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U.S. Tech Funding – What’s Going On? (a16z.com)
464 points by randomname2 on June 15, 2015 | hide | past | web | favorite | 190 comments

"And the tech IPO is basically dead. The tech IPO market is at early 1980's volumes. For most of the 90's the majority of tech funding was public. This has reversed. It used to be routine to hit $20 million in revenues and go public. Not anymore."

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.

"It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley."

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] #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.

[1] https://www.preqin.com/blog/101/4683/top-10-pe-debt-financer...

I don't think this is accurate. All the companies I know would rather go public in order to enable investors/employees/shareholders to get some liquidity (and for the company to gain credibility). The secondary market, while fulfilling this desire to some extent, is still not even close to what you get in an IPO. The onerous regulations are still clearly depressing the IPO market.

I work for a company that has deferred its IPO from plan, and from what I understand the SOX regulatory burden has very little, if anything to do with it.

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.

The big payday isn't from an IPO any more, but rather from selling out to a larger company. Big tech companies have more money than they know what to do with.

One benefit of this to founders is that a M&A deal provides instant liquidity (barring earn outs), whereas an IPO largely prohibits you from selling off a large percentage of your stock.

Yeah. The founder of one of our vendors sold his company for eight figures recently. His only obligation after the sale was to stay on for six months (at an exorbitant salary) while the management structure was integrated into the new parent company.

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.

Sorry to dig on such a small part of your comment, but could you elaborate on the credibility comment? I'm just wondering, if you're pulling uber sized rounds and valuations - who are you lacking credibility from that matters? Can't going public damage credibility too if the pricing is wrong?

Money is part of it but having proper audits and publishing financials is more what I was referring to.

That sounds right to me. Why sell off equity when you can borrow the money you need? There's a hell of a lot of money out there willing to take risks for what used to be considered a mediocre rate of return.

That's not an option for startups. Their choice is whether to sell equity to public or to private investors.

The ones that are borrowing the money are private investors.

Until interest rates start going up, at which point things could get a bit messy.

This isn't really applicable for high-growth venture backed companies because generally, they aren't leverageable. It's almost impossible to lever a minority equity investment in a private company. It's true equity capital going into late stage VC / growth equity.

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.

So the rich borrow cheaply, invest the money, and profit?

Those who dedicated their life to capital allocation, yes, they are allowed to borrow cheaply and profit. I thought about going into this in university, but there is something very soul draining about it. Too bad I discovered warren buffet later in life. More power to these folks. In fact, we shouldn't even be taxing them. We should just start taxing things like mansions, yachts, and super cars by 5x.

There's no logical reason not to tax investors. They aren't unique butterflies that make the economy flourish. Investment is just one component of a functioning economy. So is education, saving, consumption, etc. Too much focus on one is not a good thing. This is one of the reasons we have so many investor bubbles. Also, the wealthy have no other options than to invest their money. What else would they do with it, put it under their mattress? The ROI is the only incentive they need. All this does is increase income inequality.

"No other options" than investing one's savings? Go to Russia to find out some of those other options, or any other place where people don't count on their wealth not to be confiscated at an unpredictable moment. Basically the other option is "doing expensive stupid shit" and you'd be surprised how many variations of this one can come up with. Certainly society as a whole ends up waaaay less wealthy if "the wealthy" (or those with any sort of surplus, really) end up strongly preferring spending to investment.

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.)

Imagine you have a business; Would you rather have a customer or an investor?

Imagine you're on a lonely island. Would you rather eat all you can or conserve food to the extent possible?

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?")

We are clearly discussing two different things.

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.

I dont distinguish between billionaires and middle class folks in this respect. Overconsumption by the middle class us likely much more environmentally damaging. Does it drive the economy? Perhaps; if so, it's a problem. And certainly the Russian middle class consumes more of what it makes than European or American because lacking reliable property rights they do not trust investments to pay off.

Seems to me like an argument for sustainable manufacturing, rather than anti-consumption

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.

