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.
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.
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 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.
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.
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.
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.
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.
That's incredibly difficult to do.
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.)
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)
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.
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.
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.
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.
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.
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.
So a PE of 60 means the market is expecting very approximately 60% year on year growth.
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.
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.
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.)
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.
I wonder if this is part of the reasoning for their increasing centralization by offering a browser and supposedly actually hosting highly shared content.
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.
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.
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.
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.
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.
Secret raised $35m, including $6m of founder cashouts (one bought a ferrari.)
Is this a bubble? Dunno, but that's pretty frothy.
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.
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?
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.
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 . 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.
The only good metric to determine how much something is worth is how much someone is ready to pay for it.
with 700m active users, they potentially could be generating ~ 3.6% of their sale price in annual revenue.
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.
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.
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.
On what planet can the act of becoming profitable be considered a "backfire"?
Revenues don't mean a thing.
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.
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've never heard the term myself, so I am speculating.
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.
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.
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.
Of course I heard the same lines in 2006....
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.
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?
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!
Finding the scandal will be much harder this time, but I agree it's out there. Cash prize to the one who finds it.
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 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.
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.
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.
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).
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. 
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 think Sam intended "(though it is not clear to me [that] anyone who wants to .... should be ...)", with the word "that" elided.
-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
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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".
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!
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.
Not to detract from the general point, but during the last bubble crash, we ended up being forced to invest via bailouts.
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.
yeah man... higher-quality employees... please take all that and move to another planet.
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.
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 should probably be 10000x more companies than there are. The 1+ million mobile apps that exist hint at the true scale.
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.
(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.)
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.
Uber is anticipating the self driving taxi though .
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.
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 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.
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%
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  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.
 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!
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's not happening here...yet. We could be at the very beginning. Who knows for sure?
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.
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 .
It's not a tech bubble, it seems like a San Fransisco/Silicon Valley real estate bubble.
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.
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?
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.
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 am beyond impressed with that person's patience.
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.
> 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.
(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?
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.
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.
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.
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.