"I am pretty paranoid about bubbles, but things still feel grounded in reason."
Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006. They have a self-interest to believe that the good times will keep going. During the dot-com bubble and the housing bubble, the rationalizations that were being spouted by those in the midst of it were incredible.
The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.
The only thing keeping the valuations high are because people delude themselves into believing that Google or Facebook will pay billions for customers. If Google and/or Facebook declared they would be doing no more acquisitions, valuations would plummet immediately.
The valuations given to companies with no real revenues, or profits to justify ridiculous valuations. But the rationalizations that get spouted to justify them are what is a big indicator of a bubble to me.
> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.
What if they're worried about an independent Whatsapp being a threat to FB's business model? As in, maybe Whatsapp isn't "worth" $19B (whatever that means) but it's a threat to destroy $50B of Facebook shareholder value? In that case it would be rational to buy them out to ensure that doesn't happen.
> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.
I hate to pick on you, but anyone who says WhatsApp is not worth $19 bil has not seen the Chinese version of WhatsApp, WeChat. WeChat is a combination of WhatsApp and Facebook. Everyone in China uses WeChat as messenger and as a pseudo-Facebook. The risk of WhatsApp becoming the WeChat for the rest of the world was a HUGE risk for Facebook. It has a very strong hold in the middle east and was gaining a ton of traction every where else. WeChat is a less-invasive version of Facebook that many people would gladly flock to.
It's very likely a bubble when suddenly huge portion of people you knew are leaving their jobs to do startups en mass. Lot of these people hardly have anything significant on table and still get funded anyway. This is very similar to mortgage crisis where large number of people who don't qualify can easily get mortgages anyway. Accelerators have mushroomed all over places doing dozens of meetups and networking events powered by "luminaries" that no one knows because they are literally now running out of even Class-C startup celebrities.
I believe it is well know that economic condition have been very unique last few years in that there is lot of investor money in market trying to find its home. Even if returns on VC is subpar many investors wants to give it a try because returns elsewhere sucked anyway and also there is a chance of winning the lottery. As the stock market and real estate continues to gain momentum and confidence, money would start start migrating back.
My prediction is that in next 5 years, investors are going to realize that it was a good try, VC returns sucks compared to S&P/real estate and they start pulling out. This will first cause shutdown of recently mushroomed accelerators/startup schools. That would then further spook VCs causing chain reaction eventually leading to meltdown. I think more prudent VCs such as Y and Sequoia would continue as usual but many other will simply shutdown because of lack of funds. This is not to contradict Sam's predictions. Lot of the companies in his list can go big and easily double the value but in 5 years that would have much less effect on how much investment money VCs aquire.
Yes, WhatsApp doesn't have any real revenues, but Sam doesn't mention them. YC alum's are not building WhatsApp.
Uber has customers, real revenue (in the billions). So does AirBnb. So does SpaceX. So does Palantir.
Just name dropping WhatsApp is pretty low brow. There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.
The question about WhatsApp is not whether or not it was worth $19B, the question is whether or not it was worth 8% of Facebook. The bulk of that purchase was in FB shares, not cash. It just so happens Facebook is worth $235 billion dollars itself.
I can see an argument where the worlds most used mobile messaging app is worth at least 8% as much as the world's most used social network.
>"There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money."
More "did" than can. Something is worth what someone will pay. Why was FB willing to pay $19B? The answer is somewhere between what those users are worth to FB and the threat to FB's (very real) business that WhatsApp represented. This doesn't seem bubblish to me.
The valuations are crazy because investors get paid out first. So if I invest 1 billion for 10% of company x it gets a 10 billion valuation but we only have to sell for 1 billion or more to break even. Banning preferred stock for startups will result in more accurate valuations.
None of the six companies he mentions (Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX) are publicly traded.
So, one reading of the tea leaves is that something like 100B (of non-existent money) is locked up out of the hands of the people who could benefit from trading it. This, at a time when wealth disparity is not far from the Gilded Age.
There's a bubble, all right--just probably not the one the author is thinking of.
> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.
But isn't that the most important metric? I would argue there is also no metric by which a Coach purse is worth thousands of dollars but people seem to keep buying them.
> Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006.
Except he's the person dictating the flow of money. It's more like a housing buyer saying there's good investments despite signs of a bubble.
> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.
Let's observe that WhatsApp besides just being a popular app, is a scalable and high performance messaging app, meaning to emphasize that you can't hit this level without some amazing engineering feats [1]. I think that we can also agree that a company that can build something of this sort might be valuable in itself without generating any sort of revenue. If it can make Facebook more productive/efficient over the coming years, it very well might be worth its weight in bitcoin.
I can see why Facebook would pay top dollar for a company that can monetise its user base, but why buy a company that will always lose money and can only take eyeballs away from your profitable platform?
