because things are bad in Cambodia doesn't mean a startup can't spend its money how it likes, for good or ill. If a startup chooses to spend money on a fancy office with massage rooms, they are probably doing so out of a belief that this will help them attract and retain higher-quality employees, thus produce a better product, thus become profitable (or do so faster). They may be wrong in this, and in fact, quite likely are; most startups fail, after all. But if startups had to take the conditions in Cambodia into consideration before deciding where and how to spend their money, it's not likely we'd have any startups at all.

[1] http://en.wikipedia.org/wiki/Fallacy_of_relative_privation

"higher-quality employees"

yeah man... higher-quality employees... please take all that and move to another planet.

this is a weird argument. It amounts to saying that since things are bad in many places, it would be good if things were also bad in places where they are currently good.

That's what you understood. in fact, I'm talking about the big amount of money wasted bountifully for luxury offices with massage rooms, startups with no revenue but hundred thousand dollars monthly office expenses. Of course I'm happy that there is wealthy countries in the world, as well. But I do know one thing too, we owe this wealth to those who struggle and accept working for 2$ per day. And Uber or Snapchat doesn't have any impact in their lives. When people who make those jeans that we buy from the fancy stores here, many of work in underground textile factories starting in very young age like 11, and they die at twenties suffering from Silicosis disease. Just one example. You can ignore all the world and talk about Uber, Snapchat every day for sure. I'm not saying startups shouldn't be invested, or I'm not against venture capitalism. Try to get my point without arriving to that kind of conclusions.

Where do you work? I encourage you to put your money where your mouth is and take half or a quarter of your salary at a nonprofit. There are a lot of charities who would benefit from a mobile app or some server side logic and might be able to pay you 30k. I'm sure this is what you are doing right now, since you are so full of moral outrage?

My only quibble with this is that Sam is assuming about 15% a year appreciation of market value for the established >= $10B companies between now and 2020. That seems unrealistic, given historical returns of US equity markets. I am sure those companies will innovate going forward, but given how large and established they are, this should be priced into their current valuations. But, I hope Sam wins the bet !

> That seems unrealistic, given historical returns of US equity markets.

Especially considering we've just had 5 years of pretty remarkable returns in the equity markets, so if anything you'd expect low returns over the next few years. US equity as a whole is valued pretty high relative to earnings at the moment, and the technology sector is in line with that.

This also provides some context


I think this is quite a risky wager. I'm not sure how much of external factors are accounted for. The economists and financial journalists are quite excited about the whole QE and ZIRP effect. It's been deemed an unprecedented experiment. Cheap money has flooded the market. If we look at each industry of itself, most of them are in the similar state. Housing has become very expensive, stocks are at all time high, executive compensation has increased, commercial real-estate is popping up everywhere and the wealth gap is broadening. So when someone looks at statup evaluations and see them getting higher and higher, an expectation of market correction is in order just as it would be with the stock market. Perhaps the inevitable will get delayed once Euro takes up on the QE.

P.S: I think when someone talks about bubble, it doesn't imply that the current crop of startup ideas are bad. It just reflects inflation in the VC market.

There are now high speed internet, unix powered, quad-core pocket computers in the hands of billions. You can't understand the implications of that and think there's a bubble by any meaningful definition.

There should probably be 10000x more companies than there are. The 1+ million mobile apps that exist hint at the true scale.

Things can be overpriced (and therefore in a bubble), while still adding value. The people saying we're in a bubble aren't claiming that the companies affected by the bubble are bad companies. They're saying that the price required to buy into them isn't commensurate with the future revenue those companies will generate.

Think about it this way. Wikipedia adds a tremendous amount of value to the world, but it can't capture any of that value, since people don't really want to pay for it, so if in some hypothetical world you could buy equity in Wikipedia valuing Wikipedia at say, $10b, then Wikipedia would be overvalued, even though it may in fact have generated many times more than $10b of value.

Of course, you could argue that if Wikipedia were for profit it would be able to find some way to capture that value. In effect, this is where the disagreement arises between those who say there is no bubble and those who say there is.

Quad-core devices are probably in the 100s of millions for now, not billions, but I agree with the rest. :)

(Globally speaking, the most common type of smartphone today is probably a one-core 0.6-0.8 GHz Android device running Android 2.x. With a crappy 320x480 TN display and not nearly enough RAM.)

