>The problem with the bubble question is nobody seems to agree on what exactly a bubble is.
A bubble is when a sequence of stupid people pay more for something than it is worth, get lucky by managing to find someone stupider than them and hand it off to the bigger idiot for a profit. If this runs long enough, the original idiots tend to lose all perspective and get sucked into a loop of idiocy and hubris, which establishes crazy new value norms.
The bubble bursts when it is no longer possible to find someone stupid enough to buy the overpriced object, due to it's value being so high that it is worth more money than stupid people can put their hands on. That's often a depressingly high figure.
I know that silicon valley investors don't like that description but please, let's not pretend we don't know how it works.
> Even today, with the technology industry on fire, venture capital investment remains below its 2000 peak.
I don't know whether things are in a "bubble" or not, but reasoning like this does not instill confidence. "At least things are not as bad as the worst they've ever been", no need to worry about a thing.
That level of investment is huge. The second hump was caused by the real estate mania but at least the country ended up with a bunch of houses out of it.
Exactly. Even though current prices are close to peak 2000 prices, it's worth remembering that the economy has been growing for 15 years, so stocks have a much greater fundamental value than they did in 2000.
For comparison, US GDP in 2000 was $10 trillion and GDP today is well over $17 trillion.
You can't really compare numbers between 1999 and 2015 directly in any meaningful way - the web has fundamentally changed in those 16 years, lots and lots of businesses that just plain didn't work then could work now and the way a businesses is created is also very different (for one we try now to keep burn rates low).
How would we not be in a bubble? Uber is valued at $50 billion, but the legality of what they do is tenuous at best. Big cities all over the country could smack them down at a moment's notice, or at the very least drag them into expensive litigation that could take years. Airbnb faces the same problem. You can say this is what "disruption" is all about, but all I see are fields of tulips
What I really don't understand about Uber's legality issues is just how it is that their investors are able to get away with investing in that business. At some point if these lawsuits start taking a toll, shouldn't there be some sort of litigation around their investors who knowingly invested in a company doing some legally questionable things?
It happened to people who invested with Bernie Madoff; if you were getting outsized returns (e.g. the Wilpon family), there were clawbacks. Shouldn't the same apply if/when Airbnb and Uber start losing in court? Start fining the investors who clearly knew that the companies were living on the edge, legally speaking?
What about the $1.5bn that Uber is trying to get from a bank? Don't banks have to do a LOT of due diligence into businesses they are doing loans from? I can't imagine the "waste management" companies run by the Mob can get a huge loan from banks, even if they can pay a premium in interest charges. Why can Uber?
Money solves most of Uber's problems in the legal realm. In fact, the pacification of the taxi industry in the US has already occurred, they've rolled over. It's almost always easy to vanquish fractured, poorly organized competition when it comes to politics. There will be no major challenge to Uber's overall business in the US. Within another three years, the US taxi industry will be so decimated as to no longer pose any threat. Uber will suffer a few slaps on the wrist, and they'll say they're sorry and fork over some fines, and that is all that is going to happen.
Uber has already been banned in several major metros, and continues to have restrictions placed on it. You can't out-innovate they who control the roads.
Uber's valuation is an advertisement. If they try to use most of that $50 billion, they'll run into a restriction of some kind, and have to pay it back. The investor will get their $50 billion back, in one way or another.
Their actual valuation is much lower. Announcing this big number does the advertising for them, the recruiting for them, and it even writes the press release for them.
It's amazing what a very large amount of money can buy. You don't even have to spend it.
What $50 billion would the investor be getting back?
Nobody is or has invested $50 billion into Uber.
And no investor will be getting their money back due to 'restrictions of some kind.' That is not legally how investing works, not even remotely close. The investors own part of Uber, they are the ones committed to Uber's business model (which they bought into). They are assuming risk like any other investment. If Uber fails, they'll liquidate the skeleton that remains, and get pennies on the dollar (if they're lucky), there isn't going to be billions sitting in a bank account waiting to be recovered.
My thoughts on this right now are, "so what"? How much money is actually on the line? Yes, yes, there are a lot of crazy valuations going on right now into the billions of dollars, but that's off of equity purchases that rarely clock above $200 million, and are usually lower than that.
