It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley. Before an engineer might vest after four or five years, just as the company is going public at a modest valuation. But if the company stays private, the employees are forced to go double or nothing. Either the company continues to grow, and there is a Google or Facebook like outcome with hundreds of employees getting rich. Or the company goes sideways and the stock ends up diluted to nothing. Furthermore the general public would have shared in the growth in the 1980's, but now most of the value has accrued by the time the company goes public. So for the few that make it, all the wins go to the founders and VC's, rather than having the general public get in early.
No, it's a consequence of low interest rates. "Private equity" is mostly borrowed money. Think "leveraged buyout", not "all-cash deal". Here's a list of the top 10 private equity lenders for 2011. #1 is Bank of America.
Back in 2000, 1-year Treasury bills were paying around 5.11%. Today they're around 0.26%. Debt financing looks much more attractive with today's low, low rates.
Credibility and providing liquidity for investors and shareholders are certainly important reasons why companies decide to go public. But there are also downsides to going public -- most notably the myopic time horizon of the public markets, which is a huge barrier to the kind of long-term product and user acquisition investments pursued by tech companies in particular.
You can weigh these factors against one another, but ultimately the fundamental reason a company IPOs is to raise a large sum of money at an attractive valuation. Given that investors are lining up to help private companies meet this goal, the ancillary drivers you mention just aren't enough to push companies over the edge into the public markets.
Seems like an IPO is riddled with all sorts of waiting periods and notifications and paperwork people will want to sue you over if they lose money. I'd definitely go the buyout route if the price was right.
The ones that are borrowing the money are private investors.
However, for mature tech businesses that have real cash flow, LBO valuations are driven by a levered cash flow yield. Valuations in this world are increased with higher debt availability and low interest rates.
The primary mechanism by which low interest rates influence late stage VC / growth equity valuations is in the amount of capital the LP community / institutional investor base allocates to those asset classes. Right now, that allocation is quite large driven by the need to move into riskier asset classes to drive investment yield.
Hence taxing yachts sounds to me like it could be smarter than taxing investment. (Not 100% sure, as usual with these things, just looks sensible at first glance.)
Earth is humanity's lonely island. (I realize it's more complicated than that because billions of men on Earth do not make decisions in the same way that a lonely man on an island does. All I'm saying is that it is still more desirable to invest than save when we can, at least past some point. The extent to which society depends on consumption, perhaps excessive consumption, today, and "how to get from here to there" I don't know. I am however certain that flogging savers badly enough with high taxes will result in people burning their savings in what "from humanity's point of view" are very wasteful ways; also in people saving less in the first place by working less in the first place, also not that great - "imagine you have a business, would you rather have a worker who wants to make as much as he can and save it, or work as little as needed to survive because he can't save?")
You are saying overconsumption by the super rich is ultimately environmentally damaging. (which i don't disagree with)
I am saying underconsumption by the middle/lowerclass is immediately economically damaging.
Prioritizing investment over consumption leads to inequality and poor economic outcomes.
Curbing consumption is immediately damaging to the economy. The better solution would be to heavily tax unsustainable business practices, rather than try to curb consumption. If you go after consumption you give more power to the super rich, while simultaneously doing nothing to discourage environmentally unsound business practices.
Why is it better to continue producing products in an environmentally unfriendly way with lower consumption of goods, rather than lowering the production of environmentally damaging products, while raising consumption rates of sustainable products?
Go after the supply not the demand.
The key point is that taxes on investments create distortions while taxes on consumption don't. It's even worse if you tax different investments differently (e.g., interest vs cap gains, short term vs long term cap gains).
Such a cute - yet content-free - dismissal. It's also pretty clear from your "critique" that you didn't even read the article - while Sumner's examples do use a positive rate of return, his argument is independent of it.
> Suppose we want to raise revenue with a present value of $20,000...We could have a wage tax of 20%, and raise $20,000 right now.
> In contrast, an income tax doubles taxes the money saved, once as wages, and again as capital income . So now it’s $40,000 consumption this year, and only $72,000 in 20 years ($80,000 minus 20% tax on the $40,000 in investment income), an effective tax rate of 28% on future consumption
So the line of reasoning is:
1. The government wishes to raise $20k NPV in taxes
2. A 20% wage tax or VAT will accomplish this exactly, but a 20% income tax will raise $24k NPV, which means it is an effectively higher tax
3. Therefore income taxes are worse than wage taxes or VAT.
But that doesn't follow at all. The correct conclusion is that an income tax raises the same revenue with a lower nominal rate. That doesn't by itself make an income tax better or worse.