There were billions of internet-connected devices in peoples' hands in 1999 too. They were called personal computers. I'm not sure how being "unix powered, quad-core" turns devices into magical bubble protection.

Of course in the long term proliferation of communications technology will result in big changes, but that's a generational cycle, not a quarterly one. The market can (and probably will) boom and bust many times while that broader trend works itself out.

So you're saying "It's different this time"?

Uber could never have existed in 1999. Uber probably won't be able to exist in 2029, as it is today.

Uber is anticipating the self driving taxi though [1].

[1] http://techcrunch.com/2015/02/02/uber-opening-robotics-resea...

We had Internet "everywhere" in 2000, all these new doors were being opened! And yet we crashed. The investment has to remain in step with the economic returns, or else eventually a crash happens. The possibilities are one thing, the returns are something else.

Of course there are a lot more viable online/mobile businesses now than there were in 2000, so a bubble has that much more space to grow before crashing.

If there's a bubble.

I enjoyed (and mostly agreed with) the article but the dollar amount of the bet gave me pause. 10 years ago (aka before the bubble in long bets) that would have been $10k.

Sam shows a great attitude that's quite different from many VCs and entrepreneurs.

Some are quite dogmatic and won't even discuss the possibility of a bubble. If you ever question it, you're taken as old-fashioned, ignorant and heretic.

The main differentiator being that he wants companies to grow to be great (and valuation is a measure of that success), whereas traditional VC's and even entrepreneurs are looking for high valuation/exits as success, whether the company is truly great being irrelevant.

The current climate feels a lot different than the 2000 era. For starters, what was 'valued' in 2000 was:

* The number of employees you had. I had the opportunity to be at a number of Idealab parties in 2000-2001, the only thing one company bragged to another was their head count. A company that had $500 in daily sales, bragged they at 36 employees. Oh, Goto.com has over 200 people now, they moved out of the Lab!

* Your marketing spend. A company I knew 'rebranded' themselves. No one heard of them before, but they nearly bought two full page ads in the WSJ (for $110k a pop), to announce the new 'name'. They did spend around $100k in advertising and probably another $100k on a renaming party. This company had collected no revenue their entire 2 year existence up to this point.

* You are measured on how big of a pop your IPO did. That is, how much money you left on the table. So, your company had an IPO price of $30 a share, when at the end of trading of the first day, it went for $300. Thus you collected $70 million, out of a possible $700. There was an ad for the WSJ about how much better your child would be if you subscribed, it mentioned that the child of a subscriber would start a company with a 'Record first day pop'. My god if you only doubled your price on the first day you were a complete failure, even though you might have had more cash to help your company grow.

If Über, AirBNB and the rest, have real revenue, and they realistically don't need more funding to stay 'afloat' longer than a few months, then the bubble "isn't as bad" as 2000.

"Aggregate value" is an interesting way to measure performance, and makes it easier for him to be right than it looks at face value. On the face of it it looks like he's saying their value will increase by 2x or 3x, but what about capital raisings? Capital raised will still count in aggregate value, but doesn't provide direct value for shareholders.

For example, one way for a company to go from a $1bn value to a $2bn value is to raise $3bn and then fall by 50%

Glad he mentions the macro collapse possibility (which is out of his hands, and therefore irrelevant to his career except as a binary "shall I stay in this business" decision). I think any talk of bubble in tech should mention the direction of equities as an asset class, and particularly the very cheap capital available at the moment.

So when you are taking a directional bet on "the tech bubble" (including deciding to make a career as a developer or startup founder) you are really taking a position on China's economy, and global interest rates for the duration of the bet.

Hypothetical question: how many of today's startups would make it through their first five years if interest rates were in their mid-70s levels? What happened to other asset classes during the high interest rate days and what would a savvy investor have done at the time?

It's becoming a very real consideration for many countries; see the fall in AUDUSD since 2013. In 2011, the majority of online e-commerce in Australia was cross-border, because the exchange rate was so good [1] and wholesale prices in Australia could be as high as 50% higher than the rest of the world. If you're a domestic online retailer today, raising capital abroad and competing against foreign retailers (say, you're The Iconic, financed in EUR and selling in AUD, competing against ASOS selling in GBP and shipping in USD), life just got a hell of a lot better.

[1] can't find the link now, but the Commonwealth Bank of Australia crunched the numbers on over a million customers' accounts and published a fantastic report showing where the money went. In some sectors, over 90% of revenue came from abroad!