Whatsapp is a poor example to use to argue that there is a bubble. I haven't heard anyone try and justify that price beyond that Facebook was desperate and had the money. It's an outlier.
Even if he is right about his bets, it does not prove that there was no bubble. A lot of times when bubbles burst, many small competitors are whipped out of the market, while the ones that have been successful up to that point have a better chance of surviving. Not only survive, but once the dust settles they are the few left to soak up any new investments.
Boom/bust cycles can be thought of as a redistribution of bad investments, which often time results in the demise of fresh competitors or, at best, the assimilation of "failed" capital (human, tech, infrastructure) of those ventures into the companies which successfully navigate the transition at a very low cost.
The bubble that different parties speak about when talking about the tech world has to do not so much with the amount of money flowing into that sector as an aggregate, but the near-exponential growth in new companies and the unfathomable valuations of some of them which are hard to justify.
You say larger companies survive crashes, but their valuations still take huge hits. Look at the last dot-com crash: MSFT crashed from $59 to $21, AAPL crashed from $4.90 to $1.00, CSCO crashed from $79 to $14, and so on. 1 of these companies (AAPL) took 5 years to recover and double its market cap peak of 2000, while the 2 other companies never even recovered their market cap peak. So betting on Sam's metric in 1998-1999 would have been a very reliable indicator of whether or not a bubble would follow these years.
>>> Of course, there could be a macro collapse in 2018 or 2019, which wouldn’t have time to recover by 2020. I think that’s the most likely way for me to lose.
Macro collapse = Bubble Bursting. The performance of YC's personal portfolio is irrelevant to the idea of bubble bursting if there are other investors running a pump and dump on the industry at large.
The big question I debate with a friend is, if it's a bubble what would it look like if it burst?
If the latest startups couldn't raise new funds (because of investor panic), then suddenly the market is flooded with developers, do salaries, real estate, etc, go down?
Is the startup economy entirely reliant on outside money? (Especially outside of SV money - money like pension funds and other institutional investors)
Or would the Googles and Facebooks of the world - huge profitable companies that they are - absorb the ones that failed, the downturn would be modest, and soon some of those developers would be right back out there starting new things?
I'm inclined to believe the latter.
People decry a bubble for other reasons than valuations, like San Francisco real estate and how high dev salaries are getting. Companies that don't have any revenue but can still raise lots of money.
I do wonder how high dev salaries can go - I think it is tied to how much value a developer can fundamentally produce. It may well be far higher than the current average salary (perhaps multiples of it), so I don't see anything wrong with that.
But you could also say developers are themselves in a bubble, and that the proliferation of app academies and their like will soon catch up with the demand.
Right now there is a scandal going on somewhere, we just don't know where. Maybe Facebook, maybe LinkedIn, maybe Yahoo, maybe even Google. Maybe someone else, who knows. It always starts with a scandal. WorldCom, Enron, Lehmans, AIG, etc.. When a company can no longer meet growth targets to stay competitive they start lying to keep the capital flowing. They build a bigger house around the main house, but it's built out of cards and eventually it crumbles. This is what no one wants to believe, but it always happens. "It's different this time.™" It's never different. There's always going to be that incentive to cheat, and multiple people will take that bet. Someone eventually gets caught.
Once one of the titans fall, investors get scared and pull back. Companies like Google and Apple, with huge cash positions, are okay. Everyone else runs out of capital in a few months. The fallen firm lets 10,000 people go. Everyone else either does layoffs or initiates a hiring freeze. Now you've got 10,000+ locals out of work who can't get jobs. Now you've got 10,000+ people who are a few months away from defaulting on a mortgage they could barely afford in the first place because it was so expensive to live in an area propped up by cheap money and heavy leverage.
People start defaulting, and things get even worse. You've got a bunch of people in San Francisco who got $200,000 no interest downpayment loans from the city. They can't pay them back and the city gets stuck with the debt. Now there's public crisis.
Everyone and everything attached to the real estate market starts to freak out that home prices might decline. More panic, more layoffs, more defaults.
Worse, Facebook makes a lot of mobile advertising money from app install ads. If startup investors cut back the flow of money, that advertising revenue dries up. There will be a glut of unemployed developers just as Facebook starts reporting declining revenues. Facebook will need to start reducing costs, not hiring, and definitely no acquihires (startups with viable business models might be a different story).
Google might clean up with their pick of the best surviving startups and the best devs going cheap, because they have more diverse sources of advertising revenue, but they might also be under pressure to control costs if investors panic and flee tech.
Everything is connected. If there's a collapse in private equity funding, you could see consequences such as a decrease in advertising on major platforms such as Facebook, which would hurt their earning and market cap. I definitely think it would have some systemic consequences, but not at the magnitude of early 2000s unless it's triggered by a general equity market crash or some sort of global debt crisis.