I.e., if Steve blows all his money on hookers, he pays a 20% tax. However, if Sally judiciously saves her money for a rainy day or unexpected expense, she will be paying a 28% tax rate.
There should be a way for entrepreneurs to tap into that money directly, avoiding the wealthy, gate-keeping middle-men. I resent those people, because the irony is that such people make money as money flows through them, thanks to fees, so even their wealth doesn't necessarily mean they are any good at allocation. Even if you take into account returns, in a growing economy when most bets are good bets. Money should flow through people who know how to make real things, not just make decisions.
Which, by the way, is the entire point of the Fed reducing interest rates - to stimulate growth by encouraging increased spending (including investment) of cheaply-borrowed money.
It's like putting $1 in a sock and under your mattress, claim it's worth $1million and never letting up on that claim by trying to sell your "money sock 1.0" on the open market. You might even be able to get somebody to buy your "million dollar" sock and they'll go and claim to everybody that it's worth this ridiculous amount (or even more ridiculous they'll trade you their "million dollar" hat for your sock so you can both claim private market validation). Then if the hype lives long enough, they can then sell it for $1.2million to another private buyer, or tear it up and sell it off in threads for even more "buy a genuine thread from the million dollar sock! only $1,000!".
It's almost completely divorced from reality.
But the idea that private investors' valuation is not "real" somehow sounds silly to me. The companies are still getting sold. The companies/investors that buy them have real value and expect to generate enough revenue from the acquisitions amounting at least to the acquired value.
The question then (and I think is a good one), is why private investment is getting more prevalent if public markets have more efficient valuation mechanisms. I think the answer is that private investors are more willing to 'kickstart' so to speak the early stages of startups, and from then have grown to dominate the investment market to their great benefit.
As a result, there is a slight information asymmetry penalty in the valuation; however, this penalty is dwarfed by the liquidity premium you get as a public company.
I think that public companies can reveal true market value quicker than private investments.
For example, VCs invest in company xyz at a valuation of $100m, they don't actually know if that valuation is "real" until the company sells. Until then, it's made up numbers. That gap between investment and sell date might be 5-10 years and until then then there's no market proving of that valuation. We've seen it time and time again that private companies can exist with no revenue or at least no profit for years or until their private fund runs dry, but can still claim a "valuation" in huge numbers, even while the market provable "value" of the company is $0.
Public stock markets tend to suss out valuation much quicker, a company might be "valued" on the market with a market cap of $100m, but miss a couple quarters or some big sales and stock holders will dump and run and the market cap can drop quickly over even a matter of days or weeks. Public investors eventually start to want the fundamentals of their companies to be good even if they start as fantasies. Reportable revenue, eventual profit (or continued revenue growth that's quickly convertible to profit in the even of market saturation)...eventually these things all have to exist, and I'd wager that an analysis of stock market prices on a company over the long run has a strong correlation to these fundamentals. I can't go and buy 1 share of Tesla at $500 and suddenly claim the company is "valued" at $60b.
But you can do that with private companies because of the information asymmetry available to private companies. There's all kinds of wonderful ways to game "valuation", but that's fundamentally different than market "value".
There's an idea that publicly traded, but unprofitable, fast-growth companies, like Tesla, with big inflated stock prices are the same as overvalued privately funded companies, but there's some fundamental differences in those valuations. If Tesla's revenue growth curve turned downwards next quarter or two, their stock price would plummet and their valuation/marketcap would arithmetic its way downward as a consequence. But a private company's "valuation" would stay the same until the next funding round/corporate sales activity, a lag time that could be years away. Thus a private valuation is more likely to be divorced from any business fundamentals than a public one, and that's simply because private company valuations are more closely tied to investor activity not business activity.
In fact root of the often criticized short termism of publicly traded companies is exactly this hype game - the company management paints the sock impressively to fuel the hype.
Done on a small scale, this would be fraud and would be illegal. But remember, it is illegal because it does work. On the large scale, you just have to wine and dine enough pension fund managers who are in way over their head.