Sam will win this bet. A macro collapse I think is more likely due before 2018, with plenty of time to recover. The only proposition he might lose is the first one, because all of those companies except possibly Palantir may fall victim to "trend cycles" (e.g. "nobody uses myspace anymore")... Although Snapchat, the likeliest victim of trend cycles, is not in his analysis.

I believe he is right. We are not in a bubble.

VCs make big bets, assuming that many (most?) of their bets will fail, but they make it up on the winners. That is fine, I guess. What made the dot-com bubble was that the public did not understand this and the VCs were able to shovel many of these bets off in the form of IPOs, and many of these companies had no business model whatsoever. That is not happening here. These people are smart and learned their lesson, a rare trait in our economy.

There is a lot of exuberance, let's call it, in the VC world right now. On the one hand I see lots of good companies that have a good service and actually make money, or are getting close, but I also see a lot of social media companies with dubious business models, like in the dot-com days.

I get very worried however when I see a sector of the economy starting to defy the laws of nature, so to speak. What worries me are the valuations. Most of the companies he mentions are good companies, as defined above, but few if any of them I believe are worth these amounts. Sorry. I don't buy it.

Accounting shenanigans aside, public companies are relatively easy to value. These startups are black boxes with astronomical valuations. It's really tough to swallow. These valuations are clearly in the VCs interests.

What I see in the future are that some of these companies will succeed, some will be bought at an overvalued price and a whole bunch will die as startups do.

The latter two circumstances will certainly be a drag on the economy if it causes a dip in further investment, write-downs, etc.

I do not see a bubble as I said, but I see a whole lot of risk building up. It's not scary like the housing and dot-com bubbles, but it's definitely concerning.

>That is not happening here.

That's not happening here...yet. We could be at the very beginning. Who knows for sure?

Though I agree with you that it's important to stay positive and work to create rather than destroy, I share many people's concerns about potential misallocation of investment capital in tech startups right now, because the current model largely depends on it for it's continued sustainability. VCs need liquidity events in order to make a return, which are provided by going public, or by being acquired by companies that have already gone public and thus have large slush funds for acquisitions.

If that goes away, it could be a problem for the current model, because it's not designed to work for small success or failure mitigation. So if the stock market bottom falls out, it potentially takes down a lot of very promising startups that could have been successful and profitable with a different strategy. Their failures may not even be their fault, but simply bad market timing. This isn't a new thing, of course - it's been happening since the Panic of 1873. We're not exceptional to this risk, but I don't think we should ignore it.

Is there a bubble in the tech/startup/web business scene?

Probably not, this is where we're at with modern day services and business making use of modern infrastructures and newly developed technologies.

Is there a bubble specific to San Francisco / Bay Area startups? I would assume so, granted all it takes to run a startup is a sensible business plan, talent, and an office space.

There's a lot of factors at play. Advertising and data mining analysis seems to be fueling the value of services like WhatsApp/Facebook. SV has attracted a lot of talent because it's a great area to live around, there's plenty of fresh blood from the good schools in the area, and SV is where a lot of big companies have set up shop.

There's always been charlatans and swindlers in the business world, and there will be many interesting innovators to come. There's an excessive amount of cash flying around [1].

It's not a tech bubble, it seems like a San Fransisco/Silicon Valley real estate bubble.

[1] https://xkcd.com/980/

Where you stand depends on where you sit, so I understand Sam's annoyance with the question of bubble / no bubble. And I get that the tech media knows that it's a reliable source of pageviews. But it's not a spurious concern. Anyone who's got a 401K should be rightfully concerned, because asset managers of all stripes are now jumping into the pool. Zooming out, anyone who has a passing interest in the U.S., and indeed global economy, has a right to ask because the valuations are definitely being driven in part by low interest rates that our central banks have resorted to -- which are hurting savers, pensioners and anyone else on a fixed income. And if it ends badly I don't believe for one second that the hurt will only be confined to those with skin in the game. The global economy is far too financialized and integrated to hope so.

The problem with this "bet" is that it's made in terms of valuations that VCs make up in the first place. To say that Pinterest is worth 11 billion in a private, non-liquid market means nothing -- If you give me a 2x liquidation preference / full ratchet / board seats etc., yeah, sure, I'll invest at a ridiculous valuation because there is no downside risk.

