I don't know about the rest of the world, but we sure are in a bubble here at Hacker News. There seems to be a real disconnect between what people want to build/invest in and what people in the real world actually need and want to pay for. Just as sample of what I've witnessed in the past few years:
Ask HN: How do you like my file sharing app?
Ask HN: How do you like my social app for niche <x>?
Ask HN: How do you like my twitter app?
Ask HN: How do you like my facebook app?
Ask HN: How do you like my iphone app?
Ask HN: How do you like my facebook app that writes twitter apps?
Ask HN: How do you like my game?
Ask HN: How do you like my photo sharing app?
Ask HN: How do you like my video sharing app?
Ask HN: How do I monetize my free flashcard app?
Ask HN: How do you like my app that helps other hackers to do <x>?
Ask HN: How do I get traffic to my freemium app?
Ask HN: How do I get angels/VCs interested?
Ask HN: Look what I wrote this weekend!
Ask HN: Look what I wrote in one night!
Ask HN: Look what I wrote in 7 seconds!
Customer 1: How can we sell through Amazon.com?
Customer 2: How can we reduce inventory by $300 million?
Customer 3: How can we increase conversion from 2% to 4%?
Customer 4: How can we use software to reduce energy costs?
Customer 5: How can we migrate one app into another?
Customer 6: How can we get our phones to talk to our legacy apps?
Customer 7: How can we take orders through the internet?
Customer 8: How can we get our software package to do <x>?
Customer 9: How can we reduce credit card fraud?
Customer 10: How can we increase SEO effectiveness?
Customer 11: How can we connect fulfillment and ecommerce?
Customer 12: How can we increase revenue?
Customers 13-200: How can we increase profitability?
To add, approximately one half of people in the real world share a common demographic category with a sliver of HN users and a fraction of a sliver of what we create.
Women have money. Go take it. Nobody else wants it in tech. (Well, aside from Groupon, Zynga, and a few other companies that missed the opportunity to make an iPhone app that you could wiggle to share photos.)
There is also a huge (multi-Billion dollar) "industry" for corporate level software that is under serviced in many areas (i.e. the software is churned out by large development houses and is below par).
Yet very few startups seem to target these areas.
We took a product into a badly serviced industry and were wildly profitable within about a year on minimal funding. I always worry that there is a growing amount of speculation on "great teams"/social media and less focus on creating useful stuff that companies/people want/need (and, damn, there is a lot of it).
My boss always moans when I talk to him about startups and VC's, he usually says "if you give me $100,000 and 6 months I could come out with at least 5 profitable pieces of software and sales to return your investment by the end of the next year".
That's really unfair. Whilst I agree there's a disconnect, I wouldn't say it's specific to HN, but rather to the entire industry. The reason why you see those Ask HN posts is because people are looking around and realizing that those types of services have been getting tons of funding and attention.
There's a disconnect, but it's in the social web world, not just HN. And I would say HNers are trying to capitalize on the hype.
This is very true. I can give another example(maybe bit-offtopic for HN).
A very good friend of mine worked in IT for like 10 yrs. He was quite good programmer, CTO etc.
One day he decided to radically change his carrer and opened... 5 Subways in Eastern Europe (he is originally from there). FFW 2 yrs => his restaurants making him $400-500k/yr, he spends zero time managing them and just focused on opening new ones.
His lesson: IT industry has one of the hardest competition rates cause all super-smart geeks are competing on relatively small marktets. Other industries competition (esp in emerging markets) is seriously overrated.
Another example - my very stupid app for selling video files just crossed $1000/day mark in sales. Ppl just need simple tools to get things done.
B2C (and tools for programmers) is overrepresented amongst hackers because it is easier to gain domain knowledge in these territories especially for young hackers.
I also think that B2B is still underrepresented, and I am more interested in that. But we should also note that solving Customer n's problem is very different than solving Customer M's problems at once where M is s big set of customers. The first is 'consulting', the second is building a product and a scalable startup. The second is much harder than the first, that may be also a reason for not being there that much B2B startups (but lots of consulatants).
Most geeks that I know aren't trying to build apps that make money, they're trying to build apps that are fun, and that their friends think are fun.
If you offered me two choices
A) Make a million dollars a year doing something you hate that nobody will know about or care about
B) Make no money doing something you love that your friends think is cool.
I will almost always choose B, and I think most hackers will also always choose B. I would go as far as saying that choosing B is one of the defining characteristics of a hacker.
I got into computers because it was fun, not because I saw dollar signs at the end of it. Writing a video sharing app is a lot more fun than writing a software that reduces credit card fraud.
The customers in your first list are individual consumers, and the customers in your second list are businesses.
You're right about the triteness of those Ask HN examples, but let's not go so far as to suggest that we should all be building for businesses, and only businesses.
A1) Well, this [file sharing/social/twitter/facebook/iphone/game/photo/video] application sure has people's attention. Their developers are wicked smart and have a plan for monetization by utilizing the geo/demographic/taste data of their customers to make it easier for you, the b2c business to target them with advertisements.
Q2) How can we increase revenue?
A2) See A1.
Q3) How can we increase profitability?
A3) See A1.
