11 ms·

Bubble Indemnity

93 points by kdazzle 10y ago

ktRolster 10y ago
The article makes the point that valuations are high, not necessarily because of accurate valuations, but because 'dumb money' wants to get in on the deal. It then goes on to describe dumb money excoriatingly, covering a lot of rich people: Dumb money is a hedge-funder who’s jealous of a V.C. Dumb money is sovereign wealth. Dumb money is an Emirati home office. Dumb money is a Facebook millionaire in a Maserati who wants to look like a player. Dumb money wants to get in on tech because it’s a box to check off. Dumb money isn’t in it for the long run. Dumb money doesn’t actually care about the technology. Dumb money doesn’t create value.
- daveguy 10y ago
  Dumb money inflating valuations is pretty much the definition of a bubble. Another interesting tidbit: over 200 private tech terms are currently considered unicorns. 200 of what is supposed to be a rare phenomenon. When the NYT starts talking about it you know the structure of the bubble is weak. Stories like this only popped up in the months before the housing crash. Prior to that all the stories were all about what a great investment real estate is. Bubbles are odd things though, it could keep going until there are 400 unicorns, but I doubt it.
  - paavokoya 10y ago
    “The market can stay irrational longer than you can stay solvent.”
    - daveguy 10y ago
      I agree 100%! That's why I said the bubble could continue until there are 400 unicorns (or just 50 more), regargless a continuation would exhaust my solvency. I wouldn't bet against it because I don't know if it will pop tomorrow or a year from now or later, but I am almost certain we are in somewhere in the top 25% of a bubble. The breathless arguments that this will continue indefinitely has slowed.
      - dnautics 10y ago
        If we're in the top 25% of a bubble you should be able to calculate an upper limit to when it will pop. If you say you don't know when it will pop that means you don't know how close we are to the end because these things are characterized by measurable growth dynamics and spend very little time at the top.
  - deleted 10y ago
    [deleted]
  - morgante 10y ago
    > When the NYT starts talking about it you know the structure of the bubble is weak. The NYT (together with all media) has been saying there's a bubble for years. They've written nearly 200 articles about this bubble between 2008 and 2015. For example: http://dealbook.nytimes.com/2010/12/03/a-silicon-bubble-shows-signs-of-reinflating/ http://dealbook.nytimes.com/2010/12/03/a-silicon-bubble-show... There will always be naysayers. Plenty of people thought the notion of Facebook being worth even $50bn was ludicrous. Bubbles exist, but so does growth. It's all but impossible to differentiate the two until after the fact. That being said, we probably are in something of a bubble.
    - cardiffspaceman 10y ago
      I always say that the crash comes after the last skeptic buys in. I honestly don't have any anecdotes to specifically back that up, but plenty of people at cocktail parties have nodded in agreement.
      - thaumasiotes 10y ago
        This would immediately imply that no one ever gets rich shorting the crash.
        cardiffspaceman 10y ago
        Because no skeptics would be short when the crash came.
        ktRolster 10y ago
        But of course, some people do make money in the crashes. John Paulson made billions in the 2008 crash. Mark Cuban at least forsaw the .com bomb.
- doctorpangloss 10y ago
  I think it's a good summary of the tone and generalities that the journalist likely heard from the investors he spoke with. Does it sound ridiculous? Yeah. Professional investors complain about people whose only qualification to invest is their bank account. They do realize they are investors right? Well a dollar is a dollar, it doesn't have a brand. The scary thing to professional investors isn't dumb money and large valuations per se. It's the competition that gets the best deals just because it offers more money. How ironic. To take a more nuanced opinion, I don't think the distinct is between dumb and smart money, but between branded and unbranded money. There is in fact somewhat of a "brand" for a dollar. If A16Z invests in you, their dollars have some built-in, unwritten-but-real future bonus in the professional VC circus that will pile onto your next deal. Some nobody can offer the same deal on paper today as A16Z, but it won't guarantee that brand-name pile on in a later investment. The question is, how often does the A16Z actually pay off in that future-bonus way, or how many VC firms actually provide a meaningful bonus in that way? If the "Emirati home office" just offers more money up front, the branded dollar's future brand bonus is less valuable in comparison. This helps explain a firm like A16Z's increasingly generous (and preposterous) first investments. Increasing competition, not "dumb money," has negated a valuable competitive advantage American VC firms once had.
