I will take your bet.
I run a VC fund called Immaculate Conception Ventures, I am a TechStars Boston mentor, and I like to invest in TechStars alumni companies.
Michael de la Maza
Immaculate Conception Ventures LLC
I accept subject to verification that you really qualify as a VC, and I can't find a website for Immaculate Conception Ventures. What investments have you made and how large is your fund?
If terms from the blog post are acceptable I will enter into longbets.
Fund is $500K. Investments are listed below. Happy to provide LLC documents.
Please enter into longbets.
edTrips http://www.bookity.com/ (via AngelList syndicate)
My email address is email@example.com
7 confirmed investments of $25K
$100k is probably cheap to get your name in many major news outlets.
So I don't find this taker particularly interesting. In the context of an industry wide debate, the opinion of someone who doesn't have an audience similar to Sam's doesn't really mean much. Not that they aren't smart, just that they aren't someone influencing the discussion. Which is what this is mostly about.
And to say "I take the bet" without any discussion of why really misses the whole point.
Of course Sam should take this bet. But I'd suggest that he amend his proposal: Find people with enough audience to change the discussion, who are talking about bubble valuations, and ask them specifically to put a stake in the ground on this.
if another VC from a top-tier fund with at least $500MM under management would like to take the bet, i will make the same bet once more.
before, with the open definition of VC, it expressed a high confidence in your bet.
now, by limiting the pool of potential bet takers, you are weakening your overall goal of maintaining public perception that there is no bubble.
the analogy is boxing. before, you were putting a huge bet that you were the best boxer in the world and you challenged any other boxer to challenge you so you could prove it. now that someone has, it's like saying that you are the best boxer in the world, and anyone can challenge you to prove it, except this challenger because reasons. it sounds like an excuse not to fight and makes you look scared.
it sounds like your confidence in your position concerning bubbles has been weakened, but you are trying to convince yourself it is as strong as ever by saying no REAL venture capitalist has taken your bet, so you must still be right.
it's cool though, I'm sure nobody will notice.
the logic being that, the more restrictive requirements, the less people who meet them, which means less probability that someone would take his bet, which implies that he never really wanted anyone to take the bet in the first place.
the subtext is that sam is not as confident in his position as he would like you to believe.
'This bet is open to the first VC who would like to take it'
Any bets taken beyond that would be a relaxation of the 'you weren't here in time' criteria which would have excluded all other gamblers.
plus he isn't doubling down on the same bet: he's changing the new bet to be more in his favor, so the additional 100,000 is actually worth less than the original 100,000. (not monetary value, but rather the money's value as representation of the strength of his belief that the bubble won't pop before 2020).
If you believe the person will not follow through that's one thing, maybe both parties should put $100K in escrow, talking about the purpose of the bet is weak.
maybe you shouldn't be so dismissive
The only thing I'm really interested in is why sama decided the other bettor had to be a VC. That's a pretty silly requirement.
Anyway this isn't a ballsy bet at all, really. Guys on 2p2 (poker forums) routinely make huge proposition bets that are more fun, interesting, and risky than this--occasionally for charity, as well (though not that often).
Losing this bet will likely do no more to either bettor than losing a $5 bar wager would do to me. Pony up the cash, shake victor's hand, move on with my day and forget about it.
A bubble that never bursts is indistinguishable from real value. Remember that money is itself a bubble; its only value is that you believe other people will continue to accept it to give you the things you really value. The dollars in your pocket are just pieces of paper; the dollars in your credit card are even more nebulous, they're bits and bytes in your banks' computers. And yet somehow it's worked for thousands of years.
Plus, it's pretty likely that several of the companies listed will go public in the next 5 years, and then their valuation will be the public co $X. If that's lower than the stated figures in the bet, well, Sam will lose.
Wow, way to contradict yourself. You say it's indistinguishable and distinguish in the next sentence? A bubble is distinguishable this way: if the value of the asset comes only from selling it to someone else, it's a bubble. If the asset provides value without selling it, it isn't a bubble. Pretty simple right?
To the extent they go public, sure, those numbers are more reasonable.
As the programmer behind that, I'm glad to introduce you to the folks at the Long Now that can expedite that.
looking forward to see this play out.
In the short term the valuation of a company is a popularity contest, in the long term it is a direct reflection of the discounted value of the cash one can expect to extract or reinvest. This is true for all investments, stocks, bonds, public, private, and even unicorns.
