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Ask HN: If we are in a VC bubble, how would the bust play out?
52 points by fivedogit 619 days ago | hide | past | web | 66 comments | favorite
In 2007, many people knew housing prices were out of control. But they didn't fully realize how exposed the financial system was and that banks would fail on a massive scale.

Today, there is a debate about a startup-SV-VC bubble but I don't have a sense for who is exposed and what the greater ramifications would be, if any.

It plays out as companies that cannot reduce their costs enough to be operationally profitable will exit the market or be bought for pennies on the dollar. So something like uber getting bought/absorbed by a cab company. Options/stock will be worthless in the dead company. Several VC companies will report large fund losses and investors in those funds, and possibly a LP or two will get out of investing completely. Some folks who thought they were set for life will discover they have to get high paying jobs to support their personal burn rate. They won't be able to and it will change their life, bankruptcy, divorce, suicide.

For most people it will be a non-event, they wondered how people could invest in a company at those valuations and so won't be surprised when they lose their investment.

It will be really really hard to raise money for a while. Perhaps as many as 6 or 7 years. Companies that depended on new startups like digital ocean will have large layoffs as they cut costs to stay profitable.

Anyway, that is my guess. We get to see how it plays out.

Well put. I think this time the bubble won't burst but slowly collapse. Insane valuations (ex. Slack) won't be possible and the employees who are making more than their ROI and get the hope of get rich quick option plans will have to dust off their resumes and go work for the companies who handled expenses properly and focused on revenue and profit.

When will this happen? Soon. If you look at the number of seed vs. A vs. B+ rounds, you'll see that A rounds are on the decline. That's important because that's the stage where companies move from a startup to /real/ companies. Lack of A rounds means investors are willing to throw a little money (seed) on potential, or go big on proven success. That's usually great, but lack of A's means they're not willing to take any risk. That's a sign this bubble is deflating.

_FWIW - I'm a technical founder of a non-funded tech company._

Wasn't there a "series a crunch" just a couple years ago?

It never stopped. It's been growing for some years, but until now, that has been due to a parabolic increase in angel rounds - the frequency of series A rounds has remained flat for a long time. If this has changed, it's a pretty large signal, IMHO.

Over-valued companies will have to take down rounds - employees who joined late will get their options roasted. A large number of small and new VC funds will get wiped out. This time, the difference is, its the professional players that get hit (VC's, institutional investors, hedge funds etc).

Last time, tourist investors (newbies and the lay man) invested in stocks that crashed. Private huge rounds are protecting the tourist investors by virtue of lack of access.

> A large number of small and new VC funds will get wiped out. This time, the difference is, its the professional players that get hit (VC's, institutional investors, hedge funds etc).

This is what I'm getting at. Is that extent of it? Before the housing crash, most institutional investors thought it would be confined to the subprime market... but that wasn't true at all.

Where are the VCs getting all their money? Are mainstream banks exposed? Hedge funds? Corporations? Retirement funds?

The numbers (in startups, at least) are much, much smaller than 2008. Total VC funding was about $48B in 2014 [1]. By contrast, the subprime mortgage in 2007 was $1.3T [2]. The current student debt loan burden is about $1.2T [3].

I predict that the coming tech crunch will be a sideshow in much bigger chaos caused by the effects of rising interest rates on newly-minted college grads. We live in a bubble in Silicon Valley; across most of the country, youth employment never really ticked upwards. If interest rates go up, I think we'd start to see widespread non-payment of student loans and possible political unrest. That's much scarier than a few startups going belly-up.

[1] http://nvca.org/pressreleases/annual-venture-capital-investm...

[2] https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Subpr...

[3] http://www.forbes.com/sites/specialfeatures/2013/08/07/how-t...

Upvote for the term "tech crunch"

> Where are the VCs getting all their money? Are mainstream banks exposed? Hedge funds? Corporations? Retirement funds?

VCs raise money from Limited Partners (LPs). Who are they? The regulars of course (fund of funds, foundations, endowments, large family trusts, pension funds, etc), but it seems pretty common for VC firms to also take on money from other wealthy individuals who made a lot of money from the machine, i.e., founders who got big exits and even other VCs or ex-VCs who likewise previously made bank.