- x0x0 10y ago
  Well, this cuts a bit close to home The weird thing about dumb money, unfortunately, is that it can act with fiendish intelligence, insisting on stipulations that guarantee returns at the expense of founders, employees and other investors.
gonyea 10y ago
The Bubble talk is getting old. There's far, far more real money in the Bay Area than "dumb money." Amazon will double WalMart's valuation this year. WalMart is desperately pumping money into their new Sunnyvale tech office to catch up. Consumers aren't going to wake up one day, realize the Internet is a stupid fad, and throw their iPhones in the trashcan.
- boulos 10y ago
  I enjoy that your example (Amazon) is not actually a Bay Area example. Your point is still valid though: Apple, Google, etc. are awash in revenue. The article though is about private companies that aren't so clearly generating cash flow.
  - deleted 10y ago
    [deleted]
- mindslight 10y ago
  However, consumers may wake up one day and realize the surveillance web is indeed a stupid fad. And that covers the business models (explicit or implied) for most contemporary "startups".
- jeffreyrogers 10y ago
  Bubble != valueless.
ChuckMcM 10y ago
I largely agreed with this article. The interesting thing about wealth is that it, in itself, is useless. A bank account with a billion dollars in it does no work, garners no fame other than the "Hey, I got a Beeeelllion dollars!" joke that gets old fast with your friends. And since nobody really needs a billion dollars to "live on" its kind of like a pet rock in its utility. Unless you put it to work. And since nothing has been paying returns like tech startups, well you get a lot of tech startups. But those aren't "real" returns if you can't cash the money out. So that is where it gets weird. The lack of IPOs is unnatural in that sense, as late stage investors always seemed to cash out then. I'm all in favor of more meaningful bets though. But to pull them off you have to think about very large interconnected systems and that is a hard thing to do in a 3 year horizon.
- Avshalom 10y ago
  They sold over a million pet rocks. Don't underestimate the desire some people have to keep score.
- voodootrucker 10y ago
  That kind of money should be investing in cutting edge stuff. Real cutting edge stuff. Computational biology, heteromorphic computer chips of various kinds, automation of the construction industry, post-capitalistic economic experiments, and a million other things I can't even think of. Instead they have tried to play it "safe" and they all propped up the same kind of investment: "the uber of ___" or the "airbnb of ___". The gains are illusory, because they've all been bidding up each other's bets, and these companies haven't created any real productivity gain. Sadly, I suspect the "dumb money" is largely your average Joe's retirement money, and it's not "dumb", there's just a lot of it, so it can't be moved out quickly without collapsing the market. Joe's going to take another big hit, but his fund manager is going to get his bonus either way. And it will keep happening, because IRAs and 401ks artificially limit what can be invested in, and because Joe doesn't have enough savings on his own to bother to manage it himself.
  - mac01021 10y ago
    Googling "heteromorphic computer chip" doesn't yield much. What kind of R&D are you referring to here? It sounds like something I'd like to know about.
deleted 10y ago
[deleted]
partiallypro 10y ago
One thing the article ignores about a bubble popping, saying it's "mostly people who can afford to lose money" and "rich people" is that...rich people, much like everyone don't like to lose money. So in order to preserve capital, they are going to pull their money out of big gainers in the public market to offset any loss from the private market. Not only that but this private equity bubble has made housing prices in some cities absolutely explode. Those will go down too, and many people will be underwater on their $300K studio condos in mid-size cities, or $1M studio condos in larger cities. Then of course you have massive building projects that projected those prices to remain steady flooding the market with supply...who knows when this will hit the fan, but we can all see it coming. But let's face it, there is dumb money in real estate too. I don't think "smart money" is effected by FOMO. When this all happens it certainly hurts the retail investors, pension plans etc. The private market can absolutely act as a contagion to the public markets. I don't think private equity will be the first to go, usually there is some sort of contraction in credit (high yield anyone?) that begins to effect the other markets and it dominoes from there.