On the contrary, there is no logical reason to tax investors/savers. I strongly recommend this article by Scott Sumner, who works through the details carefully.


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).

That article has too many flaws to go into, but the whole idea of all investments growing the economy are just false. Most of the investment dollars go to areas with little to no benefit. The (secondary) stock market, derivatives, commodity speculation, forex, etc. These produce almost no jobs, produce no goods/services, and do very little (aside from marginal liquidity) for the economy. An economy build on financial magic and imaginary money isn't sound.

That article has too many flaws to go into...

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.

Derivatives, commodity speculation, forex, etc, all allow organizations to hedge risks and make decisions that have higher expected economic returns.

I read it and I don't get it! Here, take a look:

> 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.

OK, sure.

> 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.

The issue is that an income tax (which applies to both capital and wage income) taxes savers at a higher rate than spendthrifts.

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.

Since I sense (from the phrase "the rich") that you mean it as something bad: it's not. Just imagine whom would you rather lend your hard-earned money to: a wealthy investor with a proven track record, or a regular Joe. Well, that's exactly what the bank you keep your money it is doing.

Is the money the Fed lends out "hard-earned" or is it manufactured as a side-effect of fiscal policy (e.g. quantitative easing)? Does it seem right that public policy should so clearly benefit the wealthy by forcing money into the economy through private allocation experts?

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.

But still: whom would you give your money? To people who are wealthy because a lot of money have gone through them, or to entrepreneurs?

To entrepreneurs, of course. Money doesn't beget money by magic; it needs to flow to someone who actually makes things and works, or the rate of return drops for everyone.


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.

Yes, at the very bottom (top?) of this food chain, you see banks taking a spread between their loan rates and the Federal Funds Rate. https://en.wikipedia.org/wiki/Federal_funds_rate

And the oft quoted "inflation adjusted" valuation of companies proves to be misleading, which it does in the mentioned presentation. With the current climate of Feds still pumping money and keeping rates low, inflation hasn't taken off.

I'd also add that until the public validation of an IPO and some time trading on the markets, tech companies have just become investment "tokens" that hold arbitrary amounts of wealth as "valuations" that make no meaningful sense. M&A efforts are simply capturing this fanciful valuation and hoping they can sell this token off in some way for more to somebody else.

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.

I'm not sure public markets are a unique way of getting "real" prices. Private-equity sales are a real market with real money; if Google buys a company for $50m, that's an actual market transaction that valued the company at $50m. Is the idea that public markets provide better price discovery than private sales do? If so, is there empirical evidence that publicly traded companies really are more accurately valued than privately held companies are? (Genuine question; it's possible there is such evidence, but I haven't found a good article on the subject.)

It's a fair hypothesis to me: the public market has a larger amount of people, so more information; it also has mechanisms such as securities that benefit highly and rapidly information bearers.

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.

Public markets investors typically have far less information about companies than do private investors. For most technology companies, the probability of success / profit is driven more by specific company factors rather than larger industry and macro trends. Most public tech companies are understandably worried about disclosing detailed sales metrics / technology roadmap to all investors for competitive reasons; however, as part of any PE / VC backed investment process, private investors are typically given access to all of this detailed information.

Ah yes so private investors have more specific information while public market investors focus on overall market trends. But is there no way to public investors to get a glimpse of the internals of the companies without disclosure of competitive information? Maybe through some kind of report by a consultancy under NDA, or a small group of investors under NDA giving an investment report?

Under the SEC's Reg FD, public companies are required to disclose all material information to all investors at the same time. So, what you propose is not really workable under the current regulatory regime. Sometimes public companies will give extra disclosure to help investors (e.g., product line revenue, numbers of employees within each function, etc.), but often that information is not enough to truly diligence an investment thesis.

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.

In private sales people take big chunks and have incentives to investigate the companies deeply - much of the public market is about small chunks where people don't do as deep investigations, because it would cost them more than the potential benefit. Of course in the public market there would also be some big chunks buyers that would do those deep investigations - but it is not guaranteed how big influence they would have on the price.