See also: why should anyone publish this magazine, TV show, blog?
Back in the old timey days, you made a product people needed or you were through making said product. Today, I'm astounded by how many products/apps do the same thing as their competitors. Take iphone camera apps for example; why are there so many? Why are they getting funding? Do people need a sepia toned camera app? Is it making their lives easier?
This is not so say that innovative and "cool" apps don't have a place - they do. But it is to say that there's something concrete about making a product people need that solves a basic human problem. “My damn phone won’t take a sepia toned picture,” is not a basic human problem. In terms of a bubble, and more so, in terms of revenue – making a product someone needs assures revenue and harkens back to the old timey adage.
So is there a bubble? Yeah. Can it be quelled by a return to making products that help people with basic needs? Yeah. Do I want a camera app with sepia tone? Sure. Do I need it? No.
Those needs are dismissed as lifestyle businesses that can be bootstrapped and/or cater to enterprises and SMB. It's more glamorous and HN-friendly to be working with the latest technologies and recreational uses of them for consumers.
Who would take pleasure in reading Hacker News if it became about almost any of that customer stuff? All that stuff could be getting submitted and just not upvoted, because it is boring.
Which is why you never engage in business ventures based on what customers claim they need/want. How many companies expressed a need that would make Twitter or Facebook happen? Yet these services are nowadays a crucial part of many companies marketing efforts simply because a bunch of business people had a vision or scratched their own itches.
Re: Customer 2: How can we reduce inventory by $300 million?
I'm wondering if anyone has explored the outsourcing of inventory? In other words, would it be viable to establish a giant warehouse of all things that people could use as their own personal warehouse... like co-locating a server.
If you were at YC demo day this week, you would have seen some very solid companies that are addressing those 'Customer' issues that you list below. I was expecting bubble when I walked into the door at YC, but walked out of there thinking the total opposite.
I can't speak for all the other companies out there.
Agreed. It's not to say these products aren't successful, but you and I seem to be very traditional business people. I always find at least a few customers willing to pay for what I'm going to build and some sort of a competitive advantage I have over the potential competition.
I'm fairly often here, but I've never, even once, saw "How do you like my game?" except for that little airplanes game (but it was mentioned in the comments, not a post)... care to provide me with some links to those games? I'm interested to see those.
I come to Hacker News to see what interests a small demographic with whom I share some. To find out everything else, I go out on the street and interact with people.
That does not a bubble make. Hackers are hacking a lot != we're in a bubble. A bubble is a stock market bubble based on mass amounts of over-investment by VCs and the public.
I guess it is a matter of terminology but I have to disagree on this one.
A bubble is all-pervasive and extreme. It represents a systematic investment mania where everything becomes surreal. People sell vast tracts of land for a prized tulip. Junk companies with nothing to offer but a vague concept about revolutionizing how this or that will be done owing to some new phenomenon such as the internet make serial stock offerings to the public and get hundreds of millions for a modest percent of their unproven company. Lenders pile on with countless real estate loans to unqualified borrowers secure in the belief that what are really worthless loans will make them huge profits because they can be packaged and disposed of through artificial securitized instruments and because housing prices will continue rise broadly for endless periods. All this begins to occur in endless and ever-expanding streams until, in the end, large numbers of people are sucked into the vortex.
In such cases, broad markets affecting an entire society are sent into a frenzy by which average people start both to get rich quick and to want to get rich quick. Large numbers of people leap in, therefore, in the hope of making fast money and abandon their common sense in the process. And when things go bust, this has a major systemic effect on the broader economy. A stock market that had reached stratospheric heights loses 70% of its value. A real estate market that had become so pricey as to make housing unaffordable for average buyers plummets to the depths, taking down people's savings en masse.
The current phenomenon represented by high valuations in parts of the startup world is more transient and limited. It has not affected the broader society at all, only an insular investment community. If it fell apart today in toto, it would leave a trail of victims within the VC and angel communities but would be felt scarcely at all in the broader economy, or at least would likely have no systemic impact.
Viewed from the standpoint of the broader society, I think what we are looking at here is a speculative frenzy affecting a comparatively narrow asset class. The prices of some startups have increased considerably. The prices of companies generally in the business world remain moderate, if not depressed. Is it a pricing frenzy within a particular segment of an asset class? Probably. Is it a bubble? No. Or at least not by historic definitions.
Again, I wouldn't disagree with a single specific point made in this piece, and the author as usual makes some astute observations. I would disagree about the terminology, though, and would say that we should reserve use of the term "bubble" for the sorts of massively dislocating events that it historically has come to represent.
"A $41M investment at this stage in the life cycle of a business is normally associated with either something that is technologically complex and thus capital intensive or that requires new processes to be designed from scratch."
This is what struck me when I heard about the deal. Color is cobbling together existing technologies and not creating anything new. This deal pushed me into the "There is a Bubble" group. They had better have an ace up their sleeve.
Without any real knowledge of the VC industry, to me this "bubble" looks like VCs are just suffering from a lack of things to invest in due to the proliferation of angel investors.
They need to show their investors that they're doing something, so they throw a grip of money at a company with a solid group of founders and a roadmap full of the hot buzzwords of the day.