I would take this bet without blinking if it were in terms of a reasonable multiple on earnings in 5 years. However, my prediction is that the companies Sam mentions won't go public for another 10+ years. The high valuations in SV circles right now are influenced by increasingly complex balance sheets, which will take a long time to unwind. As a result, this bubble in valuations will eventually deflate, but a lot more slowly than the 2000 bubble did.

sama addresses the liquidation preference point: "Private companies are valued as of their last round that sold stock with at most a 1x liquidation preference or last secondary transaction of at least $100MM of stock."

By the way, this isn't some theoretical situation. Box did exactly what I'm describing. Even in a frothy Fed-fueled stock market, they IPO'd at a lower valuation than their last private market round, which I'm sure was full of all sorts of balance sheet gimmicks, and the stock has been on a downward trajectory since.

Whatever -- a 1x liquidation preference in the form of a nearly full ratchet, which is how most of these late stage investments are being structured, is still a far cry from the way that an investor in a public market would value these companies.

Wow, pretty bold bet SamA!

Anybody know how Sam's Proposition 3 would have played out for prior years of YC? He's betting that net valuation of the entire YC W15 class will exceed $3B by 1st Jan 2020. That's roughly $30m per startup in 5 years. How many prior YC classes passed that bar?

Or one $1bn+ company, a few decent successes, and dozens of corpses.

You know, if there was a private ticker say BYC53 on sharespost, which mirrors sama's 3 bets with the 5 year expiry, then a lot of us can trade alongside & quantify the worth of those 3 propositions.

Recall that the W15 batch was also much larger than previous batches with billion dollar valuations.

That's why it should be normalized per startup. Roughly $30m per, at 5 years.

> Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX are currently worth just over $100B

The reason that most these companies (excluding SpaceX) are "bubbles", is that their value is based on marketing only: anyone could start a next Uber or Airbnb in their basement.

> Private companies are valued as of their last round that sold stock with at most a 1x liquidation preference or last secondary transaction of at least $100MM of stock.

Sorry for the ignorance but can someone help me get through the jargon here? What happens if a company stagnates, never managing to raise again and never IPOs? Am I right in thinking they'd remain valued at their current valuation by this metric?

I guess my question is, assuming a company never raises below its current valuation (and if that happens I don't think we'll need any bets to decide they were overvalued) is there anything here that allows the valuation of a private company to actually decrease?

I know it's largely for show, but does anyone else think it's a bad look to publicly offer a $100k bet (a la Romney's $10k proposition to Rick Perry)? I think this might be the moment YC jumps the shark for me.

I think this tweet sums it up pretty nicely:


That tweet was extremely funny, but the argument that followed it was very much not.

I am beyond impressed with that person's patience.

One point I would make is... I've heard it said many times. "Fear and Greed are the 2 things that drive the markets". So I guess I would point out that when you try to suppress one or the other too much this is when the market can swing too wildly. My guess is it's probably healthy to have the conversation because if it's truly a bubble then it will be less of a bubble when it bursts. If it's truly not a bubble, then those who are invested will be fine and have nothing to worry about.

Sam talks only about internal factors of the industry: is there enough value generated by startups to justify their valuations?

This ignores the economic environment. There's just way too much capital floating around US stock markets and private equity funds, and it urgently to be invested in something. What that something is matters only marginally, as long as it is capable to sustain a consensual fiction that an investment is being stored.

A bubble may well be an externally induced one, not just dotcom craziness.

We might not be in a tech bubble but as sama said:

> Of course, there could be a macro collapse in 2018 or 2019, which wouldn’t have time to recover by 2020. I think that’s the most likely way for me to lose.

... The potential for global economic collapse in the next ~5 years is significant. Read James Rickards (or watch his performance in the recent Intelligence Squared debate "Declinists be Damned: Bet on America") for a smart rationale in support of the pessimistic projection.

(1) "the thing that feels least reasonable is some early-stage valuations" Sam means here that early-stage valuations are possibly too high.

(2) "Proposition 3: The current YC Winter 2015 batch—currently worth something that rounds down to $0—will be worth at least $3B on Jan 1st, 2020."

So now (1) seems to contradict to (2): if 2020 expectation of batch worth is $3B+ then current evaluations should be higher, right?

It seems to me that the moral of the story for early-stage founders is this: Don't (over)-optimize for valuation.

Naturally you want to raise at the highest valuation you can, but it's not quite as simple as supply-meets-demand economics. There are different parties that bring different sets of skill and enthusiasm to the table, and all not only have to justify their investments to LPs, but are actually hoping to make a return on the investment.