> Is the idea that public markets provide better price discovery than private sales do?

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.

Yes, but you can sell info about people who have worn the sock to advertisers.

If you're not paying to wear the socks, you may be the product.

But the sock has revenues, even if it's a red sock that has no hope of turning black.

The great thing is when one of your other properties has a good year you can lower the valuation of that sock to reduce your tax burden.

I don't see how this hype game you describe would be characteristic of private sales more than of public offerings. It is the mechanism that drives all bubbles.

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.

You just described the stock market. Public tech companies that make no profit (and/or issues no yields) trade at 30 times earnings. No connection to fundamentals, but everybody just agrees that is what it should cost.

Profits _are_ earnings. Companies that make no profit and trade at 30x earnings, trade at 0.

Let me guess the end game: after a number of trades, ending up with pension funds having a large count of both both the money sock and money hat threads.

If you're able to sell a sock for $1m then, yes, it's worth $1m. But I strongly suspect that you could not. Which is why the analogy is flawed.

You get enough people to preach it is worth $1m and you'll find many individuals really to buy 1/1000 for $900.

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.

No, but you may be able to sell a 0.01% stake in the sock to someone for $100 and tell everyone that makes it worth $1m.

By telling the investors that while it may look like a sock now, later it'll be a sock puppet and you can sell tickets to the show due to the network effects.

I think there's a lot of truth to that, but the one thing it leaves out of the analysis is the opportunity to exit via acquisition.

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?).

Many highly valued tech companies do secondary offerings to allow average employees to get some liquidity.

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.

Yeah, but as I understand it, employees can usually only sell about 20% or so in secondary offerings. Six months after the IPO, they can liquidate 100%.

They also don't get a real market price for their shares.

Good point. I wonder what the numbers are on how this affects the returns for employees.

Usually it's more like %10 of vested earnings, which ends up being something like %2.5-%5 of their stock.

It's another case of the cure (Sarbanes-Oxley) being worse than the disease (another Enron).


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.

Yeah, but prediction markets are basically illegal, because---again---government regulation.

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.

They are illegal - because it is impossible to limit the participants to just betting on the outcome instead of trying actively to get the outcome. Imagine for example a prediction market for Obama dying this year - if the price is big enough it would become an assassination market.

Nick Szabo explains it in: http://unenumerated.blogspot.co.uk/2015/05/small-game-fallac...

Prediction markets are being decentralized. They will be uncensorable.


I hope so. I am a big fan of bitcoin and I see it as the way to do prediction markets.

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).

I agree, the way American government is now, I don't think there is much hope for the legalization of prediction markets. But new governments are formed from time to time and there are quite a few nations in the world so hopefully someone else legalizes them.

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

Frankly, we ended up with the cure AND the disease. Special purpose entities were used by Enron to muddy up its accounting so nobody could tell that it was doing stupid deals to hit its quarterly numbers and wasn't really making any money, and then they were used again during the real estate bubble on an even wider scale to mask the risks of the mortgage origination machine (with convenient help from the bone-headedness of the ratings agencies). So the "cure" really didn't seem to help the disease very much.

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.

i think your proposed requirements would be on top of existing regulations, so they would also create a lot of additional work for lawyers and accountants.

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).

I see it as the cost of forming a startup is much lower now so they can stay private longer. Combined with VC companies and angel investors flush with money, they are keeping the companies private longer to capture more of the gains. Then there are established companies who want to stay relevant who throw money at startups with no profit in sight but cool technologies.

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 see it as the cost of forming a startup is much lower now so they can stay private longer.

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.

I don't agree. Lots of startups don't have sales and marketing in the early stages. The grow through word of mouth or iterate/pivot to find something that becomes a hit. Somebody like Yahoo would need to buy and maintain a lot of servers to scale up but now with cloud computing, you can grow quite a bit with Amazon AWS until you implement your own infrastructure.