We might be in a bubble. But that bubble will continue to inflate as long as people are screaming Bubble! Bubble!! The danger moment appears when all those predictions appear false and everyone start to believe, maybe this time, for some reason, exponential growth will continue forever.
The moment when everyone shut up and start to join the bandwagon is when the bubble bursts. <-- That's from my experience.
Hmph. If nothing else, posts like this are terribly offensive to the entrepreneurs that dedicate their lives to products like Color.
Did anyone consider that maybe Sequoia, who have invested in companies that make up over 10% of the NASDAQ know what they are doing?
Companies like Color, AdKeeper and Flipboard have "crazy" valuations based on the founders having ridiculous resumes. They have all created billions of dollars of value for their investors, hell, why wouldn't you invest in that potential again?
Rationalising this metaphorical bubble to domain prices is absurd, since domains have always been traded for eyebrow raising prices. You think that the domain color.com or path.com will be worth $10 in 5 years time? Seriously?
Color almost certainly didn't require $41M to get to the product you see today, did people ever consider the company is - gasp - launching early and has the capital to iterate and scale for the next few years? I can think of lots of startups that raised $10M - $20M at company formation and has then spent the next few years (or more) iterating.
Investors are less interested in where you are today, compared to where you are going
- If it is going to take them a few years to get to their eventual, profitable, goal, why invest $41M now? Why not invest $20M now and another $21M when they're on the track that will be truly profitable, once they've demonstrated where they are going?
- Is calling the investment "crazy" really offensive to the entrepreneurs? It is more a compliment to them than anything else. The investment may be crazy, but the entrepreneurs managed to get people to shell out $41M. That takes serious talent.
- Getting $41M for color is insulting to a lot of other entrepreneurs that have dedicated their lives to products like color and received nothing. Give half of that $41M in $250,000 chunks to 80 other startups and Color would still have $20M to play with.
If you know how these large investments work, $41M in Color may seem very sane, but to a large percentage of the population, it does appear crazy, particularly in light of the dot com bubble.
Perhaps you could point us to a good article showing why this is a sound investment?
"Did anyone consider that maybe Sequoia, who have invested in companies that make up over 10% of the NASDAQ know what they are doing?"
Neither Merril Lynch nor Lehman Brother knew what they were doing.
"Investors are less interested in where you are today, compared to where you are going"
Yes the future is important, but there's the risk-reward trade-off. If a company looks badly risky today, a rational investor will steer away from it.
"If nothing else, posts like this are terribly offensive to the entrepreneurs that dedicate their lives to products like Color."
And for your first point, a well functioning entrepreneurs ecosystem require both dedicated entrepreneurs AND rational investors. This is not to demean the entrepreneur.
The hero worship of folks associated/intrinsic to a previous success has a shakey foundation. A good number of successes were at the right place, at the right time. The details of who was manning the ship were, ok not irrelevant, but not meaningfully correlated with the magnitude of the previous win. Sure they were competent managers, which is required of any company to succeed. But they were not Responsible for the success.
So its a little like sympathetic magic - if we get guys who were close to that other success, maybe some of the halo is still stuck to them and voila! investment rationalization.
Some of us have seen dozens of sure-fire new companies, staffed with experienced professionals, fall on their faces. Younger, perhaps naieve investors still have some lessons to learn.
Admittedly, the article pointed to 6 indicators of a bubble which are probably not quite right; then defended only 1 of them, and waved their hands about the others. That is what I found a little offensive, but to my logical sensibility and not as an entrepreneur. Entrepreneurs have to weather a lot more than link-bait, and need to grow a much thicker skin.
I don't know if it's a bubble or not, nor do I have any idea if it's just because of where I browse (self selection), but I've noticed a trend lately. The trend is that people are excited about a startup BECAUSE IT'S A STARTUP, and not because of what the underlying value of the business' model/idea/value. As if the fact something is a startup is, in and of itself, somehow magical and has intrinsic worth.
It reminds me of a few years ago when people were all googaw over social networks, because they were social networks. That seems to have passed now and they're focusing a bit more on how social can help this cause or that business model.
TL;DR: bubble is intentionally blown, so that certain people earn more money
Pumping bubble is intentional. Financial world knows and uses this technique for years. They KNOW we have a bubble and THEY pump it up.
They earn money on stocks rising while bubble rises.
The more they invest, the more people come to them with the money (for investment). They earn money on those people (commissions, investment credits, accounts, personal advisory). And as more and more money pours from the sky, the market rises. And they earn on stock rising.
Suckers (commoners like we) believe that they can catch a train with next Facebook and sell houses or use life savings in hope for a fortune. And financial world earns.
At the proper moment leaders of this mess bail out and we have a "crisis".
Most people decide to invest too late (for example now it's much too late) and also bail out MUCH too late (after few hours or days from bubble blowout).
But those managers and capital owners.. People cry, media report suicides and they just are buying another Ferrari and houses in the Canarian/Carribean. They smoke a cigar, drink whiskey and looking at the sky think: 'suckers, so long till next bubble'.
Works like charm for years. So sad that for example my country's currency ex ratio and stock exchange is so vulnerable to this.
