Tell Sam Altman: I will take your bet

[mdlm]

Sam,

I will take your bet.

I run a VC fund called Immaculate Conception Ventures, I am a TechStars Boston mentor, and I like to invest in TechStars alumni companies.

Michael de la Maza Immaculate Conception Ventures LLC

[sama]

I sort of love that the person willing to take the other side of this is a Boston-area VC :)

I accept subject to verification that you really qualify as a VC, and I can't find a website for Immaculate Conception Ventures. What investments have you made and how large is your fund?

If terms from the blog post are acceptable I will enter into longbets.

[mdlm]

Sam,

Fund is $500K. Investments are listed below. Happy to provide LLC documents.

Please enter into longbets.

Michael

Fitocracy https://www.fitocracy.com/ Empreware https://empreware.com/ Modify http://modifywatches.com/ Ecovent https://www.ecoventsystems.com/ Amino http://narvii.com/ seedchange https://www.seedchange.com/ ROCKI http://www.myrocki.com/ CoolChip http://coolchiptechnologies.com/ edTrips http://www.bookity.com/ (via AngelList syndicate)

[ealfert]

I found the following...

https://angel.co/michael-de-la-maza

7 confirmed investments of $25K

[foobarqux]

Eh, I would be cautious, you might be getting played for publicity. If that's the case it wouldn't serve the purpose of the bet because the other side doesn't have any conviction about the outcome and only wants to raise their profile in the VC world.

$100k is probably cheap to get your name in many major news outlets.

[lvs]

This is exactly the sort of weak-minded chest-thumping I fully expect to see from venture capitalists. Way to live up to your stereotypes, both of you.

[boomshucka]

The determination of "valuation" is pretty obnoxious. These preferred securities with liquidation preferences aren't even close to a "common equity" valuation. A VC round at $x valuation isn't remotely similar, economically, to a public co at $x valuation. This bet is more about whether the late stage VC bubble continues for 5 years than any notion of real value.

[davidcgl]

Context: http://blog.samaltman.com/bubble-talk

[samstave]

Thanks, I have been off HN for the last week or so - and had no context.

[wpietri]

Hi! I'm delighted to see you'll be using Long Bets: http://longbets.org/

As the programmer behind that, I'm glad to introduce you to the folks at the Long Now that can expedite that.

[anaskar]

Didn't know this service existed. Just registered and tossed it up onto product hunt --> http://www.producthunt.com/posts/long-bets

looking forward to see this play out.

[dmabram]

The great irony of Sam's bet is that, win or lose, the terms themselves prove a bubble mentality. Every one of the terms is focused on valuation, with no mention of revenue, much less profit or cash flow.

In the short term the valuation of a company is a popularity contest, in the long term it is a direct reflection of the discounted value of the cash one can expect to extract or reinvest. This is true for all investments, stocks, bonds, public, private, and even unicorns.

I have no idea if Sam wins this bet. It's quite possible that within the next five years enough of these companies are acquired at inflated prices to satisfy Sam's terms.

What I do know is when industry leaders start to use valuation itself as a metric to demonstrate that we are not in a bubble, without even the most casual mention of underlying fundamentals necessary to justify valuation, then we are in a bubble.

[diego]

I'm curious which one of his propositions do you think has a higher chance of not happening, and why. #3 can be phrased as "there is at least one unicorn among these 114 companies" so betting against that is rolling dice. I imagine you're either bearish on 1 and/or 2, or are betting on a macroeconomic event that would bring all valuations down. Could you elaborate?

[NhanH]

Betting against 3 isn't just rolling dice. In a sense, betting against 3 is betting against YC itself (albeit a slightly weaker version, with the variance in startup, it will probably takes a few batches in aggregate to make a strong bet).

From Sam's point of view, 3) is probably the safest one. Likewise, 1) seems to be the most risky one.

[pash]

Note that the bet is the conjunction of those three propositions, so you don't have to think any one of them is particularly unlikely to think that all three of them together are.

For example, if you consider the propositions to be roughly independent, you might believe each one of them is individually nearly 80% likely to occur, yet you'd rationally believe Sam would be more likely than not to lose the bet, since 0.5^(1/3) = 0.794.

[johnward]

or OP just wants to donate $100k to charity

[gautamnarula]

Unrelated, but are you the same Michael de la Maza who wrote Rapid Chess Improvement?

[mdlm]

Yes.

[smt88]

I googled this guy, and both the author of that book and this guy seem to have gone to MIT. So unless it's a huge coincidence, I'd say the answer is yes.