- ryandamm 10y ago
  I dunno, that's a lot of causal links that aren't necessarily backed up by quantitative analysis. I don't think the scale of VC/PE in the tech sector is anywhere near large enough to have macro effects. (Zenefits and Theranos aren't going to move valuation for GE.) Real estate moves locally in sync with the local economy, and the SF Bay Area does see bubble effects in the local housing market... though the dips aren't anywhere near as deep as you think; post-2008/9 implosion, home values took a minor hit then were back to pre-crisis highs within a couple of years. (Source: I was looking to buy a house during that period.) It's popular to predict doom and gloom, and you can show connections between different events... but understanding the actual dynamics is far trickier, and usually way less sexy.
  - partiallypro 10y ago
    There's plenty of analysis available, people have been sounding the alarm for the past 6-8 months. Not a bunch of nobodies and doom and gloom blogs either, big money movers have been saying this. If you don't think it only takes one sneeze for an entire market to get the cold, you haven't been paying attention. If VCs are illiquid, and credit markets are illiquid...and there are securities above them that has a valuation based on the premise that there's liquidity in the underlying market...when people pull money out of those top level securities and the underlying market doesn't actually have the money (think ETF-like securities), you're gonna have a bad time. San Francisco is not the only market that's going to be effected in real estate. Austin, Nashville, Seattle, Charlotte; there a lot of mid-level cities that saw explosive growth over the past 6 years because of VC. The rust belt probably won't be effected like it was in 2008, because it hasn't moved as explosively. It won't be a 2008 style crisis, it will likely not be so severe, it will probably be more like a 2000-lite. It will probably rebound relatively quickly too, that's perfectly normal, it's a sling shot effect due to inventory depletion after a short period. It's just a market correction. Don't fear the correction, it's necessary; and it's how the smart money gets in cheaper with dollar cost averaging.
ryandamm 10y ago
Question for the field: what's the connection (if any) between late stage private valuations (Zenefits, Theranos, etc) and early-stage startup investing? Seems most popular discussions conflate the two, but it seems like they're wildly different markets. Yes, some large VC firms blur the line a bit, with seed funds and large, late-stage checks that are nearly private equity-esque. But by and large, the companies and backers involved in the seed stage are not competing with Emirati funds and PE arms to make investments. I ask because I'm raising a seed round, and occasionally investors cite the macro landscape as a check on valuation, but I can't see the direct connection. Negotiating tactic, misconception, or real phenomenon? Deeply curious....
- cj 10y ago
  > Negotiating tactic, misconception, or real phenomenon? I think a combination of all 3 depending on the situation. If you have a solid business with real traction, $6-7m cap is seen as very reasonable. Investors probably wouldn't cite a market downturn for deals like this, and if they do it's most likely a negotiating tactic. If you're raising money for "the next big app" with no traction and asking for a $10-12m cap, there will probably be a lot more skepticism than there would have been a year or 2 ago. Note: This is based on my anecdotal experience in the bay area market. Numbers are probably lower across the board in other cities.
csours 10y ago
Kinda OT: Market Capitalization is the total amount that all the shares of stock for a company is worth. Is there a term or measure for how much people have actually paid for the stock? ie, as a founder I have 20% of the stock, but I never paid for it. As the stock goes up, the highest bids raise the nominal value for the whole body, but for most of that value (for a startup at least), the stock owner has not had to pay anything.
- roymurdock 10y ago
  There are 2 reasons (income stream-wise) to own stock: capital gains and/or dividends. Capital gains = sale price - purchase price
- n00b101 10y ago
  I think the accounting term you're looking for is "paid-in capital"
  - csours 10y ago
    That sounds like the term I was looking for, thanks!