In other words, there's a surprising amount of circulation or recycling of funds in the bay area tech scene. And that's awesome, win or lose.

> Where are the VCs getting all their money? Are mainstream banks exposed? Hedge funds? Corporations? Retirement funds?

It all eventually comes back to the Federal Reserve. Interest rates are at record lows (much below a "market" rate), and funds are taking advantage of this to flood money into stocks, housing, tech companies, etc.

> A large number of small and new VC funds will get wiped out.

I'm not an expert, but I think most VC funds have a 10 year lifetime. Once a fund raises money and closes, it can't really be dissolved during those 10 years. Maybe the post-bubble lack of unicorns would mean the new/existing funds don't return anything, but most small VC funds don't end up having attractive returns today (especially taking into account their illiquidity).

My question is what would be the inflection point for the bubble burst? Would it be one quick event like a failed Uber or Dropbox IPO?

Or would it be something like higher interest rates drying out VC funds leading to startups going out of business left and right?

Interesting question. The second one sounds more severe, competition for money from different asset classes.

Global collapse. We'll be reduced to different factions struggling to survive in the wastelands.

Two VC's enter. One VC leaves.

The person with the strongest laptop will prevail.

I better buy more ThinkPads...

That sound you hear is the laughter of Toughbook owners.

A lot of talk has been going on about this, and a lot of comments start with a few set of presumptions.

One presumption, usually left unexplained, is that there are a lot of "unicorns" that will collapse.

I am most interested in classifying these unicorns, and speculating which will fall and which won't.

Here's my list -- I want your thoughts on it.

1) Uber -- will not go down

2) Dropbox -- will go down

3) Airbnb -- will not go down, unless threat from regulation becomes stronger

4) Snapchat -- will go down

5) Twitter -- will go down

6) Facebook -- will suffer significantly

7) Square -- will go down

8) Apple will be entirely unscathed

9) Google will suffer, but be largely fine

10) Microsoft is suffering already. It will continue to suffer, but will not go down.

Dropbox is a pretty inexpensive consumer product. Assuming they're profitable, they probably aren't any more likely to go down than netflix.

No one will go down unscathed if the bubble bursts. Even companies like Apple, Google, and Microsoft will be hurt when consumer investors react by selling off their "tech" portfolio and moving it into other assets like stock in pharma or bonds. They could lose 20-30% of their value if consumer investors perceives a bubble burst.

Companies like Uber, Dropbox, Twitter, Facebook can just downsize their operations and keep their business afloat since they all have substantial revenues.

The ones hurt the most will be these series A-D companies that haven't started bringing in serious money yet all while raising 10s of millions of dollars. There are probably hundreds of pre-IPO companies that have raised $50m+ in the past few years.

my 2c on that list. 1): It's questionable whether or not Uber has a network effect that sustains it as a leader in any market. The taxi industry is catching up, and so is regulation, and I suspect that some markets will become very competitive. This is not a defendable monopoly.

2): Dropbox is under attack from free/cheaper equivalents but defending well. It is still the easiest to use and have an incumbency advantage, but has made a few too many missteps (photos) to be comfortable.

3): AirBnB is under attack from booking.com and the like, but is a pleasantly strong business for now.

4), 5) and 6) all are fashion (or nightclub) businesses where the crowds happen to be, and the more they try to monetise the more they upset the crowd. Crowds can leave at any time.

7) Square face competition from Apple Pay and the like for payments, and payments is where they make their money. Out of the USA payment systems are far more advanced.

8) Judgement day will come for Apple when they successively fail to launch things that have an edge on everyone else, and as with RIM the decline could be fast. For now they are well ahead but my own pick is that Huawei will become the giant to beat.

9) Google is fat and happy, but their core revenue base is advertising, and when crashes arrive advertising falls.

10) Microsoft is resurgent, and I believe on the early steps of a long term turnaround program. The switch to the cloud means we are less reliant on any particular OS but Microsoft Office is dominant for business.

Smart analysis. I object to your classification of Twitter, though. I was originally a Twitter skeptic, but the truth is, they've built a central hub where Snoop Dogg, the Pope, POTUS and @pmarca all converse. Very powerful. They need to do more, but they own more than a fad, IMO.