[xxcode]

1. Dropbox: NPV is less than 10B. Will probably get brought for 3-4B by bigco if bigco can transcend internal politics. Not sure who will buy them - most probably Microsoft under Ndella.

2. Palantir: I have some experience with working with Palantir FDEs who were marketed to BigCo as 'gift from god to solve all problems'. They were pretty useless.

I think Palantir is basically shit. Wait and watch.

[300bps]

Will probably get brought for 3-4B by bigco if bigco can transcend internal politics. Not sure who will buy them - most probably Microsoft under Ndella.

I'm asking in all sincerity - what does Dropbox have that Microsoft would want? Their OneDrive technology is "good enough" for the vast majority of users.

Latest statistics I could find were that DropBox has 200,000,000 users and that 96% of them were free user accounts. That means DropBox has about 8,000,000 paying users. Instead of buying the company for $4 billion they could instead pay each paying DropBox customer $500 to switch.

Or they could spend $4 billion on marketing / giving away their free 1 TB of OneDrive space with purchase of an Office 365 subscription for $6.99 per month.

I'm probably missing something?

[recondite]

> I think Palantir is basically shit. Wait and watch.

That's a pretty bold statement.

I've worked with them as well, and definitely don't buy into the hype either. But when the latest financing round (~Jan 2015) has them valued at $15 billion, there must be something to it.

I don't know what kind of access their private investors have to the financials, but it's been reported they have 100s millions in revenue from USG alone selling their platform as enterprise software, which typically has a longer sales cycle but more "stickiness" once the customer has committed (i.e. they are less likely to purchase another platform no matter how bad the current one is). On top of that, the alternatives in this space just aren't very good, and sometimes hype and brand are all you need to make the sale.

That being said, I'm pretty skeptical of the valuations of all the tier 1 companies SamA mentioned, with maybe the exception of Pinterest, and think that category of the three has the most likelihood of losing him this bet.

[cylinder]

There are a LOT of hyped startups that deliver hugely mediocre products/services. From consumer (HomeJoy, FlyCleaners etc) to enterprise software, there's a lot of nonsense out there.

[jforman]

When I moved from SF to Boston (after co-founding Inkling six years ago), the top two things I was worried about are a) a less pro-startup culture, and b) less available early-stage money.

This really doesn't help either point. We need more early-stage money here and more optimism, not less.

[ghc]

Understandable. The seed environment in Boston is sub-optimal. But hopefully it will continue to change as more people like me band together with friends to start seed stage VC firms. The market is just too good to not take advantage while there's no competition and no crazy valuations.

[TimSchumann]

I'm surprised at someone actually taking the other side of this bet as I thought Sam was _very_ conservative on his projections.

1) Any one of those companies (besides Pinterest IMO) could conceivably achieve a market valuation of $200B by Jan 1, 2020.

2) Again any one of those companies (besides Teespring IMO) could conceivably achieve a market valuation of $27B by Jan 1, 2020.

3) Easy win for Sam.

[dkrich]

Seriously? As I write this, Microsoft, the largest purveyor of enterprise software in the world, is worth roughly $340 billion. Oracle? Less than $200 billion. Hell, Amazon, the company that Dropbox runs on isn't worth $200 billion.

You honestly believe that any one of those companies, none of which has been around for more than ten years, could reach a market cap of $200B within 5 years? Either you are incredibly bearish on the dollar or we are officially in bubble times.

[gitah]

1) Do you really think Dropbox, with all the big co competition, can grow past its current valuation? Snapchat would have been a better choice in this list.

[MCRed]

I have no idea how this bet will come out but I was not pursuaded by Sam's argument because he did not address the root cause of the bubble. Put another way, he's sitting on the surface of a bubble and pointing out that there's not a bubble rising from that surface.

He's saying that there's innovation and the innovation makes these companies more valuable-- on that we can all agree. Whether VC investments are correctly valuing companies or not at various stages, I don't even think that's an issue, so I will take his general assertion that they reasonably are. To the extent that people think that the nature of a the "bubble" is unrealistic valuations, I think it's silly to say there's a bubble. That's not the bubble. The actual bubble causes these high valuations but has nothing to do with VC judgement -- who are all acting based on the pricing information they're getting from the market-- so that they are being irrational is due to the irrational pricing info they are getting, not due to having lost their senses. The irrational pricing info is that the cost of money is way too cheap.

The bubble is not a startup funding bubble, it's a dollar bubble.