I don't have a sense of what proportion of companies that might previously have had an IPO would in recent times get acquired instead. I'd be surprised if it fully made up for the effect you describe. But I also imagine acquisition is more possible now than in the past since you now have a lot more big tech incumbents with cash to buy other companies with (e.g., who would have bought Instagram in 2000?).
Sure, the general public may not "get in early" but M&A is far less risky for both VCs and general investors. If mostly "sure things" make it to IPO, it's far less likely for the general public to be exposed to the meltdowns that made the headlines circa 2000-2001. The flipside is that until the startups IPO, the VCs and founders are exposed to most of the risk.
We'll never be rid of it. Like copyright law, It's crystallized into a self-perpetuating incentive structure. Everyone knows it's stupid, no individual has much incentive to try and change things. The ability to restore to a previous state is essential in the design of institutions, one lacking in our current governments. This is a very hard problem, but I'm hopeful prediction markets may be able to help with this in future governmental structures.
Prediction markets are so vastly powerful, both as a financial tool (hedging) and an information tool, that people would be screaming bloody murder if we already had them and then they were taken away.
Nick Szabo explains it in: http://unenumerated.blogspot.co.uk/2015/05/small-game-fallac...
The problem is, people won't be able to use it seriously (i.e. with non-trivial amounts of money), because once you convert your earnings into fiat money, it goes into a bank, so you have to pay taxes on it, and you can't put something illegal on your taxes (well, maybe you can, people say "the IRS doesn't care," and I'm no expert, but I doubt it).
Instead of dumping a bunch of new reporting requirements on everybody, it should be pretty simple: increase the amount of equity capital that needs to be held against debt (i.e. force a decrease in leverage) and change the accounting rules so shit that could blow up the company by some mechanism has to show up on the balance sheet. However, the current system creates a lot more work for lawyers, accountants and bureaucrats so it seems unlikely to be simplified anytime soon.
it might be that what stands behind Enron and other bubbles is a decrease in the rates of profit : and so it goes that people put stuff into more and more risky schemes in order to maintain expected growth targets; in order to do so they have to hack/find ways around existing regulations, but we know that you can hack any system of rules ;-)
All that might also be true for internet businesses : we had a big growth in tech business over the previous decades, but now it might get increasingly difficult to achieve the same rates of return (or not).
My guess is that in the end, problems will come when the established companies slow down in acquisitions and the VC companies and angel investors get tired of startups which can't show profit.
I don't think that is true. Sales and marketing is still very expensive. SaaS needs a lot more cash investment than traditional software, since you are only making the money back gradually. Many of these unicorn software companies are raising a half dozen rounds.
Also, the easier it becomes to write software the for the internet, the more a startup has to do. Yahoo! could get to a breakout stage just by having an HTML page full of links. That's not going to cut it these days. So I'm not sure overall if starting a company is much cheaper, even at the early stage.
also - while AWS can make infrastructure convenient to scale up, rarely is it cheaper. It certainly can feel cheaper in the beginning as its pay-as-you-go, but averaged out over N years it's not. AWS also has reserved pricing to aid with this, but most startups are not in a position to commit to either real hardware or 3 year contracts up front.
Most startup's spend an enormous amount on marketing to get any traction. I'm sure there is more examples like Slack that did not use much marketing, but they are very rare.
If you build a startup and hope to iterate your way into being viral, this is bad planning in my opinion, no matter how awesome what your building is. Unfortunately, one that I had to learn the hard way.
It's a great way to alert a much bigger competitor of an emerging market so they can eat your lunch, though.
My view is that those are not very promising
"technical" directions, exploitations, or
My view: Take in data, manipulate it,
put out results of the manipulations.
Want the results to be valuable in some
important sense. For that value, want
more powerful manipulations.
Well, any such manipulations are necessarily
mathematically something, understood or
not, powerful or not. For more powerful
manipulations, proceed mathematically,
i.e., exploiting powerful classic results
and, maybe, doing some new derivations,
right, complete with theorems and proofs.
This work needs a background in
pure and applied math, but given
that background the derivations
require just ideas, paper, pencil,
and, hopefully, access to
a computer with D. Knuth's TeX
for writing up the results.
Not really expensive.
My view is that it is much better to
exploit relatively classic pure and
applied math than anything pursued
in computer science.
Won't find a lot of traffic going
You don't think CV, ML/DL, VR are worth pursuing? Or are you saying that those are not "mathematically" technical? If the latter then you are decidedly wrong as proven by any number of research teams at MSFT/FB/GOOG etc...