We may be in a bit of tech bubble right now, and it would suck if a lot of people lost their jobs (although firms are a lot smaller than they were in the last one), but there is barely any public money on the line these days.
Yes VC backed firms supposedly generate 21% of US GDP right now (although I find that number to be a tad suspicious), but we have to allow that a huge chunk of that number is for new-tech companies (someone at MIT invented a new type of concrete, or a robot), biotech (someone at Johns Hopkins invented an artificial heart), and other niche businesses where the goal is definitely not to be a unicorn, but to hit a definable market.
Certainly it would be sad to see some of these unicorns die, but as an overall percentage of where a lot of VC money goes (and I mean the whole world of VC, not just the SV VCs that are interested in the next billion dollar companies), they don't make up a huge percentage of the employment or income in this country.
We might be in a bubble and it might pop, but the assumption that it will hurt the economy like it did in 2000 needs to be backed up by a stricter line of thought than, "the last bubble did".
"The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market.
He denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back.
'When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,' he said in an interview with the FT in Japan."
I'm not being facetious, but are you backing me up? This bolsters my point. Equating the US subprime crisis and the vast entanglements that existed therein to the current situation in SV is exactly the kind of monomaniacal thinking that that SV engages in all the time.
My point was that there aren't any entanglements, there isn't any exposure. Prince was making the point that there was complicated entanglements that existed at Citigroup so it would be hard to predict what would happen, but hopefully their lack of exposure would help (which, by the way, it did).
There simply isn't enough public exposure to SV to make a bubble popping important to the overall economy.
If the current mini-mania slows down at all or a couple of big names hit some bumps in the road... the financiers' portfolios also are also affected, and if there a GSIFI's that can't afford to take that hit and can't find the liquidity to paper over the losses... yikes
If the only "bubble" was in the market for private investment in tech companies, your analysis might be correct. Unfortunately, global monetary policy has created lots of markets with worrisome dynamics.
The bursting of the current tech bubble will come when other, larger bubbles burst. You should be concerned about those other bubbles.
You need to define what a bubble means before you can establish whether one exists.
I think Uber and AirBnB suddenly going to zero would be described by many people as a bubble pop and that may have dramatic effects on the sector, particularly financing going forward, regardless of its impact on the broader economy.
Given that "home runs" for VCs pay out 1,000x to 10,000x, and that IPOs have much tighter restrictions than in the 90's, it seems fine. Even if it's a bubble, who is harmed by it? The VCs are shouldering the risk. Those who put their money into a VC fund know that it's high risk. Everybody is aiming for the 1,000x return, and it may not be possible to get one without making a lot of risky bets.
You are only considering direct effects of a bubble bursting. But those burned VCs will be skiddish in investing in new start ups.
All the VC money that is driving huge growing in SV may disappear for a while. A lot of the money won't come back. This means unemployed people, which means pay falls for everyone.
It means less small VC fueled companies buying services that more established companies sell.
So yea it might not crash the S&P500 like 2000 did, but it would still have a huge impact within tech companies.
I'd worry about less sophisticated "end investors" getting burned. Mutual fund managers know that private equity funds are high risk, but they're getting into them anyway. Do the individuals whose pensions are being invested in Uber know where the money is?
The information should be available to them. If the fund does not have a sizable exposure to the particular company, it might only be as a statement in the prospectus that the fund can invest up to a certain amount in a certain type of company.
A flip side of this is that one of the many things that contributed to the housing bubble was the requirement that many pensions have to invest in bonds of a given rating. This helped fuel the market for rubber stamped mortgage derivatives.
Startups now are definitely wondering if they should accept a frothy valuation now so that they do not get stuck out in the cold if the bubble pops, which is probably just making the bubble bigger.
I was watching an interview with Mike Judge, the creator of the show "Silicon Valley" last night. He said that he asked many real-world VC's about realistic reasons that Pied Piper would have trouble finding financing so that he could integrate those into the storyline. Regardless of the complications he suggested, every VC told him "that really wouldn't be an issue...we'd still invest".