Financial managers are not stupid. They are pragmatically cynical.
Someone should track the Color Fund vs. the 43 participants in YCombinator W2011 class:
Round Color's (err) round up to $43m. Then say that Milner's 150K was actually $1m with the same terms (convertible debt). You'd have 2 investments of $43m. Track follow up rounds for the 43 YC alumni and Color and see which pot grew the most.
One of the arguments I've heard that state that things are different this time around goes like this: it is far less capital intensive to do a startup now rather than in the late 90s because of open source software stacks and cloud computing providers. I agree with this statement but it means that the average software startup doesn't need a lot of cash to develop their product. Apart from ads and perhaps domain names (haha), why does anyone need so much cash?
EDIT: I guess it could be patent licensing. I don't buy the technological complexity bit, personally.
Also, if you know that everyone's headed towards a bubble, what is the correct response if you are a rational entrepreneur? Riding the bubble to the top and bailing before the crash does not jive with me.
The $41m injection might well kill the company. I've never seen startups with too much capital early on to become the next Google/Facebook/Twitter - you lose your chance to become "relentlessly resourceful"!
So flickr goes mobile, gets funding, is sold for some billions, then a decade later it is dumped for a handful of millions?
The lesson here is not to blame the idea guys, they will profit from it dearly. Or blame the initial and subsequent investors all the way up to the (ponzi) pyramid, they will profit too. Or even blame the guy who signed the deal when bigCorp bought them, he got his cut under the table too.
Blame the poor souls who own shares of bigCorp for not enforcing accountability in their C*Os spending money left and right chasing the next bubble.
Best summary of bubble/non-bubble debate I've read yet:
[Are we in a bubble?]
“Maybe,” says Naval, “Certainly valuations are creepy up quickly in all stages of deals. On the other hand, 10 years ago when we all felt like this last time the total market size for any company was at maximum 100 million potential users. Now we’re in the billions of users. Facebook connections alone bring 500 million, Twitter 200 million. 10 years ago we only connected for brief periods of time when we were at our PCs. Now we’re connected to apps all the time, everywhere we go. So maybe there’s a bubble. It’s hard to say. But we’re also looking at unprecedented opportunity.”
Make no mistake, a big factor in the creation / encouragement of recent bubbles has been super easy monetary policy that provides cheap and easy credit.
In '00 we had a market crash after a dramatic run up of stocks in general and tech in specific. In 1998-1999 rates were low and credit was easily available [1]. As we led up to the millennium changeover ("Y2K") unprecedented amounts of short term capital were made available to banks and other institutions to allow them to weather any run on banks that might occur [2]. This money made it out the the markets and proceeded to whip them into something that was similar to a drug fueled frenzy: the nasdaq has never come close to those levels again. Alan Greenspan later noted that he believed his actions played an important role in the boom/bust. Once the fed windows closed for Y2K and interest rates were pulled upwards quickly all the money disappeared. Coincidence?
After the dot.com bust targeted rates were lowered dramatically to attempt to smooth out the markets. Check out this chart of historical fed funds rates as it is really easy to spot the cycles [3]. The next bubble was in housing, and predictably it began to burst when interest rates were raised again.
Look at that chart again [3]. The last couple of years have seen the lowest interest rates that have ever been available since the chart started more than 50 years ago. They have been approximately 0 for some time. In addition, the quantitative easing programs that the fed has engaged in (currently, QE2 composed of $600BN worth of treasury debt purchases) has left monetary policy so easy that if it were a woman the village would be talking.
I've heard some confusion about how this money makes it into the markets. It's really quite simple. Many people and organizations who would normally put some of their money into safe debt like treasuries decide not to because they can't make any money off of it and they are concerned about the effects of inflation. This causes them to look for better investments that will have a chance of returning something decent. The explosion of angels in SV is directly related to this process - these geeks, unable to make a good return in some traditional markets switched to making private investments. If more money comes into a sector, valuations will naturally rise and the quality of the companies funded will likely fall (or at least that seems reasonable to me).
QE2 is scheduled to end June 30th, 2011. Unless it is followed by a "QE3" (which there is probably a strong chance of) monetary supply will contract and interest rates will rise. At some point fed target rates will need to rise as a response to current growing inflation in the commodity markets and the retail increases in food and gasoline. Once the fed signals that the party is over, a ton of this money is going to run for the exits [4]. Don't expect to be able to close your next round unless you're of stellar quality or can hold out for 2-3 years.
Or at least, that's one version of it.
Of course, no one whose business relies on the expansion of public and private equity prices will explain this to you. The reasons for that should be relatively obvious.
[NOTE: I am not an economist. I wasn't classically schooled in this stuff. I'm also not a tea partier nor do I have any particular political axe to grind here. I am just a coder who has been watching carefully since the dot-com crash when I took a very big haircut. Take it all for what it's worth]
As someone else commented, Facebook could easily add a feature to show pictures from friends geotagged with your current location. (Not a perfect replacement but a lot of the magic.) Apple also appears to be getting aggressive in this space with the new version of mobile me. Color has an interesting vision, but I think traction as a photo sharing add-on is going to be tough once the social network and the mobile device maker get into the same exact business.