Always this talk about valuations. Never about revenues and profits. Reminds me of the dotcom days when people used every other metric when they couldn't talk about profitability. Like eyeballs, clicks, etc. There will be a few winners but a vast many will do down in smokes or get acquired for pennies on the dollar.
Business vs startup
When Twitter went public in 2013, it was valued at $24B — 12 times higher than Times market cap. Twitter was losing money while Times earned $133M the same year. Why do startups have such big valuations?
The answer is: cash flow. It is different between high-growth startups and low-growth businesses. Startups would usually be profitable in the future. Startup’s main metric is growth. [1]
> This bet is open to the first VC who would like to take it (though it is not clear to me anyone who wants to take the other side should be investing in startups.)
That sentence misses a 'why' I believe.
As for the subject matter: bubble or not, who cares? Those that will not invest for fear of being in a bubble would do better to keep their money anyway, and those that look at individual companies rather than the market as a whole will always have a huge edge over the investors that simply follow the herd. It's the followers that really get burned by bubbles, not the originals, they'll survive one way or another on their own merits rather than on endless capital being poured into their corporate coffers.
Bubbles are bad, corrections are good news for the real movers. In a bubble you can find yourself with a whole slew of competitors trying to go after the same market polluting pricing and models by using investor money to prop up their essentially broken propositions. Right after a bubble pops is when the real fortunes are made, that's when all the nonsense goes away for a couple of years.
It's a saw-tooth like curve and even though we're not technically in what I'd call a bubble we're definitely no longer on the ground floor either. It's not a binary thing.
"House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."
-Ben Bernanke, circa 2005.
I couldn't help myself. I really admire Sam and the current tech bubble(if there is one) is nothing like the credit crisis. Funds existed in 2008 whose sole investment strategy was to buy the opposing side of credit default swaps just so the bears had something to buy. Just wanted to poke fun :P
Of course we (or better: silicon valley startups) are in a bubble, fueled by cheap money and short memory.
And of course the VC-ecosystem is denying that for as long as possible. Nobody is saying that the 1bn+ club startups are not adding value, just that it's magnitudes smaller than valuations would imply. They are driven primarely by VCs and because they constantly push it as a valid success metric.
Investors have to deny it because they're betting their money on it, if they show doubt - their money is gone before they can flip it. The startup kids have to deny it because they want a shot at the big payout.
Where are the future profits/dividends that validate those insane numbers? User growth was a ridiculous measure in '99, it's a ridiculous measure now.
Once the cheap money dries out, the bubble will burst. AirBnB and co will probably survive but i doubt in 5years that many of them are valued >1bn. Once weakened / no longer hip, regulatory pressure will increase by a lot and bring down convenience & margins.
I respect YC for what they have built over the years, especially how they can attract top talent. But boasting with valuations is insane and had me lose all respect. Let's see what's left once its portfolio rides out more than half of a economic cycle.
Of course we are in a bubble, it's impossible to agree with the fact that Uber is truly valued at 41 billion and Google only at ~364 billion. It's hard to swallow that Uber is roughly 10% of Google in value.... That goes for all these companies many who still are not really profitable.
Of course SamA is going to say we are not in a bubble, when his company's only goal is to take 1 penny and turn it into 4 pennies based on valuation and further outside investment and growth.
The tech bubble will burst, but likely will not hurt society at large, but it will likely dent the VC ecosystem.
Let's try to convert all this navel-gazing into something usable by your average HN reader. How can the average dev best exploit the current market conditions, whether these are considered "bubblicious" or not?
Should we all high-tail it out to the Valley and get funded now so that we can cash out with billions for something very airy and non-substantive that we "made" with VC money? What kind of self-marketing and self-promotion needs to be done to ensure that we are seen as something hip like Whatsapp and bought at a massively unreasonable price?
What are the less invasive ways for Joe Developer to take an appreciable slice of the pie, meaning getting something more than long-shot lottery tickets as options and/or kind-of OK salaries? How can a developer make $1 million for himself/herself this year without founding a company? Surely that lowly sum is attainable by the humble developer what with the current valuations being "grounded in reason" and VCs going gangbusters.
Yeah, if I'm going to live in a culturally dessicated Bay Area I'd at least like to be getting a piece of the pie. Other reasons for living here are getting chased out at an accelerating clip.
I think its laudable to back firmly held beliefs with a large bet. One of the nice things about making a bet is that you need to be precise about the terms, in this case what everyone means by "bubble".
The terms in this bet imply that it would not be a bubble if most of the companies went to zero but 1-2 dramatically increased in value.
That makes sense if you are an investor in all of these companies, like YC (nearly) is. But most VCs hold only 1-2, so if there is a wide variance in outcomes (which is characteristic for startups) and the rest of the VC's portfolio are not quite as great as the listed companies (i.e. much more likely to go to zero) then there is a big risk of large drawdowns in VC funds. I think that is a reasonably likely scenario, which many people would call a bubble, but which wouldn't be reflected in the bet.