>Not really expensive.
So applied math researchers aren't expensive? Tell that to every PhD Mathematician at Google/FB.
Right. They are overwhelmingly
The methodology is to guess, with
heuristics, and then try it and find out
(TIFO method) on real data, maybe adjust,
and use it when it appears to work.
There's next to nothing in theorems
and proofs before hand that show that
the manipulations will be powerful
or yield valuable results.
There is a long history of good
applied math where, once the theorems
are proved, there isn't a lot of doubt
about how the real world application
will go. E.g., (1) GPS, (2) the earlier
version for the US Navy, (3) error
correcting coding for, say, satellite
data communications, (4) phased array
passive sonar, (5) optimal allocation of
anti-ballistic missiles to incoming
warheads, .... There's much more
making good applications of math, e.g.,
Wiener filtering, the Neyman-Pearson result
in advanced radar target detection,
in cases of engineering where,
once the engineering is done,
there's not a lot of doubt about
how good the practical
results will be. No guessing.
No TIFO. Low risk. High payoff.
As designed, unrefueled range 2000+ miles,
altitude 80,000+ feet, speed Mach 3+,
never shot down. Just as planned. Just
as clear from the engineering, based
on quite a lot of applied math.
Uh, for (5), really don't want to
have to use the TIFO method!
Instead, want to know with high
confidence before someone pushes
a big red button.
> So applied math researchers
For evaluating the cost of a startup,
commonly pay the founder $0.00 per year
until there is revenue or at least funding.
:-)! Sorry 'bout that.
E.g., I worked in artificial intelligence
at IBM's Watson lab. Part of the work
was to monitor the health and wellness
of server farms and their networks.
No theorems. No real guarantees
of the power of the data manipulations
or the value of the results. I did
an upchuck, derived some new math,
and published it. The math says that
we know in advance the false alarm
rate. The AI work didn't. The usual
approaches to machine learning don't
do such things because they don't
approach the work as assumptions,
theorems, and proofs.
For Ph.D. applied mathematicians
(I am one) at Google, once Google
ran a lot of recruiting
ads, and I sent them a resume and
got a phone interview.
They asked what my favorite programming
language was, and I said PL/I. Apparently
the only acceptable answer was C++.
It was clear enough that my
answer of PL/I essentially
ended the interview.
Why PL/I? It has some
total sweetheart scope of names rules.
The exceptional condition handling
is super nice (get an implicit
pop of the stack of dynamic descendancy
with just the right clean up).
The data structures are nearly as powerful
as classes and much faster in execution.
in the language. Pl/I does
really nice things with
automatic storage -- C doesn't.
And there's more.
C++? We know the history: Unix
was a baby Multics, on an
8 KB DEC box. C was a dirt simple
language, no runtime. All function
calls for every little thing, e.g.,
string manipulations -- the first
version of PL/I was like that, but
the later versions compiled such
things and were much faster.
PL/I does just wonderful things
with arrays, but C doesn't really
Then C++? That was, along with Ratfor,
an example of Bell Labs liking
pre-processors. So, C++ was a
pre-processor to C. Instead, PL/I
was carefully designed.
My selection of PL/I over C++
was not wrong.
Google laughed at my naming PL/I.
The laugh is on Google. Uh, Linux
is a version of Unix which was
a baby version of Multics which was
written in, may I have the envelope,
please (drum roll), right, PL/I.
It was clear that my Ph.D. in applied
math and experience were of no interest
at all. None. Zip, zilch, zero.
C++? Sure. Ph.D. in applied math?
Nope -- worthless.
Okay. It was
Google's decision. But,
now I get to make a decision:
impressed by the power of the role
of math at Google. At QUALCOMM,
maybe. At Renaissance Technologies,
sure. At Google, nope.
I still prefer PL/I to C++. Sorry
'bout that! But I wouldn't want
to use either language in production
Now I program on Windows, not Linux,
and on Windows I use the .NET Framework.
To do that, for a language, I have
just two leading choices, C# or the .NET
version of Visual Basic (VB). The
difference is mostly just the flavor
of syntactic sugar, and I prefer
the more verbose flavor of VB.
For FB, I never applied -- it
seemed totally hopeless.
I'm doing my own startup, right,
based on some applied math
I derived as in my post here.