I especially agree on Apple.

What Microsoft has done recently is great. I hated them with the passion of a thousand suns when I was in college, but Satya seems to get it. He knows that if you put out a browser that causes devs around the globe to have to program exceptions because it doesn't behave like the others, they will hate you for it. (Doubly. Once for technical reasons and again for acting like a monopolistic ass.) And what you gained from some niche technical benefit, you've lost 1000x in goodwill and, ultimately, bad PR. I'm actually rooting for them now. It's crazy.

Anyone have any data on Dropbox or Square? I have an odd assumption that they're not doing well, with no evidence.

8) Is the worse analysis you pick on ;)

Apple have a strong position. If google/ms survive, then apple will....

Plus, Apple already bite the dust, almost lethally. Now they have enough cash to survive for long, and enough goodwill, marketshare, etc to keep them afloat..

Look, if MS have survived for so long being the evil INC, and hated far more than Apple..

I disagree about FB.

They got a lot of criticism before and immediately after their IPO for not justifying their value. Today they are genuinely making a lot of money. Their advertising platform it is valuable not unlike Google's. I think the only thing likely to harm facebook is losing users.

> I think the only thing likely to harm facebook is losing users.

Which is supposedly happening.

Obviously this is just one vague, anonymous data point, but I deleted (not just deactivated) my FB account and I feel like a weight has been lifted from me. I don't have to look at a falsely curated feed of how great everyone else is doing anymore.

The more people flirt with quitting, the more they realize their feeds have been reduced to attention whores and babies (their real friends stopped posting long ago), the mroe they'll quit and it'll just snowball.

FB messed up by getting too big. I'm going to post my true thoughts when my grandfather might read them? Nope.

My problem with Facebook is that they didn't diversify their products much (except for Oculus). Once FB is not fashionable anymore and users are using another platform (see WhatsApp and why FB bought them) it will be the end of FB. Can they reinvent themselve? not sure, but they surely need to invest more in R&D and diversify their products like Google, instead of putting everything on IM/Social.

What's a path for something like Twitter or Facebook to die that isn't slowly fizzling out of existence like MySpace? Is there a chance that they run out of money even with that bazillion users still using them daily?

One thing that would hurt Facebook a lot is the perception that you can't make good money on apps, since they make a lot of theirs on mobile app advertising now.

Not really clear how that would happen though - at the very least IAP games are making a lot of money, and carrying TV advertising budgets. Their business model looks pretty stable, assuming studios can deal with or defeat the fact mobile games tend to be short lived.

They could lose a lot of small advertisers, the startups that throw some of their seed funding into Google and Facebook's advertising pools a long way before having a real business model if those companies dry up - but I don't see it coming close to killing them.

I propose we change the alleged "startup-SV-VC bubble" term to "cockroach" because it just won't die. People have been predicting bubble for years. Coincidentally, people have been predicting the decline of Tesla stock, and when it drops 30 points they claim, "see!" Please.


I imagine that if the alleged bubble burst, VC funded startups and their immediate environment would be where the most damage was/is. A lot of startups would just fail. Employees would lose their jobs and options/shares would be wiped out. Even otherwise healthy startups could suffer or fail from the mess. If a company is worth $200m one day and $40m the next, all sorts of bad things can happen even if they are profitable.

Beyond the immediate vicinity of VC backed startup land I don't think the fallout would be very severe. VC funded startups are not really a very big employers in the scheme of things. VC as an asset class isn't a big one either. Since VC investments are expected to be high risk, most end user investors allocate only a small portion of their portfolio to the class. It is expected to be high risk and on the whole it is considered very irresponsible to depend on its success. Even startup employees do not generally treat their jobs as highly secure, so at least psychologically they are prepared to one day find themselves looking elsewhere. They are also generally employable in the much large technology fields that are not directly related to VC money.

For an analogy think of the hypothetical bitcoin bubble bursting. Some bitcoin centric businesses would go bust. Some gamblers would too. But I imagine that most people holding large amounts are aware of the risk, they haven't bet the house on it.