Put another way, the bet is like saying YC's portfolio (or at least the synthetic portfolio described in the bet) is undervalued in aggregate, not that many specific companies are.
So long as Google, Apple, Facebook and Microsoft are there to acquihire failed startups and return money to VC and seed stage investors, everything's peachy.
The whole "valuation" thing is dumb anyway... saying that if you buy 5% of a company for $5, the company is worth $100 is incorrect because value is defined by how much you can SELL a thing for, not how much you paid for it.
Given the fact that, if you buy 5% of some company in a seed stage round, you can probably not sell it at all, your share of the company is valueless, so the value of the company is whatever the owners can sell the remaining 95% of the company for.
Every time you sell more of the company, it reduces the value of the company unless the remaining percentage is increasing in value quickly enough to offset what you've already sold.
It's not that valuations are too high, it's that we're calculating the value of a company inaccurately.
I appreciate Sam's perspective. He has much more experience with startups and identifying businesses that solve real problems. My perspective is somewhat naively stuck in the viewpoint of a software engineer who used to deliver pizzas.
When I was a pizza delivery driver I made under-the-table minimum wage, $8 per hour. It was very clear to me where that money came from. People would order an everything pizza for $20, we'd subtract the cost of ingredients (mainly cheese), absorb some profit for the business, and pay our salaries out of the remainder.
As a software engineer making upwards of $50 per hour, I question where my salary comes from. If I worked for FB, Google, or Pinterest, surely it'd be from advertising revenue. But isn't there AdBlock Plus, AdBlock, and uBlock? I install uBlock immediately after downloading a new browser. I think anyone in tech does the same.
Which makes me worry about Twitter, Reddit, and Snapchat. These apps are mostly used by people under 40 who are tech-savvy. They are all in the red (maybe Twitter is green now?), but they plan on making money through advertising. Their prime user base knows about AdBlock. What happens when ad blocking is ubiquitous?
That's one way the bubble could burst. Here's another. I work for a company that's venture-backed. My salary comes from venture capital. We've spent the past few years building a healthcare product that's finally gotten some traction. There are currently major incentives for hospitals to adopt emerging technologies. These governmental initiates have made it easier for us to approach customers. Federal funding fluctuates rapidly and while it may be advantageous to start a health tech company today, that could change depending on election outcomes and other spending.
Our investors are keenly aware of this situation. Should the environment shift, they would be unlikely to perform another investment round. Venture capital is not a sure footing to build a business on - at least not as sure as selling pizzas. And I think this defines my idea of a bubble. Too many venture-backed companies with extreme evaluations that are planning on making money someday using strategies that worked in the past (e.g. advertising), or assuming that the next round of capital will be there should their plan fail.
This post scares me in the way that most bitcoin journalism does. There is no shortage of press talking about the start ups themselves (as opposed to the state of the capital markets). For many people, the state of the markets really does matter. If if you're looking to raise capital, it helps to know that these are historically favorable times. If you're looking to invest, it's important to consider whether things may be overheated. This article advocates silence (I'm tired of hearing about [insert topic]). This head in the sand talk is alarming in the same way that it's scary to hear people say "I'm tired of people saying that bitcoin is a pump and dump scam". Generally, it's a bad sign when a viewpoint is suppressed. Having lived through the dot-com bust (in which my father's "bubble" talk fell upon deaf ears) and the subsequent housing bubble in which people were similarly dismissive of "negative" voices, I'm wary of this rhetorical style.
1 - I don't have 100K lying around to allocate to charity bets.
2 - I'm not an early stage investor.
3 - Perhaps because of 1 and 2, I'm not in Sam's position to take the bet.
But Sam has laid 3 very aggressive goals. His position is that the market is significantly undervaluing all 3 stages of investment. The odds are that at least one of these will be wrong. (And it won't take a bubble to prove that - all it will take is just 10% returns in one of the 3 phases of investing rather than 15+%.) If it were a cash bet, it would be worth taking just as a hedge.
Net - any true naysayer should take Sam up on it, as it's a good bet for even folks who think we are in for just modestly good times.
The issue is we work in a field that has had a bubble in the past so until it inevitably happens again, the doubters will look for every sign that a bubble exists, contrary to the truth of the matter. In a similar manner to the housing market, technology will always be seen as "bubbly" and every high valuation just feeds the rhetoric. Ebbs and flows in economies is natural and known to anyone that studies macroeconomics even at the basic level, but truth doesn't sell: fear and doubt does unfortunately. It's annoying, but not quite as destructive as the other fear mongering happening with other news around the world.