What I don't get, economically speaking, is how we can both be in a bubble and in a barely recovering economy. In other words, how do these angels and VCs still have that much money to invest in such companies?
Most VC's are backed by enormous pension funds and/or other group retirement vehicles. This is how they can afford to bet large sums of money on multiple companies with an expected payoff of only 1 in 10 companies on long time frames.
The pension isn't using that money (right now anyway), so the VC is free to do with it what they want, and in the end the money comes back to the pension in multiples.
At least this is my understanding talking to an actual VC (not in a fund-raising situation, just casually).
One reason I know we're not in a bubble: because everyone is saying we're in a bubble.
For you young whippersnappers who were too young to remember the 90's, a bubble is a manifestation of irrational exuberance- with (almost) everyone saying it's a whole new market, it doesn't matter how much the thing costs it's worth it to buy it because it's price is just going to keep going up up up, so do whatever you need to do to buy in now, because the longer you wait, the less you make.
In other words- it's a bubble when everyone is saying it's not a bubble. But if everyone is saying it IS a bubble, then it's not a bubble.
There is a difference between a healthy (or at least "not on death's doorstop") economy and a bubble.
We might be, but are bubbles always bad? Lots of money gets thrown around. More people get jobs. Ideas are everywhere. People get experience starting and running companies. Interpersonal and business networks are built. Lots of bad ideas are funded, sure, but a few great ones also emerge.
We shouldn't condemn bubbles as automatically bad. We should be aware of them, though.
The problem with a bubble, is not that 'money is thrown around' by investors - but that the source of the money ends up being in public hands.
The founders get their investment from the investors.
The investors get their money back when the company is acquired (or makes money).
In the early stages of a bubble, this process generally consists of 'money being thrown around' as you say.
However, due to the hype of the returns from these 'investments' (e.g. Facebook growth) - it attracts the public investors into wanting to get in on the 'action'.
Typically this is done through an IPO, which allows the public to come on board and potentially pay all previous investors / founders down the chain their money back (plus more).
However, even without the IPO's of the last bubble (and they may still come!) - the public money is finding a way in (e.g. Banks setting up Social Media Investment Funds). Not to mention any other general investment companies having some of their portfolio riding on 'internet based stocks'.
Then when the bubble eventually bursts (The trend reverses and everyone tries to get out while they can) - it is often the public investors which are left out of pocket / losing their homes / etc.
The point made at the end of the article is, if you are in a start up right now (or even a VC) - it is better to get out early, than to get greedy and end up getting burnt when it bursts (e.g. GroupOn).
[+] [-] edw519|15 years ago|reply
[+] [-] patio11|15 years ago|reply
Women have money. Go take it. Nobody else wants it in tech. (Well, aside from Groupon, Zynga, and a few other companies that missed the opportunity to make an iPhone app that you could wiggle to share photos.)
[+] [-] ErrantX|15 years ago|reply
Yet very few startups seem to target these areas.
We took a product into a badly serviced industry and were wildly profitable within about a year on minimal funding. I always worry that there is a growing amount of speculation on "great teams"/social media and less focus on creating useful stuff that companies/people want/need (and, damn, there is a lot of it).
My boss always moans when I talk to him about startups and VC's, he usually says "if you give me $100,000 and 6 months I could come out with at least 5 profitable pieces of software and sales to return your investment by the end of the next year".
[+] [-] reason|15 years ago|reply
There's a disconnect, but it's in the social web world, not just HN. And I would say HNers are trying to capitalize on the hype.
[+] [-] businessguy|15 years ago|reply
A very good friend of mine worked in IT for like 10 yrs. He was quite good programmer, CTO etc. One day he decided to radically change his carrer and opened... 5 Subways in Eastern Europe (he is originally from there). FFW 2 yrs => his restaurants making him $400-500k/yr, he spends zero time managing them and just focused on opening new ones.
His lesson: IT industry has one of the hardest competition rates cause all super-smart geeks are competing on relatively small marktets. Other industries competition (esp in emerging markets) is seriously overrated.
Another example - my very stupid app for selling video files just crossed $1000/day mark in sales. Ppl just need simple tools to get things done.
[+] [-] nadam|15 years ago|reply
[+] [-] blhack|15 years ago|reply
Most geeks that I know aren't trying to build apps that make money, they're trying to build apps that are fun, and that their friends think are fun.
If you offered me two choices
A) Make a million dollars a year doing something you hate that nobody will know about or care about
B) Make no money doing something you love that your friends think is cool.
I will almost always choose B, and I think most hackers will also always choose B. I would go as far as saying that choosing B is one of the defining characteristics of a hacker.
I got into computers because it was fun, not because I saw dollar signs at the end of it. Writing a video sharing app is a lot more fun than writing a software that reduces credit card fraud.
[+] [-] spatulon|15 years ago|reply
You're right about the triteness of those Ask HN examples, but let's not go so far as to suggest that we should all be building for businesses, and only businesses.
[+] [-] euroclydon|15 years ago|reply
A1) Well, this [file sharing/social/twitter/facebook/iphone/game/photo/video] application sure has people's attention. Their developers are wicked smart and have a plan for monetization by utilizing the geo/demographic/taste data of their customers to make it easier for you, the b2c business to target them with advertisements.