A few weeks ago I got
all the code running I first planned
to do. Now that the code is running,
I see a few tweaks. Then I will load
some initial data -- have been
having fun collecting some. Then
on to alpha test, beta test,
going live, getting publicity, users,
ads, and revenue.
will like the results (from the
math, although users will not be
ware of anything mathematical);
if so, then I stand to have a nice
Much of my confidence in the work
is the theorems and what they say
about the power of the data manipulations
and the resulting value of the
Math is supposed to be useful.
There's a long track record that
it can be.
I studied math hoping it would
be useful, and I believe that
it is for my project.
Doing some applied math might
seem unusual, but it's not
"crazy". The unusual part
indicates an opportunity.
For my work so far, I've not
needed a static IP address so
have not paid extra for one from
my ISP. So neither do I have
a domain name yet.
I won't get a static IP address
or a domain name until just
before I go live, ASAP.
My startup is for Internet
search, discovery, recommendation,
curation, notification, and subscription
for safe for work Internet content
where keywords/phrases work at best
My project might become a big thing.
The user interface is just a
simple HTTP, HTML, CSS Web site,
also simple enough for
So, my software takes in data,
manipulates it, and sends
the user the results. The
crucial core of the manipulations
is from some math I derived
based on some advanced prerequisites
I got mostly in grad school.
Right, the users will see the
results but not be aware of
any of the math. What the
user does with the Web site
and the results they get back
will seem intuitively reasonable
and maybe even natural, but
actually doing the data
in a way with good promise
of good results is a
challenge, one that I
The theorems give good evidence
that with some good data the
results for the users will be good.
Given what I'm betting on this
project, I want the good evidence,
up front, long before TIFO results,
My main use of italics is a common
one, mark a word as being
used in a sense maybe not the
same as in a literal dictionary
definition and, thus,
needing some caution, reinterpretation,
I think it's exactly this as well. The way I see it (and I'm a financial idiot so I'm probably totally off), the bubble pop won't be when "the stock market" decides the companies aren't valuable anymore, rather the game is up when the Big Corps (Google/FB/Microsoft/etc) stop buying.
Can you elaborate a bit here. Specifically this is so vague its almost a useless statement "at roughly the same benchmarks that an IPO"
While in theory such a system should bring a little democracy/meritocracy to these future unicorns of tech (no longer shall VC money/equity dictate winners) in practice I think we will see snake oil salesmen and big marketing firms ruin the trust for everyone.
This is also the same problem facing 2/3rds of our economy that are small businesses. They can't get access to financing for R&D because R&D doesn't produce immediate cash flow to service debt, and equity investors will never get their money out of a small business.
It was done with the bigger picture of restoring retail confidence in the market. That could only be achieved by damping the oscillations.
I agree it's been a bad thing. What is odd to me is that I exepcted IPO activity to take off in a different jurisdiction, like London or Toronot or somewhere. That hasn't happened really. Instead it's just a case of some companies getting picked off by bigger ones, a couple of big home runs, and the rest sputtering along making a but if money but soaking up investors time and patience.
Moreover, they're basically arguing that it's logical for investors to pile into these late-stage deals, because waiting around for IPO is a losing strategy.
If you believe this data, it doesn't tell you that there isn't a bubble. It says that if there is a bubble here, it's mostly happening off the books, and depends on the huge public exits of a handful of mythical creatures.
Also, slide 38 is an argument for the "No Exit" way of looking at startups: we've got a boom in low-cost, early-stage deals (2x growth since 2009), coupled with an ever-more-ruthless culling of the herd, where most of the aggregate funding goes into fewer (<20) hot deals than ever. Investors are taking a cheap call option on your youth.
Some real, present revenue to big companies comes from the startup world. Maybe it's where I live and what I do, but startups seem to pay for a ton of the Twitter and Facebook ads I see. Amazon makes good money running datacenters for them. Apple and Google see a lot of the value of their mobile platforms created by startup app developers. The big companies' current revenue helps determine how much they're willing to invest, including investments in the form of acquisitions, so the dollars invested into the system can themselves contribute to exit amounts in a weirdly circular way. I'm not the first to observe this.
That in itself proves very little; both sustainable and unsustainable systems can feed on themselves. And all these large companies I'm mentioning are certainly sticking around.