I think that says alot about the Valley today. "I might miss out" seems to be a mantra on Sand Hill Road these days. If you or one of your cofounders has dropped out of Stanford or Harvard, you can and will get funded. Despite Peter Thiel's protestations to the contrary, Stanford in particular is worth the money for a year or two if only for this reason. Any education you receive is just a bonus.
It's interesting to me that Sam Altman, who was ~15 (same age as I was) during the 2000 dot-com boom/bust is $100k certain that his companies will be worth $200bn in 5 years. I'm curious whether that's confidence in the companies, confidence in the market or confidence coming from not having been involved in dot-com 1.0.
To me, the writing on the wall for VC companies was when Paul Graham stepped aside. Based entirely just on my own conjecture, I suspect he realized that the glory days were coming to a close and chose to look for something else to do. Curious to see if that's how it'll pan out.
Fair, but ultimately it's not so much about the money as it is about the publicity. The money is just to catch people's eyes and to keep things interesting-isn.
PG is a founder. The company he founded (in this case YC) has succeeded and matured. It needs managed now, not kicked into existence. Who knows? Maybe he'll find something else exciting to do.
I think there is an overestimation of the value added from the great data-grab we have seen in the last 5-10 years. Customizing adverts based on a recent conversation in [some-app] or similar means, probably doesn't increase the "click-count" by a significant value enough to justify itself. In short, the business trend "Big-Data" is likely based on false pretenses.
We see large corporations like Facebook grabbing up applications solely for their user base to defend its current flawed business model instead of adapting. Perhaps Facebook should extend its idea of connection to include a method of discovery rather than sharing. Essentially, let me pay a dollar to find all the single girls in the bay area who like Starbucks and C++ that have a primary or secondary connection[friend of a friend]. Really stick it to okcupid.
> let me pay a dollar to find all the single girls in the bay area who like Starbucks and C++ that have a primary or secondary connection[friend of a friend]
>and Airbnb, the home rental service, will be worth more than $200 billion by 2020.
How is this influenced by city regulation? There are several cities that are now taking measures to ensure that homes cannot be used in an Airbnb fashion and it hurts Airbnb business.
You're Airbnb, you jump out to a fast lead, and dominate your segment across the whole of the US market. You move so fast that regulations and politics trail years behind you.
You operate in every major city in the US, 300-400 of them. Out of hundreds of cities, two dozen cause you serious problems, such as bans or hard restrictions.
Now, even if six of the 24 that cause you serious problems are major cities (NY, SF etc), you've got 90-95% of the market (along with the rest of the world to go after) that isn't causing you problems.
With your new vast scale, and large pile of cash, you triple down and go to work on the politics in SF or NY or wherever else you're having problems. There is no scenario under which, assuming you keep your 90-95% rest of the market, that you can lose. With enough time, you wear down SF and buy enough politicians to squeak back into the market. Your network effect instantly brings you back up to dominating in SF upon being allowed back into that market.
It's a form of the little bighorn market attack. The only variable is time, and that will give way eventually, so long as you don't lose a massive portion of the US market (which is extremely unlikely in Airbnb's case).
Meanwhile, they can attack the rest of the planet, and pull off the same jump-out-in-front move, and then lean on their vast scale to go to work on the problems.
In total, you end up with no terminal risks to the whole system, merely a few broken bones.
The way Microsoft handled being a monopoly is admittedly different but feels relevant. The consequences years later of their actions didn't slow them down much.
Yeah, cigarette companies would work. Like how they were really popular, but then they got a smack on the wrist by health specialists who found out that cigarettes causes cancer.
High valuations don't make a bubble. A bubble is when people invest believing there will be a "greater fool" down the road who will pay a higher price. Startups aren't going public at the same pace they did in the last bubble, where the public was the chump. Prices might be high but there's also more value being created now, and more rigor in evaluating startups.
I do not agree that the Greater Fool theory is a necessary condition for there being a bubble. That would be closer to a pyramid or a Ponzi scheme. Not 100% sure of what the difference is.