If I were to raise a seed round again (and we were oversubscribed - not best-of-YC-oversubscribed but oversubscribed), I would optimize purely for investors that would be most helpful, and let the valuation be an afterthought. My guess is 90% of founders who have gone through it would say the same. Doubly so if they had a really bad set of investors.

If you are a YC founder and you want to start a bidding war, can you find some sucker wiling to give you money at a an absurd valuation? Probably. But when Series A/B time comes you have to justify that absurd valuation. The day of reckoning is ~1 year away. That's a hell of a lot of pressure on a short time-frame for a company just barely getting off the ground.

To a certain extent (and I recognize this is a very flawed analogy), your seed round valuation is like getting somebody to bet on what you'll score when test time truly comes. So if you want to say, "I'm going to score X" and you get somebody to believe you, that's great, but now you have to fulfill on that promise or nastiness comes. That could mean a lot of dilution, a down-round, CEO firings... not fun stuff.

That being said, every company is different, and a lot of the time I see people saying, "Look at that valuation, it's 1999!" while knowing absolutely nothing about the company, its founders, the market, the trajectory, the metrics, the revenue, etc. There are relatively few metrics someone outside of the deal could use to determine whether or not we're in a bubble, so we mostly look at how many zeroes are behind a valuation and determine according to that if it's "a bubble." Pretty difficult, but everyone will have their say.

Personally I wouldn't mind things being deflated a little bit. We didn't raise the highest valuation possible, mostly because we wanted to go with people we trusted and get back to work. I'd like to think taking a little bit of the valuation edge off would make hiring less competitive, rent in Silicon Valley cheaper, etc, and I'd be OK with it being less hot than it is now. Obviously I hope a 2000-like scenario never happens again, but I'll be around no matter what happens, so let what may come.

2020 is not far off but there is room for another recession before then.

There has been a lot of money flowing into equities and startups as well past few years - I guess it's at least partly because of QE (in the US, Japan and Europe).

But in general I think it's great there is money flowing into innovative companies, whether in some cases they are overvalued or not.

On the counter argument: just because there were survivors from .dotcom era or 'RIP times' doesn't mean that there was no bubble. Investing or startup funding should be buy low sell high at your comfort level. Yes there will be survivors after all bubbles and good for you if you had picked them all.

"I would much rather read about what companies are doing than the state of the markets."

This statement rings true for me when applied to much writing that passes for journalism. "Horse race journalism," is the word for it when talking about political journalism.

Don't forget about MR MARKET as described by Ben Graham and popularized by Warren Buffet. Also, you are not distinguishing between price and value. Markets can be quite irrational at times, but intrinsic values are not irrational. There is a difference.

Bubble or not - seems a little self interested to release this blog post the day YC's latest batch is judged and valued (Demo Day). The last part "The loser donates $100,000 to a charity of the winner’s choice" is pretty badass though!

This strikes me as a bit cringe worthy, though perhaps it's my puritanical modesty. I like Sama, but putting up significantly more than the national average household income to make a point reminds everyone just how little the money matters.

'My name is Sam Altman, king of VCs: Look on my works, ye Mighty, and despair!' Nothing beside remains. Round the decay Of that colossal wreck, boundless and bare The lone and level sands stretch far away

If your ass is sitting in an aeron chair reading this, then yes you should always be worrying about a bubble (unless to make up for that your desk is a 2nd hand card table)

if there is a bubble and it persists then the valuations you propose are more likely and would be provided by the same investors participating in the bubble today. so, not sure of your logic here. maybe if you proposed a metric for actual cash generation you'd be on to something, but there's nothing to suggest that actual cash generation will be the driver of the valuations.

    Proposition 3: The current YC Winter 2015 batch—currently worth 
    something that rounds down to $0—will be worth at least $3B on 
    Jan 1st, 2020.
This is a clever way of wording to the VCs: "You should invest in the whole batch of YC W15 companies because in 5 years your investments will own part of a $3 billion group of companies."

The problem is nobody knows what's in the contract. What is the liquidation preference? etc.

Yes, this time, it's different...

To be fair, speculation of a "new tech bubble" has been rampant since a few years after the dotcom bust, and there hasn't been a major tech-specific crash yet. At some point the guys talking about a bubble will probably eventually become correct, but that doesn't mean they're correct now.

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