I respect putting in writing for all to see your predictions for the future on a controversial topic. Not easy to do.
However there are a large number of companies lumped in together which sort makes this a hard metric to measure definitively. The logic seems to follow in the following way:
"A lot of people believe there's a bubble." -> "Those people believe all new techy companies are part of this bubble." -> "Those people think all new techy companies are overvalued."
I don't think that that logic is accurate. I think it's totally possible for somebody to believe (as I do) that a large number of tech companies are overvalued (Pinterest), while simultaneously believing that there are some that are not (SpaceX). So predicting that that entire group will exceed $200B in value in five years is making a broader argument that some tech companies that have already exhibited an unambiguous amount of success will continue that trend in the next five years. But what if four of those companies go belly-up or drop in value by 50%, while one outlier becomes the next Google? Is the argument correct? Technically speaking, yes. But I think in that case the overall point would be proven wrong.
Ultimately I think the entire "bubble" conversation centers on the argument of whether private tech companies that are < 5-10 years old who's primary product is a captive audience of users is overvalued when a single group of VC's choose to value them in the 9-10 figures. It isn't bubble in the dot-com/real estate sense that actually has a meaningful negative impact on the economy, but more or less a disagreement on whether that value would be proven on a public market after a meaningful amount of time.
Interesting proposition. I've got a counter offer, invest $100,000 in the named companies (It would require a bit of financial juggling to make that completely work but it could be done) and liquidate in 2020, with whatever you get back going to charity.
But that sidesteps the issue of bubbleness or not. Really the question is whether or not the private valuations of these companies is in excess of their "fair market value" (like Box's was) and so the private investors are over paying for participation. Sadly we can't just convert these privately held companies to publicly held ones to its hard to run the experiment.
[+] [-] steven2012|11 years ago|reply
Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006. They have a self-interest to believe that the good times will keep going. During the dot-com bubble and the housing bubble, the rationalizations that were being spouted by those in the midst of it were incredible.
The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.
The only thing keeping the valuations high are because people delude themselves into believing that Google or Facebook will pay billions for customers. If Google and/or Facebook declared they would be doing no more acquisitions, valuations would plummet immediately.
The valuations given to companies with no real revenues, or profits to justify ridiculous valuations. But the rationalizations that get spouted to justify them are what is a big indicator of a bubble to me.
[+] [-] defen|11 years ago|reply
What if they're worried about an independent Whatsapp being a threat to FB's business model? As in, maybe Whatsapp isn't "worth" $19B (whatever that means) but it's a threat to destroy $50B of Facebook shareholder value? In that case it would be rational to buy them out to ensure that doesn't happen.
[+] [-] hendzen|11 years ago|reply
[+] [-] PublicEnemy111|11 years ago|reply
I hate to pick on you, but anyone who says WhatsApp is not worth $19 bil has not seen the Chinese version of WhatsApp, WeChat. WeChat is a combination of WhatsApp and Facebook. Everyone in China uses WeChat as messenger and as a pseudo-Facebook. The risk of WhatsApp becoming the WeChat for the rest of the world was a HUGE risk for Facebook. It has a very strong hold in the middle east and was gaining a ton of traction every where else. WeChat is a less-invasive version of Facebook that many people would gladly flock to.
[+] [-] sytelus|11 years ago|reply
I believe it is well know that economic condition have been very unique last few years in that there is lot of investor money in market trying to find its home. Even if returns on VC is subpar many investors wants to give it a try because returns elsewhere sucked anyway and also there is a chance of winning the lottery. As the stock market and real estate continues to gain momentum and confidence, money would start start migrating back.
My prediction is that in next 5 years, investors are going to realize that it was a good try, VC returns sucks compared to S&P/real estate and they start pulling out. This will first cause shutdown of recently mushroomed accelerators/startup schools. That would then further spook VCs causing chain reaction eventually leading to meltdown. I think more prudent VCs such as Y and Sequoia would continue as usual but many other will simply shutdown because of lack of funds. This is not to contradict Sam's predictions. Lot of the companies in his list can go big and easily double the value but in 5 years that would have much less effect on how much investment money VCs aquire.
[+] [-] stevebot|11 years ago|reply
Uber has customers, real revenue (in the billions). So does AirBnb. So does SpaceX. So does Palantir.
Just name dropping WhatsApp is pretty low brow. There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.
[+] [-] krschultz|11 years ago|reply
I can see an argument where the worlds most used mobile messaging app is worth at least 8% as much as the world's most used social network.
[+] [-] lumens|11 years ago|reply
More "did" than can. Something is worth what someone will pay. Why was FB willing to pay $19B? The answer is somewhere between what those users are worth to FB and the threat to FB's (very real) business that WhatsApp represented. This doesn't seem bubblish to me.