Obviously it varies quite a bit. Some consumer companies can spend very little on sales and marketing. But many consumer companies and nearly all B2B companies spend an enormous amount. Look at a company like New Relic. They took four rounds of venture, plus two rounds of private equity. They were spending 70% of their operating budget on sales and marketing. It was expensive the whole way. It costs a lot of money to develop a product to the point where it is better than the status quo, and then a lot more money to market it.

would love to hear examples of successful startups that did not do any marketing. especially ones that are tech/Internet startups.

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.

zenefits, zenpayroll, slack were basically word of mouth

Zenefits and zenpayroll have easy to spot ads running on google right now.

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.

If you build a startup and hope to iterate your way into being viral

It's a great way to alert a much bigger competitor of an emerging market so they can eat your lunch, though.

Zenefits has a massive sales team now, I don't know if it always did.

In fact as a founder I don't think there is anything cheap or easy about it. Especially if you are trying to do anything with significant technical challenges like with computer vision, deep learning, VR etc...

> Especially if you are trying to do anything with significant technical challenges like with computer vision, deep learning, VR etc...

My view is that those are not very promising "technical" directions, exploitations, or "challenges".

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 that direction.

I can't really parse what you are stating.

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.

> Or are you saying that those are not "mathematically" technical?

Right. They are overwhelmingly merely heuristic. 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. E.g.,


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 aren't expensive?

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. Threading (tasking) 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 have arrays.

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: I'm not 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.

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.

Hopefully people 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 startup.

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 results.

I'll be interested to see how it goes for you.

I've noticed posts because of your use of italics. I can't tell if you are crazy or onto something. Would you mind sharing the name of your startup?

I'm not "crazy", not at all.

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.

A "name"? 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 poorly.

My project might become a big thing.

The user interface is just a simple HTTP, HTML, CSS Web site, also simple enough for smart phones.

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 manipulations in a way with good promise of good results is a challenge, one that I addressed mathematically.

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, traction, etc.

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, and/or apology.

> 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 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.

In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached.

> In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached.

Can you elaborate a bit here. Specifically this is so vague its almost a useless statement "at roughly the same benchmarks that an IPO"

The playing field in the private market should be leveled with the JOBS Act that will allow equity crowdfunding. Though I think the rules were supposed to be created a year after the law went into effect, and it's about 3 years later.

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.

Keep in mind that putting money into a company is only half the equation. Getting it back out is the other half. The JOBS Act is saying anyone can invest, but those small time investors will now face the same risks employees at start ups that don't IPO face right now - their stock is worth essentially nothing.

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.

And the more interesting follow up, which I really hadn't thought about, was that the value is being returned privately. That explains for me why hedge funds are investing in private companies. If these companies then develop a process of 50 / 50, where if you're in at Stage X then at Stage Y you can sell 50% of your holdings and buy in at your pro-rata share. Then you can invest, get returns, and never have the company go public (caveat the number of investors rule).

But is that the right strategy? Going public sure forces you to reveal lot of things you rather not and bring in expensive SAP and KPMG guys to do SO. But considering so much "free" money flows in during IPO, wouldn't it be good strategy to go public if you can?

thats very interesting, I never thought of it that way but yeah its kind of true. many companies now all the money is already made before the IPO

I would argue the point of Sarbox was to squish the IPO market. Not an unintended consequence at all.

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.

Note that they use the valuations of public companies to argue that the market isn't overvalued, then spend 90% of the presentation arguing that all of the value is being "created" in the private markets, and that IPOs are dead.

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.

Interdependence is a big deal.

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.

Yeah, this is definitely a reasonably-sized elephant in the room. It's clear that a big chunk of tech revenues come from spending by other tech companies. You can't throw a stone in SOMA without hitting the fancy offices of a startup-servicing startup.

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.

Yeah, I thought the same thing when reading through the slides. It's pretty disingenuous of them to do that, since I think when most people say "tech bubble" they're referring to the inability of most of the VC funded companies to go public. A couple of months ago there was a blog post by Mark Cuban that made a similar argument. It wasn't well received on HN largely because most commenters just looked at the words tech bubble and instantly disagreed, rather than seeing that his argument was really about liquidity.