The main argument for us being in a bubble is not that we're in a bubble of VC expectations for companies-- though that is a side argument that VCs expect google and Facebook to buy everything whatever the quality.

The main argument is that since 2001 and especially since 2008 the money spigot has been opened wide. Helicopter Ben is in full effect. The 2008 bubble was a direct consequence of that spigot being open, combined with interest rates being held below the cost of money and the Clinton era "not loaning money to people who can't repay is racist" agenda and changes to the CRA that forced banks to make bad loans. Everything else that happened in 2002-2007 was secondary effects.

When 2008 happened the spigots were opened even wider, the interest rates forced lower ,and now, instead of having an open market for T-bills the federal reserve itself is buying them. Totally distorting the market.

The short description of what that means is that money is really cheap-- really cheap for the institutional types that have a lot of it already, and especially really cheap for anyone who can go to the federal reserve window. EG Banks. T he banks have all this money and have to put it somewhere that earns a return over the borrowing cost (carry)... which from the Fed is even cheaper than the money you lend them in your savings and checking accounts.

The way the money spigot works is it filter thru tiers of the economy. Banks lend as much as they can which produces economic growth (though not without cost, hence the whole misrepresenting this system as Keynesian-- keynes recognized the cost and danger of this, but everyone who claims to be "keynesian" since then and advocates this system seems to ignore the cost and danger.).... and a lot of it hits the stock market and then even more risky ventures.

All this money in the VC pockets chasing startups is originating at the federal reserve as they shove money into the economy.

Sam talks about "interest rates rising". Well, interest rates would have risen, but the fed is providing unlimited demand for T-bills so that's distorting a market signal. The FOMC is providing unlimited money to paper short gold, so that's distorting another market signal.

I don't know how it will break-- just as I wasn't sure how the housing crisis would break in 2008, even though I knew there was a bubble (and at that time, by the way, everyone said there wasn't a bubble. They also said there wasn't a bubble in 1999. How old was Sam in 1999? I honestly don't know but I'm guessing he was not 18.)

And all of this is on top of a hundred years (since the founding of the federal reserve) of exporting the effects of US dollar inflation onto other economies-- most of which were weaker than us but now are reaching parity and don't need the dollar to back their currencies so much anymore.

The bubble is not a startup funding bubble, it's a dollar bubble.

I'm certain we are in one. I have no idea if it will bust in the next 5 years. But when it does, it will be worse than 2008, 1999 and the 1930s combined.

[discardorama]

Well, with Amazon's "unlimited storage" announcement today, you can bet some wind got knocked out of Dropbox's sails...

[foobarqux]

After the bet has been finalized, please post your rationale for the "against" case.

[nicklovescode]

Hi Michael, would you mind explaining your rationale? In particular, why would you believe his bet and still be a VC?

[vikp]

I'm also curious about the general case of people believing that we're in a bubble giving advice to startups. Do they advise that startups keep a really low burn rate and wait it out, or go for broke and raise as much as possible now? Do they advocate certain business models that do better in recessions?

[ddorian43]

...what bet ?

[hydrazine]

http://blog.samaltman.com/bubble-talk

https://news.ycombinator.com/item?id=9258798

[ndamiano]

This is a nice way to get publicity for relatively cheap.

Should I be disturbed that our YC batch ended up being just a bet? I feel like I'm in the Silicon Valley version of "She's All That."

[iamcurious]

I wonder how this works, is it necessary for Sam to acknowledge the bet? What happens if more than one person wants to take the same bet?

[hydrazine]

The bet is only open to the first VC to publicly take it I believe.

[an4rchy]

It would great if there are multiple bets on both sides (crowdfunding for each side). I'd question the legality of this but more money for charity would be great!

If there's enough demand, it might make sense to make a site/app and pick a side (maybe use Stripe to put money into some sort of escrow account).

[bbcbasic]

I think Michael will almost certainly lose the bet.

I also think this is a very shrewd move by Michael. It is pure genius to accept that bet. (No sarcasm)

[louisswiss]

2) and 3) seem like a given, but looking at the companies in 1), I think Sam might have his work cut out for him...

[adrianpike]

SpaceX alone makes me not want to bet against Sam on point #1.

[davmar]

boy this is an awkward post.

[shepardrtc]

Awkward or not, $100,000 will be going to a charity at the end of this. I think we can all put up with it for that alone.

[choppaface]

sama and mdlm: since you're effectively going to lock up $100k each for 5 years, how about you both give the interest on that capital to charity?