But it does suggest there are paths were one thing goes bad first--new investment falters, the market starts pricing ads drastically lower, big regulatory interventions shake up some subsector or other--and the ripples are bigger and reach further than might be expected.
In the late 90s, this happened because all of the companies were buying ad contracts from one another, booking the total value of the contract as revenue, and using that to pad revenue growth. Today's version is the deferred ARR, which turns a tiny cash flow from subscription software into a magically big top-line number. But what goes up quickly, can fall just as fast...it doesn't take many companies to pare back on spending before your fictional deferred revenue graph falls off a cliff.
Anyways, I don't have a strong opinion either way as to whether we're in a tech bubble or not and it doesn't strongly affect me since I'm not heavily invested in tech companies. But I certainly am skeptical of the high valuations that currently exist.
One last thing HN readers should be aware of. VC firms are like hedge funds. The people running them make money whether the fund does well or poorly and typically the amount invested by the general partners is quite small relative to the size of the fund (often around 1%), so when you look to VC guidance for how the VC market is doing keep in mind what their incentivizes are.
Edited to add on VC firms: Typically the investors in such funds aren't rich people either. They're often (probably in most cases) institutional investors such as pension funds and university endowments.
And private companies are slowly going public at current valuations.
Yet public tech company's earnings to revenue is unusually high.
Open source doesn't fully explain this, as this alone is not a barrier to entry.
As US rates slowly increase, I expect to see an increase in currency headwinds.
"Andreessen Horowitz’s presentation treats the relative lack of tech IPOs as a sign of market health. As I wrote last week, there is a much less charitable way to view it. Moreover, the lack of IPOs also means that the public markets have yet to validate many of these unicorn valuations."
Moreover, most of the institutions doing these late stage rounds and secondaries are the same banks and asset management firms that float the IPOs.
One of the unintended consequences from SOX is the creation of this public-private funding environment where huge private firms and high net worth individuals can invest, but small retail investors are shut out until the venture firms believe the company's value has plateaued (Slide 30). We saw this happen with Facebook, for which there is a ton of second market valuation data from 2007 through the IPO to the present. If you believe that small retail investors should be protected from themselves when it comes to early stage investing, this is a good thing.
It's substantial. If VCs get a 1x liquidation preference, then it's (effectively) a no-downside investment since Uber is worth (worst-case) $500M+. If they get >1x and are the last investor (most-preferred), then they are virtually guaranteed solid return. Late stage VCs know what they're doing and valuation is still only half the equation.
As for private firms and high net worth individuals.... that's an entirely different issue; I'm certainly not a fan of accredited investor regulation. I'm also not a huge fan of my retirement (401k funds) being invested into the startup ecosystem without any say in the matter either.
And which secondary markets are those?
Alternately, the small retail investor isn't getting the chance to make life changing amounts of money by putting 1k into Microsoft or Amazon.
I suspect I (and lots of other people) would have been willing to invest in Facebook when it was a 1 billion company. That would be a 270x return from now. If you bought at IPO you'd be a little more than 2x now. Alternately, if you bought at the absolute bottom it's ever been you'd be at 4x.
Certainly 2x and 4x are nice, but they don't make you wealthy in the way 270x does.
Why is that?
[Edit: Wow was I not awake when I wrote this. Retracted but left up for posterity.]
Let's say a VC invests $500M into Uber at a $50B valuation (1% equity). If Uber gets acquired for sub-$50B, then the VC gets their $500M back despite their ownership percentage. As an example, if Uber were acquired for $25B, then the VC would get their $500M back rather than the equity value of their shares (1% of $25B => $250M). And if they had 2x liquidation preference, they'd earn $1B on a $25B liquidation.
This downside protection (sale of company for less than valuation at fundraise) is a key term on all priced rounds for this very reason. That's why these terms matter so much.
No, that's wrong. The investor loses nothing until the value declines to $500 million and then suffers linear losses afterward (i.e. if value is $100M then they lose $500-100=$400M).
The tech vortex that is sucking away quality of life from the middle class and padding the billionaires (and large company) bank accounts. Throwing out a few bones on occasion (fewer and fewer) to entrepreneurs to keep the vortex going.
Vortex is the opposite of bubble, but it does the same thing to the life of the average person.
In return, the average person has gotten information at their fingertips, sheep-throwing, Farmville, Candy Crush, easy travel bookings, a place to stay in every city, a computer on every desk, the ability to fly through the air, a car of their own and a house in the suburbs, and many other things.