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.

GP commit is always at least 2%. Also, I think its pretty disingenuous to say that partners at VC / PE make money whether the fund does well or not. The management fee (2%) almost all goes into operating expenses - mostly salaries for mid-level / junior folks, professional / legal fees, research, consultants, etc. Partners make almost no money off of the management fee (LPs make sure that the management fee is just sufficient to cover the operating expenses of the fund) The way that partners make real money is through carried interest. Most funds have a hurdle rate of return (around 8%) below which, no carry gets paid. Furthermore, the vast majority of LP agreements have clawbacks associated with early carry paid in the event that later investments prove unsuccessful. So, unless the fund returns 8% per year to its investors, the partners make only their salaries.

Public tech company's price to earnings does look historically reasonable.

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.

Mid-sized mature software businesses have figured out how to run very very profitably (25%+ EBITDA margins). Tech management teams have learned from the giants (Oracle, SAP, etc.) about how to extract maximum value from their IP and past investments. This innovation helps drive earlier stage investment, as investors know that there is a potential for a ton of cash flow available down the road.

I thought Dan Primack had a solid response:


"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."

Except that the valuations are meaningless without understanding all the other undisclosed terms granted to the VCs in the latter rounds (eg. liquidation preference, participating preferred, etc).

How important is a liquidation preference on a $500m round which values Uber at $40b? Not very.

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.

> How important is a liquidation preference on a $500m round which values Uber at $40b? Not very.

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.

I personally wouldn't call it substantial. You can quantify the value of the liquidation preference by looking at the difference between the value of the preferred shares and the value of common shares available on secondary markets. Once you have a company that owns its market, has healthy and growing revenue, etc, there is very little difference. This is what happened to Facebook and Twitter. I'm not familiar with Uber but I do track Pinterest and Airbnb and right now their common stock (no preference) sells for about a 10% discount to the latest preferred rounds. Square and Palantir, which people seem to have less faith in (for whatever reason), trade at a steeper but still not what I'd consider substantial discount.

Preferred shares have different terms, they don't all have liquidation preferences. Even if they do, the preference is worth much less once the stock appreciates significantly. For example, if I get a preferred with liquidation preference at some price P then that is worth far more than the same security once the price appreciates to 3*P (since it acts more like a common share, the value of the preference being reduced [since the chance of it being useful is less]).

And which secondary markets are those?

The most active secondary markets I see today are the broker dealer successors to Frank Mazzola/Felix Advisor type outfits who use company approved (or tolerated) LLCs to vacuum up stock from ex employees who want liquidity. You have to find them or be referred to them and then they will periodically pitch you inventory as it becomes available. Chris Sacca is doing the same thing but it looks like a venture fund and (as far as I know) he holds to IPO, where on the east coast it looks like a private equity fund and they will allow intra-fund exchanges between old and new investors. Very little transparency in this market and probably the perfect breeding ground for the next Bernie Madoff style Ponzi scheme (not Frank or Chris who are both legitimate).

>If you believe that small retail investors should be protected from themselves when it comes to early stage investing, this is a good thing.

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.

Just for an accurate number Uber has ~4bn of liq prefs currently.

> How important is a liquidation preference on a $500m round which values Uber at $40b? Not very.

Why is that?

A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%.

[Edit: Wow was I not awake when I wrote this. Retracted but left up for posterity.]

You are incorrect. Liquidation preference matters for ANY liquidation valuation less than the fundraising valuation.

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.

> A 1X liquidation preference on a $500m investment is only relevant if the price of Uber declines by 98.75%. If it is 2X, then only relevant if price of Uber declines by 97.5%.

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).

Uber has raised almost 6B. It's very unlikely their valuation drops to a few hundred millions as they must still have a few billions cash. However it's not impossible to see it drops to the 10B level or less if the economy tanks or they fail to execute, leaving little to the common shares. If I were an early employee at Uber, I would've been looking for anyway to liquidate my shares :), even if it that means shorting the NASSAQ.