Q2) How can we increase revenue?
A2) See A1.
Q3) How can we increase profitability?
A3) See A1.
See also: why should anyone publish this magazine, TV show, blog?
[+] [-] binksty101|15 years ago|reply
This is not so say that innovative and "cool" apps don't have a place - they do. But it is to say that there's something concrete about making a product people need that solves a basic human problem. “My damn phone won’t take a sepia toned picture,” is not a basic human problem. In terms of a bubble, and more so, in terms of revenue – making a product someone needs assures revenue and harkens back to the old timey adage.
So is there a bubble? Yeah. Can it be quelled by a return to making products that help people with basic needs? Yeah. Do I want a camera app with sepia tone? Sure. Do I need it? No.
[+] [-] orky56|15 years ago|reply
[+] [-] cma|15 years ago|reply
[+] [-] arkitaip|15 years ago|reply
[+] [-] run4yourlives|15 years ago|reply
I'm wondering if anyone has explored the outsourcing of inventory? In other words, would it be viable to establish a giant warehouse of all things that people could use as their own personal warehouse... like co-locating a server.
[+] [-] revorad|15 years ago|reply
[+] [-] bradgessler|15 years ago|reply
I can't speak for all the other companies out there.
[+] [-] karanbhangui|15 years ago|reply
[+] [-] Keyframe|15 years ago|reply
[+] [-] unknown|15 years ago|reply
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[+] [-] hoprocker|15 years ago|reply
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[+] [-] sabat|15 years ago|reply
[+] [-] grellas|15 years ago|reply
A bubble is all-pervasive and extreme. It represents a systematic investment mania where everything becomes surreal. People sell vast tracts of land for a prized tulip. Junk companies with nothing to offer but a vague concept about revolutionizing how this or that will be done owing to some new phenomenon such as the internet make serial stock offerings to the public and get hundreds of millions for a modest percent of their unproven company. Lenders pile on with countless real estate loans to unqualified borrowers secure in the belief that what are really worthless loans will make them huge profits because they can be packaged and disposed of through artificial securitized instruments and because housing prices will continue rise broadly for endless periods. All this begins to occur in endless and ever-expanding streams until, in the end, large numbers of people are sucked into the vortex.
In such cases, broad markets affecting an entire society are sent into a frenzy by which average people start both to get rich quick and to want to get rich quick. Large numbers of people leap in, therefore, in the hope of making fast money and abandon their common sense in the process. And when things go bust, this has a major systemic effect on the broader economy. A stock market that had reached stratospheric heights loses 70% of its value. A real estate market that had become so pricey as to make housing unaffordable for average buyers plummets to the depths, taking down people's savings en masse.
The current phenomenon represented by high valuations in parts of the startup world is more transient and limited. It has not affected the broader society at all, only an insular investment community. If it fell apart today in toto, it would leave a trail of victims within the VC and angel communities but would be felt scarcely at all in the broader economy, or at least would likely have no systemic impact.
Viewed from the standpoint of the broader society, I think what we are looking at here is a speculative frenzy affecting a comparatively narrow asset class. The prices of some startups have increased considerably. The prices of companies generally in the business world remain moderate, if not depressed. Is it a pricing frenzy within a particular segment of an asset class? Probably. Is it a bubble? No. Or at least not by historic definitions.
Again, I wouldn't disagree with a single specific point made in this piece, and the author as usual makes some astute observations. I would disagree about the terminology, though, and would say that we should reserve use of the term "bubble" for the sorts of massively dislocating events that it historically has come to represent.
[+] [-] dclaysmith|15 years ago|reply
This is what struck me when I heard about the deal. Color is cobbling together existing technologies and not creating anything new. This deal pushed me into the "There is a Bubble" group. They had better have an ace up their sleeve.
[+] [-] jarin|15 years ago|reply
They need to show their investors that they're doing something, so they throw a grip of money at a company with a solid group of founders and a roadmap full of the hot buzzwords of the day.
[+] [-] z92|15 years ago|reply
The moment when everyone shut up and start to join the bandwagon is when the bubble bursts. <-- That's from my experience.
[+] [-] pclark|15 years ago|reply
Did anyone consider that maybe Sequoia, who have invested in companies that make up over 10% of the NASDAQ know what they are doing?
Companies like Color, AdKeeper and Flipboard have "crazy" valuations based on the founders having ridiculous resumes. They have all created billions of dollars of value for their investors, hell, why wouldn't you invest in that potential again?
Rationalising this metaphorical bubble to domain prices is absurd, since domains have always been traded for eyebrow raising prices. You think that the domain color.com or path.com will be worth $10 in 5 years time? Seriously?
Color almost certainly didn't require $41M to get to the product you see today, did people ever consider the company is - gasp - launching early and has the capital to iterate and scale for the next few years? I can think of lots of startups that raised $10M - $20M at company formation and has then spent the next few years (or more) iterating.
Investors are less interested in where you are today, compared to where you are going
[+] [-] kovar|15 years ago|reply
- Is calling the investment "crazy" really offensive to the entrepreneurs? It is more a compliment to them than anything else. The investment may be crazy, but the entrepreneurs managed to get people to shell out $41M. That takes serious talent.