[+] [-] therealwill|11 years ago|reply
[+] [-] tptacek|11 years ago|reply
[+] [-] angersock|11 years ago|reply
So, one reading of the tea leaves is that something like 100B (of non-existent money) is locked up out of the hands of the people who could benefit from trading it. This, at a time when wealth disparity is not far from the Gilded Age.
There's a bubble, all right--just probably not the one the author is thinking of.
[+] [-] x0x0|11 years ago|reply
Secret raised $35m, including $6m of founder cashouts (one bought a ferrari.)
Is this a bubble? Dunno, but that's pretty frothy.
[+] [-] kyleblarson|11 years ago|reply
But isn't that the most important metric? I would argue there is also no metric by which a Coach purse is worth thousands of dollars but people seem to keep buying them.
[+] [-] serve_yay|11 years ago|reply
I think it is just too easy to say things like this. Number one, how can anyone know this?
Number two, if not 19B then what? 18B? 5B? 500M? What? Was it overvalued by 2x or, like, 10x? If it was too much, then how much too much?
[+] [-] duaneb|11 years ago|reply
Except he's the person dictating the flow of money. It's more like a housing buyer saying there's good investments despite signs of a bubble.
[+] [-] mrdrozdov|11 years ago|reply
Let's observe that WhatsApp besides just being a popular app, is a scalable and high performance messaging app, meaning to emphasize that you can't hit this level without some amazing engineering feats [1]. I think that we can also agree that a company that can build something of this sort might be valuable in itself without generating any sort of revenue. If it can make Facebook more productive/efficient over the coming years, it very well might be worth its weight in bitcoin.
[1] http://highscalability.com/blog/2014/2/26/the-whatsapp-archi...
[+] [-] golergka|11 years ago|reply
The only good metric to determine how much something is worth is how much someone is ready to pay for it.
[+] [-] danieltillett|11 years ago|reply
[+] [-] onewaystreet|11 years ago|reply
[+] [-] varunsrin|11 years ago|reply
with 700m active users, they potentially could be generating ~ 3.6% of their sale price in annual revenue.
[+] [-] washedup|11 years ago|reply
Boom/bust cycles can be thought of as a redistribution of bad investments, which often time results in the demise of fresh competitors or, at best, the assimilation of "failed" capital (human, tech, infrastructure) of those ventures into the companies which successfully navigate the transition at a very low cost.
The bubble that different parties speak about when talking about the tech world has to do not so much with the amount of money flowing into that sector as an aggregate, but the near-exponential growth in new companies and the unfathomable valuations of some of them which are hard to justify.
[+] [-] AlfonsoP|11 years ago|reply
[+] [-] jmcatani|11 years ago|reply
Macro collapse = Bubble Bursting. The performance of YC's personal portfolio is irrelevant to the idea of bubble bursting if there are other investors running a pump and dump on the industry at large.
[+] [-] unknown|11 years ago|reply
[deleted]
[+] [-] baddox|11 years ago|reply
[+] [-] JimboOmega|11 years ago|reply
If the latest startups couldn't raise new funds (because of investor panic), then suddenly the market is flooded with developers, do salaries, real estate, etc, go down?
Is the startup economy entirely reliant on outside money? (Especially outside of SV money - money like pension funds and other institutional investors)
Or would the Googles and Facebooks of the world - huge profitable companies that they are - absorb the ones that failed, the downturn would be modest, and soon some of those developers would be right back out there starting new things?
I'm inclined to believe the latter.
People decry a bubble for other reasons than valuations, like San Francisco real estate and how high dev salaries are getting. Companies that don't have any revenue but can still raise lots of money.
I do wonder how high dev salaries can go - I think it is tied to how much value a developer can fundamentally produce. It may well be far higher than the current average salary (perhaps multiples of it), so I don't see anything wrong with that.
But you could also say developers are themselves in a bubble, and that the proliferation of app academies and their like will soon catch up with the demand.
[+] [-] themagician|11 years ago|reply
Once one of the titans fall, investors get scared and pull back. Companies like Google and Apple, with huge cash positions, are okay. Everyone else runs out of capital in a few months. The fallen firm lets 10,000 people go. Everyone else either does layoffs or initiates a hiring freeze. Now you've got 10,000+ locals out of work who can't get jobs. Now you've got 10,000+ people who are a few months away from defaulting on a mortgage they could barely afford in the first place because it was so expensive to live in an area propped up by cheap money and heavy leverage.
People start defaulting, and things get even worse. You've got a bunch of people in San Francisco who got $200,000 no interest downpayment loans from the city. They can't pay them back and the city gets stuck with the debt. Now there's public crisis.
Everyone and everything attached to the real estate market starts to freak out that home prices might decline. More panic, more layoffs, more defaults.
The dust settles and we start over.