I think the "systemic" impact would be minimal. The real dangerous bubbles are asset classes like real estate, bonds, blue chip shares and those esoteric but enormous "instruments" and securities. These are expected to be reliable and safe so money that must not disappear goes into them. They are also much bigger.

I guess you never really know unless it happens, but I doubt the kinds of levers that make big bubbles so bad are present here. A lender wouldn't/shouldn't be loaning out money to be invested in VC, so I don't think you would have the kind of domino effects that make crashes spread.

If it was severe and scary enough with big name "startups" going under, tech stock prices might dip. That might be a good time to buy. I can't see much of a relevance of a VC crash to Google, FB or MSFT's medium term prospects.

EDIT: One more - Since VC is a "professionals only" class of investment, we are not likely to see middle class people directly impacted. This means that macro-demand shouldn't be effected much either, except directly by employees losign their jobs and startups no longer consuming whatever they consume.

The real question is, "if we're in a bubble, how do we take advantage of knowing it will pop?" (genuine question)

Markets can remain irrational longer than you can remain solvent - John Maynard Keynes

If you work for a big tech company, try to partner with the startups doing interesting work in your domain. When they run out of money you can scoop up their IP (and maybe team?) for cheap.

Can you short sell a company that doesn't have a public offering?

Yes but you would have to make that deal with the private investor(s).

Recent trends in economics leads me to believe the accumulation of wealth and capital from gains in productivity and technology is amassing into huge piles of cash that want & need to invest in something, so now the question is what?

There are other more volatile economic "bubbles" out there to be concerned about.

If you're assuming starting a business based on delivering over priced telegrams or selling rolls of quarters at a 180% markup will lead you to your "exit" than okay be afraid of "the tech bubble".

Start a real business that makes sense, and the bubble is irrelevant.

You seem to be denying the concept of leverage and the relevance of zero-cost debt on investment strategies and portfolio allocations.

Interesting points. Anyone know any counter-examples? Startups delivering real value which were wiped out regardless?

I can't think of any particulars right now, but my feeling is that many of companies the 2000-era bubble would be sound and profitable today, they just got to the market too early. It's very hard to judge an idea in isolation; the key is how that idea is applied to the market under particular circumstances.

If a true bubble burst were to happen, it'd kill startups by percents, not by merit. Some investors will keep money for their portfolio companies, others will sit until the market hits bottom and they can get better deals. It'll kill everything and everyone, not just the bad companies.

Right after the 2007-2008 financial crisis credit was incredibly tight. Nobody was getting any. The same would happen after a tech bubble pop.

Companies that are still in the growth phase, and not profitable yet would find themselves in real trouble.

You could argue those startups aren't (yet) delivering real value, and I'm sure in large majority of cases that'd be true. But not in all cases.

Well, if you are company that delivers real value to other companies that dont, then you will be in trouble.

> Recent trends in economics leads me to believe the accumulation of wealth and capital from gains in productivity and technology is amassing into huge piles of cash that want


> & need


> to invest in something, so now the question is what?

How about nothing?

Yes, there is a lot of capital out there which wants to be invested in something profitable.

I don't see where the need for investment is. If someone has $10 billion, and has $8 billion invested, and has $2 billion left over but sees no good investments, why do they need to invest that extra $2 billion? They don't need to invest it, so they don't invest it.

What has the capacity utilization rate of total industry in the US been? A postscript at the end of this post tells you how to see for yourself on government websites. From 1967-1969 the rate was over 87% every year. From 2001-2007 it never exceeded 80.4%. And from 2008 to 2012 it never broke into the 80's, even hitting 68.6% in 2009. I can't find data past 2012.

That's just one trend, but if existing capital was being used at an 87% rate at the end of the 1960's, whereas in past few years it has been used at a 68.6%-79.2% utilization rate, why invest in a new capital plant? Companies aren't even using their old capital plant.

The statistics say there's overcapacity. Over the past decade, invested capital has been sitting idle 20%-30% of the time where it could be in use (invested capital, meaning money invested in the stock market, VC firms etc., not money that those with a lot of money are keeping on the sidelines - counting that, the amount would be even higher). In 2009, even more than 30% of industrial capacity was unused - for the whole year.