I have no idea if Sam wins this bet. It's quite possible that within the next five years enough of these companies are acquired at inflated prices to satisfy Sam's terms.
What I do know is when industry leaders start to use valuation itself as a metric to demonstrate that we are not in a bubble, without even the most casual mention of underlying fundamentals necessary to justify valuation, then we are in a bubble.
From Sam's point of view, 3) is probably the safest one. Likewise, 1) seems to be the most risky one.
For example, if you consider the propositions to be roughly independent, you might believe each one of them is individually nearly 80% likely to occur, yet you'd rationally believe Sam would be more likely than not to lose the bet, since 0.5^(1/3) = 0.794.
Personally, I might put the odds of each at 60%, 70%, and 90%, respectively. Independently, that gives me a mere 37.8% chance of losing. However, I also think that condition 1 succeeding is highly indicative that the others will succeed too. So, if it were really $100,000 at stake, I wouldn't take the bet.
The real conundrum is that stakes of winning aren't $100,000. The loser's money goes to charity, and the winner's takings are the publicity gained from being right. No doubt both participants feel that the publicity is worth more than $100,000. They don't need to have even 50% confidence to take the bet.
It's a shame you stopped playing. I'm sure it would've been interesting to see how the program would have to adapt as you aimed for 2200 and beyond.
2. Palantir: I have some experience with working with Palantir FDEs who were marketed to BigCo as 'gift from god to solve all problems'. They were pretty useless.
I think Palantir is basically shit. Wait and watch.
I'm asking in all sincerity - what does Dropbox have that Microsoft would want? Their OneDrive technology is "good enough" for the vast majority of users.
Latest statistics I could find were that DropBox has 200,000,000 users and that 96% of them were free user accounts. That means DropBox has about 8,000,000 paying users. Instead of buying the company for $4 billion they could instead pay each paying DropBox customer $500 to switch.
Or they could spend $4 billion on marketing / giving away their free 1 TB of OneDrive space with purchase of an Office 365 subscription for $6.99 per month.
I'm probably missing something?
Same reasons MS ended up investing in FB, instead of turning Messenger (think: you've already got everyone and their friends using it!) into a good social network?
That's a pretty bold statement.
I've worked with them as well, and definitely don't buy into the hype either. But when the latest financing round (~Jan 2015) has them valued at $15 billion, there must be something to it.
I don't know what kind of access their private investors have to the financials, but it's been reported they have 100s millions in revenue from USG alone selling their platform as enterprise software, which typically has a longer sales cycle but more "stickiness" once the customer has committed (i.e. they are less likely to purchase another platform no matter how bad the current one is). On top of that, the alternatives in this space just aren't very good, and sometimes hype and brand are all you need to make the sale.
That being said, I'm pretty skeptical of the valuations of all the tier 1 companies SamA mentioned, with maybe the exception of Pinterest, and think that category of the three has the most likelihood of losing him this bet.
This really doesn't help either point. We need more early-stage money here and more optimism, not less.
1) Any one of those companies (besides Pinterest IMO) could conceivably achieve a market valuation of $200B by Jan 1, 2020.
2) Again any one of those companies (besides Teespring IMO) could conceivably achieve a market valuation of $27B by Jan 1, 2020.
3) Easy win for Sam.
You honestly believe that any one of those companies, none of which has been around for more than ten years, could reach a market cap of $200B within 5 years? Either you are incredibly bearish on the dollar or we are officially in bubble times.
That's not the bet. The bet is that they will, in aggregate be worth $200B.
"Proposition 1: On January 1st, 2020, these companies
will be worth at least $200B in aggregate."
Particularly, liquidation preference & anti dilution.
If the argument is that somebody bought 0.001% of the company for $2,000,000, therefore 100% of the company is worth $200B, that's just a bridge too far.
I thought about it like this...
Would I bet that every company on this list will do worse than doubling their valuation over the next 5 years?
He's saying that there's innovation and the innovation makes these companies more valuable-- on that we can all agree. Whether VC investments are correctly valuing companies or not at various stages, I don't even think that's an issue, so I will take his general assertion that they reasonably are. To the extent that people think that the nature of a the "bubble" is unrealistic valuations, I think it's silly to say there's a bubble. That's not the bubble. The actual bubble causes these high valuations but has nothing to do with VC judgement -- who are all acting based on the pricing information they're getting from the market-- so that they are being irrational is due to the irrational pricing info they are getting, not due to having lost their senses. The irrational pricing info is that the cost of money is way too cheap.