Which makes the original point made even stronger.

My takeaway- the VC's have leveraged the money from their successes to create a vortex that sucks in money from consumers, into privately owned companies, back into VC pockets, and back into more companies that get more people to spend more money.

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.

That's the way capitalism has always worked - it is up to you to make deals that increase your overall level of happiness, and it's up to your counterparties to ensure that those deals also increase their happiness. In past years, instead of "VCs" the villains have been hedge funds, private equity, corporate raiders, giant conglerates, corporations in general, investment trusts, robber barons, and colonial empires.

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.

>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.

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 reason for the accumulation of wealth is because most profitable markets (i.e. ones where profits are not competed away) involve owning an asset that others a.) value and b.) cannot easily replicate. Very often these days, that asset is simply the purchasing habits of a large number of consumers. Building machinery is easy, but changing peoples' minds is hard.

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.

That seems like a non-sequitur. The existence of such assets does not entail massive wealth inequality. It obviously cannot, since such assets have always existed whereas wealth inequality has increased enormously. Purchasing habits are not really an asset, by the way, since a company does not own the purchasing habits of its customers.

> the average person values money for what it can do for them, while billionaires and large companies value money as a scorecard

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.

This is basically what Capital in the 21st Century said too. People who reinvest money they make into making more money are getting richer. Those who spend it are not. Pretty straight forward.

Except that unless you are lucky, you're unlikely to become wealthy from just saving/investing ordinary income. You're both presenting it as if it were a simple choice between being frugal and engaging in consumption, but it's not.

There's more than that implicit in my comment. If you're the sort of person who views wealth as a scorecard rather than a means to consumption, why should you care whether you end up becoming wealthy or not? You'll be too busy making money to spend it. And if you're the sort of person who views wealth as a means to consumption, then of course you'd like to be wealthier, but, well, you know how to achieve that.

(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.)

Not to be argumentative (because I think we have somewhat similar opinions on the broader topic), but I am having real problems with your scorecard analogy. I have certainly met people who think that way but a) of course they want to be wealthy, because being in the game but having a low score isn't satisfying and doesn't come with any status benefits and b) even people who are obsessed with money-as-score still like to consume, partly to signify their ability to do so. Furthermore, almost all of the people with the scorecard mentality that I've encountered come from financially privileged backgrounds. I remember one person in particular who was working as a professional investor that I occasionally did some IT work for, and who confided in me that he sometimes felt it was an uphill struggle because he wasn't his father's favorite son and so had to start his investing career with only $1 million of capital. I forebore from mentioning that that was about 30 times my annual income and I would be delighted to swap my problems for his, but it was pretty dispiriting; while I don't view capitalism as a zero-sum game, there are far fewer investment opportunities open to people who have only tiny amounts of capital.

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.

Actually, it really is that simple.

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.

Hardly anyone makes more than $2M in ten years. Investing $1M conservatively and moving to the third world might get you a reasonable standard of living, but that's not what people mean when they say rich.

This seems to contain a number of assumptions about income, non-discretionary living expenses, and rates of return. You'll certainly be richer but you're not likely to become rich (which I guess I should have defined earlier, but which I consider to be wealthy enough that you can retire and live off passive income should you so choose).

>In return

In return for what? I've read your post several times now and it's unclear what you are referring to.

In return for forking over the vast majority of their income. It doesn't just vanish (well, except for credit card interest...that does just vanish). The "vortex" that the grandparent's referring to is the money that customers are shelling out for services, which then becomes a tech company's revenue. But in return for shelling out that money, they get mobile phones, cloud storage, a place to stay in every city, on-demand transportation, access to service professionals, a second income stream, exposure for their business, and many other things of value.

The Romans called it bread & circus. You get candy crush and an iPhone to let you work harder.