[+] [-] gruntled|11 years ago|reply
Google might clean up with their pick of the best surviving startups and the best devs going cheap, because they have more diverse sources of advertising revenue, but they might also be under pressure to control costs if investors panic and flee tech.
[+] [-] adam419|11 years ago|reply
[+] [-] pkaye|11 years ago|reply
[+] [-] gdilla|11 years ago|reply
The answer is: cash flow. It is different between high-growth startups and low-growth businesses. Startups would usually be profitable in the future. Startup’s main metric is growth. [1]
[1]https://medium.com/@paulmillr/zero-to-one-summary-8dbda22e15...
[+] [-] jacquesm|11 years ago|reply
That sentence misses a 'why' I believe.
As for the subject matter: bubble or not, who cares? Those that will not invest for fear of being in a bubble would do better to keep their money anyway, and those that look at individual companies rather than the market as a whole will always have a huge edge over the investors that simply follow the herd. It's the followers that really get burned by bubbles, not the originals, they'll survive one way or another on their own merits rather than on endless capital being poured into their corporate coffers.
Bubbles are bad, corrections are good news for the real movers. In a bubble you can find yourself with a whole slew of competitors trying to go after the same market polluting pricing and models by using investor money to prop up their essentially broken propositions. Right after a bubble pops is when the real fortunes are made, that's when all the nonsense goes away for a couple of years.
It's a saw-tooth like curve and even though we're not technically in what I'd call a bubble we're definitely no longer on the ground floor either. It's not a binary thing.
[+] [-] rudolf0|11 years ago|reply
[+] [-] jholman|11 years ago|reply
I think Sam intended "(though it is not clear to me [that] anyone who wants to .... should be ...)", with the word "that" elided.
[+] [-] PublicEnemy111|11 years ago|reply
-Ben Bernanke, circa 2005.
I couldn't help myself. I really admire Sam and the current tech bubble(if there is one) is nothing like the credit crisis. Funds existed in 2008 whose sole investment strategy was to buy the opposing side of credit default swaps just so the bears had something to buy. Just wanted to poke fun :P
[+] [-] malthaus|11 years ago|reply
And of course the VC-ecosystem is denying that for as long as possible. Nobody is saying that the 1bn+ club startups are not adding value, just that it's magnitudes smaller than valuations would imply. They are driven primarely by VCs and because they constantly push it as a valid success metric.
Investors have to deny it because they're betting their money on it, if they show doubt - their money is gone before they can flip it. The startup kids have to deny it because they want a shot at the big payout.
Where are the future profits/dividends that validate those insane numbers? User growth was a ridiculous measure in '99, it's a ridiculous measure now.
Once the cheap money dries out, the bubble will burst. AirBnB and co will probably survive but i doubt in 5years that many of them are valued >1bn. Once weakened / no longer hip, regulatory pressure will increase by a lot and bring down convenience & margins.
I respect YC for what they have built over the years, especially how they can attract top talent. But boasting with valuations is insane and had me lose all respect. Let's see what's left once its portfolio rides out more than half of a economic cycle.
[+] [-] ProAm|11 years ago|reply
Of course SamA is going to say we are not in a bubble, when his company's only goal is to take 1 penny and turn it into 4 pennies based on valuation and further outside investment and growth.
The tech bubble will burst, but likely will not hurt society at large, but it will likely dent the VC ecosystem.
[+] [-] cookiecaper|11 years ago|reply
Should we all high-tail it out to the Valley and get funded now so that we can cash out with billions for something very airy and non-substantive that we "made" with VC money? What kind of self-marketing and self-promotion needs to be done to ensure that we are seen as something hip like Whatsapp and bought at a massively unreasonable price?
What are the less invasive ways for Joe Developer to take an appreciable slice of the pie, meaning getting something more than long-shot lottery tickets as options and/or kind-of OK salaries? How can a developer make $1 million for himself/herself this year without founding a company? Surely that lowly sum is attainable by the humble developer what with the current valuations being "grounded in reason" and VCs going gangbusters.
[+] [-] beatpanda|11 years ago|reply
[+] [-] foobarqux|11 years ago|reply
The terms in this bet imply that it would not be a bubble if most of the companies went to zero but 1-2 dramatically increased in value.
That makes sense if you are an investor in all of these companies, like YC (nearly) is. But most VCs hold only 1-2, so if there is a wide variance in outcomes (which is characteristic for startups) and the rest of the VC's portfolio are not quite as great as the listed companies (i.e. much more likely to go to zero) then there is a big risk of large drawdowns in VC funds. I think that is a reasonably likely scenario, which many people would call a bubble, but which wouldn't be reflected in the bet.
Put another way, the bet is like saying YC's portfolio (or at least the synthetic portfolio described in the bet) is undervalued in aggregate, not that many specific companies are.