The reason money gets drawn away from "the average person" and collects in "billionaires and large companies" is because the average person values money for what it can do for them, while billionaires and large companies value money as a scorecard. Naturally, it makes sense that money will flow away from people who want it so they can spend it, and toward people who want it so they can hoard it. If you're unhappy with this arrangement, decide which side you would rather be on and then act accordingly.
That's the reason that people buy things from people who sell things, not the reason for the unequal distribution of wealth. There is no logical necessity in people's spent money accumulating in a small number of pockets. Clearly, given the enormous variation in the distribution of wealth through even recent history, there must be many other factors at play.
The good news - from an economic mobility standpoint - is that technological change is rapid enough that peoples' purchasing habits change all the time. The bad news is that it's often pretty unpredictable which product or service they will land on.
I don't think you're right about billionaires and large companies, actually, but at any rate: the complaint here is not that massive, nearly record-setting levels of wealth disparity are unfair, or even that people are unhappy. If everyone is materially taken care of, it can be difficult to talk about fairness or happiness. What we're losing out on isn't fairness but self-determination - a democracy can't survive long if a fraction of a percent of the population controls half the wealth. Wealth may not literally equal power, but there is an exchange rate there and it stays pretty stable over time. If a concentration of wealth leads to a concentration of power, that will undermine a democracy which can only work if power is relatively more diffuse. We may be finding out the hard way that capitalism and democracy are not compatible, and if they aren't then so far capitalism appears to be winning.
(In actuality, the distinction isn't binary - most people desire both consumption and accumulation of wealth, in different proportions. But that reinforces the meta-point I'm trying to make, that money is a means to make choices about your life, and what makes those choices meaningful is the fact that there are constraints in the first place.)
I agree that money can be a means to make choices about one's life, but only past a certain point. Poor people need money to obtain the necessities of survival, and that often doesn't leave a whole lot of options open for making life-scale economic choices. Picture a Monopoly game where some players get the standard $1500 at the outset and $200 each time they pass Go, others get $150 and $20, and one person gets $15,000 and $2000. No matter how good the players in the second group are, they're probably going to perform poorly under those conditions; likewise whoever is fortunate enough to start out controlling large sums is considerably more likely to win.
We all have the same amount of time at our disposal, and how we use that can certainly have a huge impact on our economic futures. But large capital disparities arguably provide a disincentive to maximize productivity insofar as people feel hard work will have little impact on their prospects for advancement relative to their contemporaries.
Save 50% of you income for ten years and invest it sanely and you will become rich. It's a pretty simple mathematical equation.
Most people don't want to admit that it works because they can't defer their consumption for a decade.
In return for what? I've read your post several times now and it's unclear what you are referring to.
Billionaires make wacky amounts of money in stock because we stopped taxing them.
Fed buying trash MBSs with QE -> Investment Banks -> Stock Market -> Big Tech Companies -> Acquisitions -> Venture Capitalists -> Tech Companies -> Startup Employees -> San Francisco Landlords and Fancy Toast Restaurants.
NIMBYs then leverage it further by constraining supply.
1) The FED is basically printing money out of thin air.
2) To close this open loop:
SF Landlords and Fancy Toast Restaurants -> IRS -> THE FED
We don't have a tech bubble we have a Silicon Valley valuation bubble, one a16z is part of themselves.
The discussion isn't whether tech companies are under or overvalued, they are most likely in general undervalued.
The discussion is whether the kind of investments that companies like a16z and other VC companies make are over valued or even valuable.
In other words, they are setting up a straw man about tech funding in general but the very issue is that it's not the tech sector in general that is having insane valuations tied to it but a small but important subset.
They are showing that there is in fact no tech bubble which I agree with. But that doesn't mean there isn't a bubble far more problematic inside the tech sector. There are a bunch of companies that get a lot of attention for their valuation but without any real proven path to ever honor it.
This is a great comment. The grandparent is being pointlessly dismissive with zero evidence presented. That makes it an incredibly low-value comment.
A lot of VC funding that used to go to "tech" companies is now going into much less profitable types of businesses that should not be considered "tech". Businesses that most VC's don't really have a lot of experience with.
For example, their investments in Soylent, Walker and Co, Dollar Shave Club. It is REALLY hard to make money in these types of businesses when compared to software. They could be in for a rude awakening...