When you read "public returns" that doesn't mean the middle class. The "public market" the deck is referring just means that the trading happens on the open market (NASDAQ, S&P, etc.) rather than in private deals. Regardless, it is always the big players who make the big returns. The average investor wasn't the one making all the returns on Microsoft either. So you are right that the rich use these tools to get richer, but it is hardly a new thing.

So, those 30% annual returns my dad made in the 90s were some sort of dream? The early players made more, but plenty of people rode Microsoft and Intel up through the 80s and 90s. We all missed the first decade of Dropbox.

Billionaires make wacky amounts of money in stock because we stopped taxing them.

You're just describing capitalism.

Here's my current map of where the money is coming from and going to.

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.

And the landlord step is further accelerated by the overseas wealthy using sf real estate as a secure bank account compared to their home country and hedge funds buying up stock as an investment step.

NIMBYs then leverage it further by constraining supply.

The "overseas wealthy" is the trade deficits we've been running for the past 30 years slowly trickling back into the U.S asset markets. We were able to export our inflation for 30 years and it was all piling up in foreign central banks as treasury bills. Now, with very low interest rates, it is going into any asset that's not a bond. If the dollar index starts to go the wrong way, watch out, that little stream of overseas dollars buying into U.S assets is going to become a flood.

Let me add to this amazing chain two important points

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

As I have mentioned in another thread.

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 made a number of specific points about why they don't think it's a bubble. Now, they could be wrong, but at least they are coherent

It's a red herring. They present data about public markets to conclude there's no bubble. But the bubble, whether real or not, is generally considered a funding bubble taking place in private markets.


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.

they made a number of specific points about why they don't think it's a bubble. Now, they could be wrong, but at least they are coherent

This is a great comment. The grandparent is being pointlessly dismissive with zero evidence presented. That makes it an incredibly low-value comment.

When Andreesen talks about "tech funding", what do they mean by this?

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...

Bingo. A very large part of recent "tech" startup scene is just the good old "doing X but now with a smartphone" pattern. Or even worse "Sending a person with a smartphone to do X for you when you call them using your smartphone". I simply don't know how these businesses are supposed to be profitable at the scale they're supposed to grow to. Will Uber still be cool when it has a million quasi-employees? Will the governments around the world still allow the "quasi" part to stay intact at that scale - highly unlikely.

> Will the governments around the world still allow the "quasi" part to stay intact at that scale - highly unlikely.

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.

I'm not predicting Uber's demise. I'm casting doubts on continued revenue growth and margin protection to justify the skyhigh valuation (since this is a thread about private funding valuations).

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.

As big as Microsoft when the EU handed an antitrust judgement down to them?

If your business has a website, it is now a "tech" company.

It's a brave new world.

Us consultants call this the "Digital Business Transformation"

Not new at all. I remember reading articles in the media in 98-99 about "tech" stocks like pets.com and etoys. Anything back then that had a website was a tech stock just like anything with an app is a tech stock these days. Nothing new to see here...

Robert Shiller had an interesting analysis of the current stock market's "frothiness": http://www.businessinsider.com/robert-shiller-stock-market-b...

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.

Hopefully gradual increase in interest rates will result in stabilization of stock value as people pull out for safer low-rate returns (which are basically non-existent now).

Then again the fed sure is taking their time...

The problem is that banks are leveraged to the hilt.

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.

Can you elaborate on this last statement?

A bank borrows at the Fed Funds Rate (say 0.1%) and buys one year Treasuries (currently 0.26%). On Treasury trades, banks can do leverage of 100x or more. So the bank's profit is 0.16 times 100 or 16%.

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.

the problem with this theory is the bank doesn't borrow at zero. Goldman Sachs has 380 Bln of outstanding debt, and is paying roughly AA corporate rates on that debt. Overnight bank rate is 0.13 right now, which is the Fed Funds rate

That's only corporate bonds. Federal Reserve transactions are not publicly disclosed, which is one of the issues.

Banks get the money at 0%, lend it out at above 0%. Profit.