[+] [-] dools|11 years ago|reply
The whole "valuation" thing is dumb anyway... saying that if you buy 5% of a company for $5, the company is worth $100 is incorrect because value is defined by how much you can SELL a thing for, not how much you paid for it.
Given the fact that, if you buy 5% of some company in a seed stage round, you can probably not sell it at all, your share of the company is valueless, so the value of the company is whatever the owners can sell the remaining 95% of the company for.
Every time you sell more of the company, it reduces the value of the company unless the remaining percentage is increasing in value quickly enough to offset what you've already sold.
It's not that valuations are too high, it's that we're calculating the value of a company inaccurately.
[+] [-] aabajian|11 years ago|reply
When I was a pizza delivery driver I made under-the-table minimum wage, $8 per hour. It was very clear to me where that money came from. People would order an everything pizza for $20, we'd subtract the cost of ingredients (mainly cheese), absorb some profit for the business, and pay our salaries out of the remainder.
As a software engineer making upwards of $50 per hour, I question where my salary comes from. If I worked for FB, Google, or Pinterest, surely it'd be from advertising revenue. But isn't there AdBlock Plus, AdBlock, and uBlock? I install uBlock immediately after downloading a new browser. I think anyone in tech does the same.
Which makes me worry about Twitter, Reddit, and Snapchat. These apps are mostly used by people under 40 who are tech-savvy. They are all in the red (maybe Twitter is green now?), but they plan on making money through advertising. Their prime user base knows about AdBlock. What happens when ad blocking is ubiquitous?
That's one way the bubble could burst. Here's another. I work for a company that's venture-backed. My salary comes from venture capital. We've spent the past few years building a healthcare product that's finally gotten some traction. There are currently major incentives for hospitals to adopt emerging technologies. These governmental initiates have made it easier for us to approach customers. Federal funding fluctuates rapidly and while it may be advantageous to start a health tech company today, that could change depending on election outcomes and other spending.
Our investors are keenly aware of this situation. Should the environment shift, they would be unlikely to perform another investment round. Venture capital is not a sure footing to build a business on - at least not as sure as selling pizzas. And I think this defines my idea of a bubble. Too many venture-backed companies with extreme evaluations that are planning on making money someday using strategies that worked in the past (e.g. advertising), or assuming that the next round of capital will be there should their plan fail.
[+] [-] zackchase|11 years ago|reply
[+] [-] mathattack|11 years ago|reply
I'll put 3 caveats:
1 - I don't have 100K lying around to allocate to charity bets.
2 - I'm not an early stage investor.
3 - Perhaps because of 1 and 2, I'm not in Sam's position to take the bet.
But Sam has laid 3 very aggressive goals. His position is that the market is significantly undervaluing all 3 stages of investment. The odds are that at least one of these will be wrong. (And it won't take a bubble to prove that - all it will take is just 10% returns in one of the 3 phases of investing rather than 15+%.) If it were a cash bet, it would be worth taking just as a hedge.
Net - any true naysayer should take Sam up on it, as it's a good bet for even folks who think we are in for just modestly good times.
[+] [-] kirinan|11 years ago|reply
[+] [-] dkrich|11 years ago|reply
However there are a large number of companies lumped in together which sort makes this a hard metric to measure definitively. The logic seems to follow in the following way:
"A lot of people believe there's a bubble." -> "Those people believe all new techy companies are part of this bubble." -> "Those people think all new techy companies are overvalued."
I don't think that that logic is accurate. I think it's totally possible for somebody to believe (as I do) that a large number of tech companies are overvalued (Pinterest), while simultaneously believing that there are some that are not (SpaceX). So predicting that that entire group will exceed $200B in value in five years is making a broader argument that some tech companies that have already exhibited an unambiguous amount of success will continue that trend in the next five years. But what if four of those companies go belly-up or drop in value by 50%, while one outlier becomes the next Google? Is the argument correct? Technically speaking, yes. But I think in that case the overall point would be proven wrong.
Ultimately I think the entire "bubble" conversation centers on the argument of whether private tech companies that are < 5-10 years old who's primary product is a captive audience of users is overvalued when a single group of VC's choose to value them in the 9-10 figures. It isn't bubble in the dot-com/real estate sense that actually has a meaningful negative impact on the economy, but more or less a disagreement on whether that value would be proven on a public market after a meaningful amount of time.
[+] [-] untog|11 years ago|reply
[+] [-] rckrd|11 years ago|reply
https://twitter.com/sacca/status/579731109753159680
[+] [-] netcan|11 years ago|reply
[+] [-] ChuckMcM|11 years ago|reply
But that sidesteps the issue of bubbleness or not. Really the question is whether or not the private valuations of these companies is in excess of their "fair market value" (like Box's was) and so the private investors are over paying for participation. Sadly we can't just convert these privately held companies to publicly held ones to its hard to run the experiment.