From the standpoint of profitability, capital is overfunded already. Which means there is a small amount of overproduction - even with 20-30% capital plant non-utilization, sometimes a tiny bit more more commodities are put out then needed (or a lot more in the case of homes paid for by subprime mortgages). If capital plant production went down to 15% underutilization, that would be massive overproduction of commodities - and would still mean 15% underutilization.

People can't afford to buy what is being built with companies running at 70-80% of capacity. So why invest more in companies? People aren't buying what the existing capital plants are capable of putting out.

P.S. Go to https://www.whitehouse.gov/administration/eop/cea/economic-r... which is the 2013 Economic Report of the President . Go to "Appendix B: Statistical Tables Relating to Income, Employment and Production". Look at "Table B–54. Capacity utilization rates, 1965–2012" which is page 75 of the PDF and page 387 of the overall report.

Likely the evidence for a bubble that would be risky for our economy is the surprisingly large number of recent unicorns, that is, private companies who have a recent funding with a post money evaluation of $1 billion or more.

One reason for so many unicorns, that is, such valuable private companies, is the reluctance of significant private companies to do an IPO. Reasons include (A) having to try to please Wall Street that has a very limited view of real progress for a company and a very short term focus and (B) the overhead of Sarbanes-Oxley.

But I believe that you will find that a surprisingly large fraction of the unicorn fundings are more like traditional private equity instead of venture capital. So, for the unicorns, the high post money evaluation may be at high risk (bubble bursting), but, due to the deal terms, the last investor is relatively well protected and at only low risk.

That high post money evaluation was just something out in the ozone anyway, a long way from that much in actual cash, so that, if such high evaluations suddenly disappeared, that is, the bubble burst, then the effect on the economy would be minimal.

So, why do these goofy late stage fundings and unicorns even exist? The companies may want the cash from the equity funding and not want to attempt an IPO, and the private equity investors see maybe an upside, if the bubble doesn't burst first.

1. Lots of unicorn corpses. They either get down rounds, fold completely, or get bought for much less than their last round's valuation.

2. It would be harder for new startups to raise money. The big losses in the unicorns would then lead to smaller B/A/angel rounds.

3. Lots of unemployed people who formerly worked at startups, scrambling to get jobs and the handful of large survivors.

4. With money drying up, it would be a good time for bootstrappers or people who don't need much financing.

Mark Cuban made some interesting remarks http://blogmaverick.com/2015/03/04/why-this-tech-bubble-is-w...

"If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it ?"

That sounds like a guy who regrets some investment decisions, wants to sell, but can't.

I think bubble will not burst but it will start to deflate, when bunch of companies with 1B+ evaluation fail to give the investors huge promised returns. This will dry up seed funding and Series funding for startups. Investors will loose their money and series of layoffs at startups. This may impact the growth of big giants but nit sharply. Lastly, Silicon valley crazy rental could be see decline too.

I think the inherit nature of bubbles means that it's almost impossible to accurately predict the fallout. Sure, there were investors that bet against credit default swaps, but it was still a bet, or calculated risk.

If such predictions were easy to make, bubbles wouldn't occur, at least at the scale of the dot com and housing bubbles.

What's easy to predict, though, is who will benefit from the burst: Chinese big four will likely be the winners. (Protected on their back by the gov, they also have the lucrative commerce in their hands, and they'll harvest all the engineers from the failed start-ups.)

- Huge bubble where startups valued at almost around $1trillion are not regulated. - They are not required to report anything to public. - Eventually, VC will need liquidity that may force these companies to go public. - Once public, they are required to show significant growth to justify super high premium valuation. - If few of the top unicorns fail to show that growth, market may tank, VCs may loose money. - VCs who lost money may be more cautious in future but may also have hard time raising capital. - Many Unicorns do NOT have higher entry barriers or network effects. For instance, why can't same driver serve users from Uber, Lyft & 10 other apps, cheapest for customers & highest paying for driver - an arbitrage opportunity? Or why can't someone list house on Expedia,Travelocity along with Airbnb?

If the tech/ anything bubble pops, what tech companies would be the best to work for preceding this event? Which industries that employ tech workers would be the best to work in preceding the bubble? This under the assumption that getting a software dev job would become increasingly difficult with a rise in unemployment in this sector.