The bubble is not a startup funding bubble, it's a dollar bubble.
The main argument for us being in a bubble is not that we're in a bubble of VC expectations for companies-- though that is a side argument that VCs expect google and Facebook to buy everything whatever the quality.
The main argument is that since 2001 and especially since 2008 the money spigot has been opened wide. Helicopter Ben is in full effect. The 2008 bubble was a direct consequence of that spigot being open, combined with interest rates being held below the cost of money and the Clinton era "not loaning money to people who can't repay is racist" agenda and changes to the CRA that forced banks to make bad loans. Everything else that happened in 2002-2007 was secondary effects.
When 2008 happened the spigots were opened even wider, the interest rates forced lower ,and now, instead of having an open market for T-bills the federal reserve itself is buying them. Totally distorting the market.
The short description of what that means is that money is really cheap-- really cheap for the institutional types that have a lot of it already, and especially really cheap for anyone who can go to the federal reserve window. EG Banks. T he banks have all this money and have to put it somewhere that earns a return over the borrowing cost (carry)... which from the Fed is even cheaper than the money you lend them in your savings and checking accounts.
The way the money spigot works is it filter thru tiers of the economy. Banks lend as much as they can which produces economic growth (though not without cost, hence the whole misrepresenting this system as Keynesian-- keynes recognized the cost and danger of this, but everyone who claims to be "keynesian" since then and advocates this system seems to ignore the cost and danger.).... and a lot of it hits the stock market and then even more risky ventures.
All this money in the VC pockets chasing startups is originating at the federal reserve as they shove money into the economy.
Sam talks about "interest rates rising". Well, interest rates would have risen, but the fed is providing unlimited demand for T-bills so that's distorting a market signal. The FOMC is providing unlimited money to paper short gold, so that's distorting another market signal.
I don't know how it will break-- just as I wasn't sure how the housing crisis would break in 2008, even though I knew there was a bubble (and at that time, by the way, everyone said there wasn't a bubble. They also said there wasn't a bubble in 1999. How old was Sam in 1999? I honestly don't know but I'm guessing he was not 18.)
And all of this is on top of a hundred years (since the founding of the federal reserve) of exporting the effects of US dollar inflation onto other economies-- most of which were weaker than us but now are reaching parity and don't need the dollar to back their currencies so much anymore.
I'm certain we are in one. I have no idea if it will bust in the next 5 years. But when it does, it will be worse than 2008, 1999 and the 1930s combined.
It would be a bubble if everyone believed that loose monetary policy was going to last forever. The Fed is well aware of the trillions of dollars they've created and they have the ability to make it go away, once the economy is moving again to their satisfaction.
Planet Money did a segment on this last week. The problem is, a lot of that money never made it out into the regular economy -- when the Fed creates money, it's really creating it for banks which are supposed to have incentives to loan it out. But mostly, according to that show, the banks aren't lending it out. At the very least, this shows they don't have the requisite irrational exuberance for it to be a bubble.
One thing for sure: it seems that banks have less incentive to make productive investments than the Fed thinks they do. A possible reason why: "manager capitalism" yields higher incentives for short term speculation, bonuses, etc. Maybe a trickle of that money has made it into VC but I have no idea how to determine that.
> 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.
1.) If you're in a position to raise capital, raise money now, because the funding window may not be open for a long time.
2.) Cut burn rates immediately.
3.) Get to cash-flow positive.
4.) Cut non-essential features, and focus on customers that are willing and able to pay.
It's usually not practical for a startup to change its entire business model (although LoudCloud did it in the first dot-com bust), but they can trim fat, and stop doing activities that aren't absolutely essential to generating revenue.
To win, I have to be right on all three propositions.
1) The top 6 US companies at http://fortune.com/2015/01/22/the-age-of-unicorns/ (Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX) are currently worth just over $100B. I am leaving out Snapchat because I couldn’t get verification of its valuation. Proposition 1: On January 1st, 2020, these companies will be worth at least $200B in aggregate.