By the time that happens, Uber will be as big as google. They will find a way - when lot of smart people work together, they generally do.
Uber doesn't have a monopoly on smart people. Pretty soon each and every significant market in the world will have a local competitor who'll know how to play the local system better than Uber and not to piss off civic stakeholders to this extent. There's nothing to stop the competition either. Drivers already on the road with Uber can be easily persuaded to install a second app with a small financial incentive. It's absolutely a commodity play for them. Same for consumers. It's a classic race to the bottom competitive situation, great for consumers and perhaps even the drivers but not necessarily for the company.
It's a brave new world.
Basically, the stock market is a bit overvalued, and people expect that trend to continue. However, peoples' level of confidence in the stock market pricing is very low. To me, if there's a coming crash, it's going to be because investors are overly anxious rather than because valuations are so stratospheric.
Then again the fed sure is taking their time...
If you have 30x leverage in 5 year duration bonds, and interest rates go up 1%, you lose 150%!
ZIRP (0% interest rates) is a wealth transfer to big banks, a backdoor bailout.
If the Federal Reserve raised the Fed Funds Rate to 1%, then the bank would be borrowing at 1% and lending at .26%, and they'd be .74% in the hole per bond, 74% accounting for 100x leverage. Big banks are comfortable doing this trade right now, because they know the Federal Reserve isn't going to raise interest rates. (It is more accurate to say that the Federal Reserve is owned by the big banks, rather than acting independently.)
Instead of buying Treasuries, they could invest in stocks, futures, corporate bonds, mortgages, houses, whatever. The bank borrows at zero and buys stuff that yields (on average) greater than zero. The bank can lend money to hedge funds who in turn invest in VC funds or startups. (ZIRP indirectly causes a startup valuation bubble.)
Most of the time, the banks make huge profits (borrowing low and lending high).
Every 20 years, there's a severe recession, and the big banks get a bailout.
When interest rates are lowered, that's an indirect bank bailout. Suppose the bank owns a 5 year duration bond, uses 10x leverage, and interest rates go down 1%. The bond prices go up 5*1 = 5%. With 10x leverage, that's 50% profit.
(And if they don't find anything, they only pay 0% while they wait.)
This free money being doled out by the Fed to a select few entities will have consequences. My biggest fear is market will finally win over retail investors from 2008. Then, and only then will the big boys pull out leaving us holding the empty bag. Big boys who should gave bleed out if Bush Administration didn't throw them a coagulant? (I know a cheezy metaphor.) Oh yes, My America--you are the picture boy of Capitalism?
Steven was right.
This doesn't really mean there's a "tech bubble", though. It's possible we'll see a massive correction to those companies, but it will likely be isolated, and thanks to the weird structuring of these private equity deals I can't imagine that the VCs will be much worse off.
It's not just a canard that these companies are "not focusing on revenue".
Apple even saw an isolated correction a couple years ago.
That is one reason I believe the public markets are in fact healthy. Sectors have been allowed to correct on their own instead of everything just failing in a systemic way.
These days, with Google, AWS, Rackspace, Heroku, there's none of that. You can spin up a new server in minutes and scale up as required. All the technical infrastructure is already there, so you can focus on the product and market.
Regulators killed the IPO market such that all the gains are being made by venture investors and the public is totally missing out.
A point which seems to be lost in this discussion.
Slides talk about S&P IT but no one is concerned with IT public market valuations (at least relative to the rest of the public market). The concern is with private tech market.
Slides talk a lot about how the amount of funding is justifiable but the question is whether the valuations are. Lower amounts of funding do suggest there is less at risk, however.
How do you reconcile slide 37, which suggests that fund raising is as difficult as ever, with the widely held view that money is flowing freely today.
You can't own an index of unicorns (slide 32)
Why does it seem all the money is in the US and not in Canada? More investors? More money? Taxes?
The only reason to IPO these days is to provide liquidity to existing shareholders (i.e. cash them out).
The Valley is a Harsh Mistress
Investment yes, Wall Street no.
The reason to seek investment is to grow one's company so that one can grow one's business in ways that would not be possible to fund out of one's current revenue.
One of the very wealthiest people I have ever met founded "The Nation's Largest Sperm Bank" in the early 1970s with $2,500.00 of his own money, along with just one other partner, mostly for liquid nitrogen dewars, medical lab equipment as well as pr0n.