(And if they don't find anything, they only pay 0% while they wait.)

The average retail investor is still licking their wounds from 2008. Many, like myself, put our tiny blood soaked wads in CD's, at .01 percent. There are millions of Americans who can't gamble on a rigged stock market, and relied on a healthy 5% interest rate.

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?

The average retail investor is doing just fine. Anyone who did something as basic as hold an S&P 500 ETF is up quite a bit from the crash.

Well, yes. But that dies to fit the narrative of markets bad! Capitalism bad!

well, public markets have gone up dramatically since the trough in 2008/2009

Robert Shiller is an academician not an investor. During 2009 when the market was at an all time low he told Steven Schwarzman that the market would remain low for many years, Steven said no, it would bounce back in less than a year.

Steven was right.

If anyone had trouble seeing the embedded flash of slideshare, here's the direct link to the slideshare:


This doesn't really directly address the issue of valuations for the unicorns. P/E valuations are probably insane by most metrics - the type of user base growth required to get them in line (P/E wise) with other companies is on the order of double-digit percentages of the global population IIRC.

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.

Facebook revenue grew 8000% from 2007 to 2014. Clearly not all "unicorns" will perform this well. And maybe none will. But possibly they avoided discussion of these companies' P/E because the data is both unavailable and unreliable given their size?

It's not just a canard that these companies are "not focusing on revenue".

We've already seen many isolated corrections in the public market over the last few years. 3D printing has corrected in a massive way. Biotech had a big correction a bit over a year ago, however it has recovered and continues to rally. Solar suffered a correction recently and many small to mid-cap technology companies had a correction about 1.5 years ago too.

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.

I think a lot of people don't grasp the extent to which the cost of founding a tech company has fallen since the dot-com boom. I remember forking out tens of thousands of pounds for physical hardware (which then had to be hosted somewhere) and software licences for things like Oracle and Checkpoint firewall, which I then had to install, set up, admin and maintain.

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.

1999-2000 was insane.

Regulators killed the IPO market such that all the gains are being made by venture investors and the public is totally missing out.

>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.

Lot's of points to dispute:

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)


you can own an index of unicorns if you are an LP in a16z :)

No, you can own some unicorns but not all of them or something that represents all of them. I suppose you could invest in the top 5-10 VCs but in either case you would also own a bunch of non-unicorns. It would be like saying you can buy an index of CPG companies by buying the S&P500.

"It’s Carlota Perez’s argument that technology is adopted on an S curve: the installation phase, the crash—because the technology isn’t ready yet—and then the deployment phase, when technology gets adopted by everyone and the real money gets made" - http://www.newyorker.com/magazine/2015/05/18/tomorrows-advan...

The slide about e-commerce only making up about 6% of total retail sales is only relevant if there are a lot of "unicorns" which are in that market. According to Fortune's Unicorn list there are only 3 unicorns that are retail e-commerce based businesses.

Is a16z focused on the seed stage now? That seems to be what they are selling in these slides.

Who were those companies which had funding > 1bn within a year in the year 1999?

Maybe the tech IPO is dead because Andressen Horowitz (et al) invest in Series B, C, and D at geometrically increasing valuations and have pushed valuation levels to where the public markets are skeptical.

The takeaway for me is that investing in tech companies during the growth stage has gone from being mostly for rich people to being pretty much exclusively for very very rich people.

Why are IPOs no longer viable? Too much red tape? It seems that investors and their money have a better chance underground (private) where public stocks are either too slow to get a return or the return amount would be much less.

Why does it seem all the money is in the US and not in Canada? More investors? More money? Taxes?

If you want to raise money and can't do so without going through the regulations of being a public company you would do so.

The only reason to IPO these days is to provide liquidity to existing shareholders (i.e. cash them out).

Didn't see where the OP explained why the tech IPO market is dead.

Is there a video of someone giving this presentation? It's interesting.

IPO's are dead and so are options.

I've been adamantly opposed to the public trading of tech companies for fifteen years now:

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.

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