2) Stripe, Zenefits, Instacart, Mixpanel, Teespring, Optimizely, Coinbase, Docker, and Weebly are a selection of mid-stage YC companies currently worth less than $9B in aggregate. Proposition 2: On January 1st, 2020, they will be worth at least $27B in aggregate.
3) 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.
#3 is a die roll. #2 is the killer. And I might take the bet on just #1.
This is exactly the sort of thing that everyone making press about investment capital should be willing to do. Sam isn't making a bet about money here, he's making a bet about his reputation as a forecaster/analyst.
A number of reasonably likely events could cause #3 to be false without any catastrophic loss to YC.
To believe Sam's motley list of companies can either hold onto valuations approaching those "real" companies for five more years, let alone actually generate viable earnings and go public (even at goofy P/E multiples) in line with what GE, Microsoft, or Buffett's candy, ketchup and mac'n'cheese subsidiaries alone make seems ... optimistic at best.
If he loses, might I suggest the book title? "Oops! Brands Aren't Businesses!" by Samuel H. Altman.
For instance Rubbermaid simply owns numerous home, commercial and healthcare markets. They make everything from saws to Sharpies. They doubled their market cap in the last five years. 20,000 employees (more than anyone on that list) $6 billion in revenue (ditto) P/E ratio of 30 ... and they're worth $10B.
Which companies in that list have profits let alone profit margins? And are half as diversified? I see the big upside. I see the big downside. But I don't see how they all grow to average 3x NWL/Rubbermaid in the absence of bubble valuations.
Also all this "2x or 3x" after the big rise talk is just dilly-shaking anyway. The numbskulls who jumped in on the last Tumblr round would've made more money flipping Microsoft stock over the same period. Talk about unnecessary risk for the sake of risk.
As of Jan 1, 2012, their most recent funding would have been a Series B round for $250M at ~ $4B. So, in this case, Sam would have won.
In my opinion, #3 is a little unfair, just because there are significantly more startups in these YC batches than in years past. I wouldn't be surprised if the entire W15 batch hit $3B in total valuation by the end of the year. There are roughly 100 in this batch, so they would only need an average of $30M in valuation for Sam to win #3.
It seems like there are still chance that Pinterest, Dropbox and SpaceX still might ... fold, isn't it?
Should I be disturbed that our YC batch ended up being just a bet? I feel like I'm in the Silicon Valley version of "She's All That."
If there's enough demand, it might make sense to make a site/app and pick a side (maybe use Stripe to put money into some sort of escrow account).
I also think this is a very shrewd move by Michael. It is pure genius to accept that bet. (No sarcasm)
The problem with bubbles is that when you're in them, it's very hard to know you're in a bubble and thus crazy things seem perfectly rational.
I'm not saying we're in a bubble or not in early stage investment--- I'm just pointing out the nature of bubbles.
But, I also think that although there is a lot of optimism a lot of it rightfully there. Technology has been creating a revolution in communication, media, entertainment and just about every other industry. The internet finally arrived for the masses in the mid-2000's followed by the smart phone revolution followed by tablets and smart devices. There's simply a lot of opportunity out there.
I don't think we are in a bubble so much as in the middle of a rare technological revolution. So many things are happening at once between computer systems becoming so powerful and networks becoming so large and fast, etc. Old industries are dying while new, more profitable companies take over.
The current state of affairs has companies being bought in cash by other large companies such as Google, Apple, etc. So the public never gets the chance to purchase overly valued stock. Further, of the companies that did have an IPO (Facebook, Groupon, Google) none of them had outrageously high growth. In fact, most of the companies stock values dropped after an IPO (at least initially).
All of those are clear signs we are not in a bubble, as it is financially impossible at this point, regardless of the "nature of bubbles." However, 5 years from now, who knows! The bet was for 2020, not 2016.
you wanted to have a discussion behind closed doors before announcing this to the entire world? ok, that's fine, but that begs the question "why?"
given human nature, it's probably for nefarious purposes and propaganda control. I'm thinking you regret this bet, have realized it has only accelerate d the bubbles collapse, and are attempting serious efforts at damage control.
look, your a smart guy, sam, but you are pretty terrible at this whole communication thing, which is a shame considering that's a major part of your job.
In any case, there is a difference between writing bombastically about a situation you are financially involved in and a journalist writing an article about tech.