Rather, the problem is when unsophisticated investors buy in because they don't want to miss out of the gravy train. It does not matter if the mantra of the day is "Computing/BigData/DaCloud is eating the world" or "Real state prices will keep going up in the foreseeable future" or whatever they said during the years of the Tulip mania; it is always magical thinking.
In theory, everybody knows that VC are high-risk/high-rewards. In practice, once the dumb money starts flowing, it's only a matter of time before short term greed triumphs over common sense and sound business practices.
"Laws regarding IPOs create decent incentive to avoid an official IPO. Money follows the incentives."
That's just the thing. If companies truly were profitable, in general wouldn't investors want to keep the company private? No overhead of having to manage SEC reporting, no oversight, nobody to answer to except themselves. The problem is, investors need the public markets to make money, because their money is not in the company actually turning a profit, it's in convincing the public that the company is worth whatever they say it is.
Think Zynga/King. They were very profitable for awhile, but for their investors to make money, they didn't want to sit on $50m/mo profit, because their investments assumed that the company was worth billions. They knew the company was doomed in the long run (meaning they couldn't sustain the profits), so they ditched the company onto the public, cashed in their chips and walked away. Now the company is bleeding money. If the investors thought for a second that they'd continue to make money indefinitely, they never would have pushed for an IPO.
It's not a fictional line, it's a very distinct line. Investors have convinced the public that their company is worth however many billions, usually without ever having turned a profit. They want their money back.
> If the investors thought for a second that they'd continue to make money indefinitely, they never would have pushed for an IPO.
Not really true, most venture funds have a fixed timeline where limited partners want to get their money back around 10 years. And they don't necessarily want just a steady stream coming back, they want their actual money, to invest in things that have just as much growth potential.
Also, employees want a way to cash out, which is very difficult when a company is private. Not necessarily because the company is bad, but because you would much rather diversify your holdings.
Even if an asset is making money, it isn't natural to want to keep that asset.
The problem is that all of these things assume an IPO as an exit. Funds aren't interested in building long-term profitable companies, they want to pump up the stock price as high as they can and get the exit, profitability be damned.
Same with employees. If an employee has a 0.05% stake in a company that pulls in $100m/year in profits, that's an extra $50k if you do straight-up profit sharing. Problem is, these employees want no ownership whatsoever; they also don't want a long-term stake in the company, they want to cash out and move on.
It feels like the whole startup economy is operating on the "bigger sucker" plan these days. It's not about building sustainable businesses with solid profits, its about sprinting to an IPO and dumping the stock onto the public to let them deal with the consequences. Maybe I just have an overly bleak outlook on the current layout of startups (and I work for one).
> Same with employees. If an employee has a 0.05% stake in a company that pulls in $100m/year in profits, that's an extra $50k if you do straight-up profit sharing. Problem is, these employees want no ownership whatsoever; they also don't want a long-term stake in the company, they want to cash out and move on.
This is the rational choice for the employee. Nobody wants more than 10% of their net worth wrapped up in a small nascent (read: very risky) asset. I'm sort of in the situation you describe, and I'd be very happy to sell my share at a steep discount to avoid the risk.
> If companies truly were profitable, in general wouldn't investors want to keep the company private?
Not necessarily, you might want the stock to liquid so you can sell off some/all of your investment rather than wait for a trickle of income, and selling out will get taxed at a much lower cap gains rate rather than as ordinary income.
pre-IPO the list of investors is small, therefore if the company crashes and burns fewer things are affected. post-IPO they are publicly traded and anyone that can purchase stock can tie up their finances in the company.
Large private companies do exist. For a mature, profitable company the benefits of being public generally outweigh the costs, but there's plenty of room for diversity here.
A bubble is when a sequence of stupid people pay more for something than it is worth, get lucky by managing to find someone stupider than them and hand it off to the bigger idiot for a profit. If this runs long enough, the original idiots tend to lose all perspective and get sucked into a loop of idiocy and hubris, which establishes crazy new value norms.
The bubble bursts when it is no longer possible to find someone stupid enough to buy the overpriced object, due to it's value being so high that it is worth more money than stupid people can put their hands on. That's often a depressingly high figure.
I know that silicon valley investors don't like that description but please, let's not pretend we don't know how it works.