I'm a junior developer, so if there became a huge oversupply of developers I think it would be very hard for me to get a new job. This is actually something that really worries me currently. I'm already having a hard time finding a new job, if there was another economic crisis I feel like I would have to leave the tech industry to get a job.

Junior developers do fine as long as they actually have coding skills and can demonstrate their work with a portfolio. Make sure you work somewhere where you can point to stuff you've shipped and you'll be fine. The folks who get tossed out of the tech industry in a recession are those who should never have been in it in the first place, i.e. the folks who heard it was easy money but don't actually enjoy programming or building things.

My Guesses are:

1- Facebook: Will go bust and be bought by a conglomerate (non IT Group or Microsoft). They will be the "Lehmans Brothers" of the next crisis.

2- Dropbox: Likely to go bust. No diversification and a lot of competition.

3- Twitter: Will be hurt but can survive,due to appeal to Marketers/News/..etc.

4- Google: Will likely drop a lot of products and concentrate on search and self driving cars.

5- Apple: Will become the new Microsoft.

Terrible terrible guesses

Has anyone written a good set of articles about the 1999/2000 tech bubble bursting, and which businesses it affected?

Lots of smaller companies, like Redhat, were hit in their valuation, but made it through.

Proliferation of SPVs. Retail will get in on it. Eventually will spread to non AAA deals. Private market bust.

When interest rates start going up later this year this bubble will pop

It could be the trigger. Other things to look at is Greece, China's economy, Europe's quantitative easing.

[Citation needed]

I don't have a citation to backup GP/OP, but the school of thought is that because interest rates are so low, capital is chasing increasingly risky investments to get an "acceptable" return (which is $expected_return after any taxes or inflation).

With interest rates rising, other asset classes will see returns rise, reducing the attractiveness of startup/VC investing.

Not only that, but the US, Europe and Japan printed a lot of money that is floating in the system (quantitative easing). If interest rates rise, it will mop up a lot of that.

Strangely enough, even with trillions of dollars in QE in both the US and Europe, GDP is stagnant (or retreating) and the EU still has negative interest rates.

Welcome to the new normal.

>[Citation needed]

A citation for a future event? Its clearly a prediction...

I doubt that it's going to be anything like 2008's financial market crash. VC-funded startups just aren't that important. Housing prices and interest rates affect everyone; VC is just a game for rich people playing with other peoples' money by taking bets on young narcissists with big ideas.

So far, when VC flips its products on to the public markets, the markets react fairly rationally and the bad companies tank. Look at Zynga. The market may be overvaluing it still, but it's nothing like the 1990s. Public markets seem to be recognizing shitty tech stocks as what they are. So, we're not at the 1999 level of bubble.

Furthermore, the 2001 crash didn't have a major effect on the economy (although it was bad for the Bay Area, and for many engineers). It wasn't the crash, or even 9/11, but the sluggish ("jobless") recovery in 2002-4 that made the 2000s (except for people on Wall Street or in the slowly recovering Valley) a shit decade.

So, let's assume that the VC bubble ends. Some people will get hurt. The celebrity engineers who make $500,000 and aren't any good will get beefed. Run-of-the-mill engineers, if they're any good, might drop from $140k to $125k; not such a big deal. The ScrumDrone engineers will have a hard time finding work. Unfortunately, this will also hurt self-taught (meaning "no college degree") engineers even if they are good; the ones who are talented are still in a position of low leverage because "everyone knows" (well, employers know) they're more sensitive to a dry-up.

The short answer is that some people will take painful hits-- you're going to have a lot of 25-year-olds who thought they were millionaires, find out that they worked overtime for nothing-- but average people of average-or-better talent will mostly be fine. Bay Area salaries for good engineers might go down 10 to 20 percent at worst.

The bad news: housing in San Francisco's not going to become more affordable. First, the people who actually have money (not a half-million from options) are already diversified and less exposed to dot-com/VC, and the foreign money-launderers aren't exposed to it at all. Second, people hoard rather than sell (a steep positive volume/price correlation) when the market "should" soften. The stupid competitiveness around getting rentals (e.g. competitive open-houses, people cutting checks for a whole year's rent) will go away, but rents and prices will stay about where they are.

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