- Getting $41M for color is insulting to a lot of other entrepreneurs that have dedicated their lives to products like color and received nothing. Give half of that $41M in $250,000 chunks to 80 other startups and Color would still have $20M to play with.
If you know how these large investments work, $41M in Color may seem very sane, but to a large percentage of the population, it does appear crazy, particularly in light of the dot com bubble.
Perhaps you could point us to a good article showing why this is a sound investment?
[+] [-] tyng|15 years ago|reply
Neither Merril Lynch nor Lehman Brother knew what they were doing.
"Investors are less interested in where you are today, compared to where you are going"
Yes the future is important, but there's the risk-reward trade-off. If a company looks badly risky today, a rational investor will steer away from it.
"If nothing else, posts like this are terribly offensive to the entrepreneurs that dedicate their lives to products like Color."
And for your first point, a well functioning entrepreneurs ecosystem require both dedicated entrepreneurs AND rational investors. This is not to demean the entrepreneur.
[+] [-] JoeAltmaier|15 years ago|reply
So its a little like sympathetic magic - if we get guys who were close to that other success, maybe some of the halo is still stuck to them and voila! investment rationalization.
Some of us have seen dozens of sure-fire new companies, staffed with experienced professionals, fall on their faces. Younger, perhaps naieve investors still have some lessons to learn.
Admittedly, the article pointed to 6 indicators of a bubble which are probably not quite right; then defended only 1 of them, and waved their hands about the others. That is what I found a little offensive, but to my logical sensibility and not as an entrepreneur. Entrepreneurs have to weather a lot more than link-bait, and need to grow a much thicker skin.
[+] [-] brown9-2|15 years ago|reply
I'd prefer to see evidence of success before assuming it will happen.
[+] [-] MatthewPhillips|15 years ago|reply
[+] [-] michaelcampbell|15 years ago|reply
It reminds me of a few years ago when people were all googaw over social networks, because they were social networks. That seems to have passed now and they're focusing a bit more on how social can help this cause or that business model.
[+] [-] fastviper|15 years ago|reply
Pumping bubble is intentional. Financial world knows and uses this technique for years. They KNOW we have a bubble and THEY pump it up.
They earn money on stocks rising while bubble rises.
The more they invest, the more people come to them with the money (for investment). They earn money on those people (commissions, investment credits, accounts, personal advisory). And as more and more money pours from the sky, the market rises. And they earn on stock rising.
Suckers (commoners like we) believe that they can catch a train with next Facebook and sell houses or use life savings in hope for a fortune. And financial world earns.
At the proper moment leaders of this mess bail out and we have a "crisis".
Most people decide to invest too late (for example now it's much too late) and also bail out MUCH too late (after few hours or days from bubble blowout).
But those managers and capital owners.. People cry, media report suicides and they just are buying another Ferrari and houses in the Canarian/Carribean. They smoke a cigar, drink whiskey and looking at the sky think: 'suckers, so long till next bubble'.
Works like charm for years. So sad that for example my country's currency ex ratio and stock exchange is so vulnerable to this.
Financial managers are not stupid. They are pragmatically cynical.
[+] [-] dclaysmith|15 years ago|reply
Round Color's (err) round up to $43m. Then say that Milner's 150K was actually $1m with the same terms (convertible debt). You'd have 2 investments of $43m. Track follow up rounds for the 43 YC alumni and Color and see which pot grew the most.
[+] [-] iqster|15 years ago|reply
EDIT: I guess it could be patent licensing. I don't buy the technological complexity bit, personally.
Also, if you know that everyone's headed towards a bubble, what is the correct response if you are a rational entrepreneur? Riding the bubble to the top and bailing before the crash does not jive with me.
[+] [-] tyng|15 years ago|reply
[+] [-] scrrr|15 years ago|reply
[+] [-] Kilimanjaro|15 years ago|reply
The lesson here is not to blame the idea guys, they will profit from it dearly. Or blame the initial and subsequent investors all the way up to the (ponzi) pyramid, they will profit too. Or even blame the guy who signed the deal when bigCorp bought them, he got his cut under the table too.
Blame the poor souls who own shares of bigCorp for not enforcing accountability in their C*Os spending money left and right chasing the next bubble.
[+] [-] frederickcook|15 years ago|reply
[Are we in a bubble?]
“Maybe,” says Naval, “Certainly valuations are creepy up quickly in all stages of deals. On the other hand, 10 years ago when we all felt like this last time the total market size for any company was at maximum 100 million potential users. Now we’re in the billions of users. Facebook connections alone bring 500 million, Twitter 200 million. 10 years ago we only connected for brief periods of time when we were at our PCs. Now we’re connected to apps all the time, everywhere we go. So maybe there’s a bubble. It’s hard to say. But we’re also looking at unprecedented opportunity.”
- http://www.bothsidesofthetable.com/2011/03/22/the-magic-midn...
[+] [-] svrocks|15 years ago|reply
And then we're not REALLY in a bubble until Air.com, the leader in the social breathing space IPOs at twice that.
[+] [-] trotsky|15 years ago|reply
In '00 we had a market crash after a dramatic run up of stocks in general and tech in specific. In 1998-1999 rates were low and credit was easily available [1]. As we led up to the millennium changeover ("Y2K") unprecedented amounts of short term capital were made available to banks and other institutions to allow them to weather any run on banks that might occur [2]. This money made it out the the markets and proceeded to whip them into something that was similar to a drug fueled frenzy: the nasdaq has never come close to those levels again. Alan Greenspan later noted that he believed his actions played an important role in the boom/bust. Once the fed windows closed for Y2K and interest rates were pulled upwards quickly all the money disappeared. Coincidence?
After the dot.com bust targeted rates were lowered dramatically to attempt to smooth out the markets. Check out this chart of historical fed funds rates as it is really easy to spot the cycles [3]. The next bubble was in housing, and predictably it began to burst when interest rates were raised again.
Look at that chart again [3]. The last couple of years have seen the lowest interest rates that have ever been available since the chart started more than 50 years ago. They have been approximately 0 for some time. In addition, the quantitative easing programs that the fed has engaged in (currently, QE2 composed of $600BN worth of treasury debt purchases) has left monetary policy so easy that if it were a woman the village would be talking.
I've heard some confusion about how this money makes it into the markets. It's really quite simple. Many people and organizations who would normally put some of their money into safe debt like treasuries decide not to because they can't make any money off of it and they are concerned about the effects of inflation. This causes them to look for better investments that will have a chance of returning something decent. The explosion of angels in SV is directly related to this process - these geeks, unable to make a good return in some traditional markets switched to making private investments. If more money comes into a sector, valuations will naturally rise and the quality of the companies funded will likely fall (or at least that seems reasonable to me).
QE2 is scheduled to end June 30th, 2011. Unless it is followed by a "QE3" (which there is probably a strong chance of) monetary supply will contract and interest rates will rise. At some point fed target rates will need to rise as a response to current growing inflation in the commodity markets and the retail increases in food and gasoline. Once the fed signals that the party is over, a ton of this money is going to run for the exits [4]. Don't expect to be able to close your next round unless you're of stellar quality or can hold out for 2-3 years.
Or at least, that's one version of it.
Of course, no one whose business relies on the expansion of public and private equity prices will explain this to you. The reasons for that should be relatively obvious.
[NOTE: I am not an economist. I wasn't classically schooled in this stuff. I'm also not a tea partier nor do I have any particular political axe to grind here. I am just a coder who has been watching carefully since the dot-com crash when I took a very big haircut. Take it all for what it's worth]
[1] https://secure.wikimedia.org/wikipedia/en/wiki/Dot_com_bubbl...
[2] http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id...
[3] https://secure.wikimedia.org/wikipedia/en/wiki/Federal_funds...
[4] http://www.chrismartenson.com/martensonreport/coming-rout
[+] [-] toddmorey|15 years ago|reply
[+] [-] yannickmahe|15 years ago|reply
[+] [-] adaml_623|15 years ago|reply
They need investment opportunites and investing in real estate probably isn't popular. Hence angel funds have tons of money to throw around.
[+] [-] futuremint|15 years ago|reply
The pension isn't using that money (right now anyway), so the VC is free to do with it what they want, and in the end the money comes back to the pension in multiples.
At least this is my understanding talking to an actual VC (not in a fund-raising situation, just casually).
[+] [-] tyng|15 years ago|reply
[+] [-] bhurt|15 years ago|reply
For you young whippersnappers who were too young to remember the 90's, a bubble is a manifestation of irrational exuberance- with (almost) everyone saying it's a whole new market, it doesn't matter how much the thing costs it's worth it to buy it because it's price is just going to keep going up up up, so do whatever you need to do to buy in now, because the longer you wait, the less you make.
In other words- it's a bubble when everyone is saying it's not a bubble. But if everyone is saying it IS a bubble, then it's not a bubble.
There is a difference between a healthy (or at least "not on death's doorstop") economy and a bubble.
[+] [-] digisth|15 years ago|reply
We shouldn't condemn bubbles as automatically bad. We should be aware of them, though.
[+] [-] PaulJoslin|15 years ago|reply
The founders get their investment from the investors. The investors get their money back when the company is acquired (or makes money).
In the early stages of a bubble, this process generally consists of 'money being thrown around' as you say.
However, due to the hype of the returns from these 'investments' (e.g. Facebook growth) - it attracts the public investors into wanting to get in on the 'action'.
Typically this is done through an IPO, which allows the public to come on board and potentially pay all previous investors / founders down the chain their money back (plus more).
However, even without the IPO's of the last bubble (and they may still come!) - the public money is finding a way in (e.g. Banks setting up Social Media Investment Funds). Not to mention any other general investment companies having some of their portfolio riding on 'internet based stocks'.
Then when the bubble eventually bursts (The trend reverses and everyone tries to get out while they can) - it is often the public investors which are left out of pocket / losing their homes / etc.
The point made at the end of the article is, if you are in a start up right now (or even a VC) - it is better to get out early, than to get greedy and end up getting burnt when it bursts (e.g. GroupOn).