  - cgio 10y ago
    Paid in capital would be only with regards to what the company received when issuing the stock. For transactions thereafter in the secondary market, paid in capital remains the same regardless the market price. You can calculate what you ask for by using market data (i.e. volume of transactions at each price point in the life of the instrument, taking into account splits etc.)
    - csours 10y ago
      Is volume at price recorded, tracked and reported? I know people pay a lot of attention to stock prices and volume
- adventured 10y ago
  > Is there a term or measure for how much people have actually paid for the stock? Cost basis. That's what the IRS will want to know when it comes time to sell.
crabasa 10y ago
Quote #1 - "They should focus on using capital as a way to take really big bets on things that seem totally audacious." Quote #2 - "Operating expenses and burn rates will come way down, and companies that didn't worry about profitability or unit economics will." I'd love to hear how you square those two incompatible desires that the "smart money" have.
- adventured 10y ago
  Don't have the same expectations for each company, depending on its unique opportunities. Obviously exceptionally few companies will end up the size of Amazon, Google, Facebook, etc. There is no scenario under which most companies need to bleed red ink to the tune of hundreds of millions in capital. Most companies also will never need to make audacious bets with hundreds of millions in capital, there's no outcome scenario for them in which that makes sense. If you happen to find a potential monster company, you don't worry so much about whether they're burning $40m+ per quarter - they get a larger reprieve than everyone else (Tesla is being given that exception in the public markets today for example; much like in the Amazon / Bezos case, investors want Musk to bet big and they buy into the long-term story).
- maxander 10y ago
  I think you find these incompatible simply due to the Valley's own particular brand of "audacity." What #2 predicts the end of are build-fast-and-break-things concept-startups that throw tons of energy, developer-wages, and hype into their product, for indefinite periods of time and with umpteen pivots, with no notion of what their eventual business model will be. "We'll figure out money later" has become a startup trope, and while its worked out for several big names (Facebook, Twitter, etc.) its not exactly a good idea. There are other kinds of audacity, though! Elon Musk has his picture in the dictionary next to "audacious," but likely could have told you on day one how he hoped Tesla would wind up making money, and how he thought he could get there. And by all accounts he's running a tight ship- employees aren't treated lavishly, money isn't being spent where its not needed- all very standard, non-audacious stuff on the business side. Much of this is of course that Tesla is making cars, not webpages or apps, and the latter categories are much more forgiving in terms of things like unit economics[1]. I think the point is, though, that investors are no longer going to be so happy about founders taking such flagrant advantage of that forgivingness. [1] What even is a "unit of sale" for something like Facebook? An ad display? Does anyone calculate exactly what operating Facebook costs on a per-ad basis?
nemo44x 10y ago
The best time to hire the very best is when the industry craters. Google and Facebook both rose from the ashes of 2 separate crashes and were able to hire unbelievable talent at a discount in part because the demand was so low. The best time to create or join a startup is when the industry is broken. The best to invest is then too.
brooklyndude 10y ago
Chamath Palihapitiya is quoted in the article. He is about to rock Silicon Valley. He is a new voice, keep your radar up. The guy is for real. Source: Futurist

93 points by kdazzle 10y ago

The article makes the point that valuations are high, not necessarily because of accurate valuations, but because 'dumb money' wants to get in on the deal. It then goes on to describe dumb money excoriatingly, covering a lot of rich people: Dumb money is a hedge-funder who’s jealous of a V.C. Dumb money is sovereign wealth. Dumb money is an Emirati home office. Dumb money is a Facebook millionaire in a Maserati who wants to look like a player. Dumb money wants to get in on tech because it’s a box to check off. Dumb money isn’t in it for the long run. Dumb money doesn’t actually care about the technology. Dumb money doesn’t create value.

daveguy 10y ago
Dumb money inflating valuations is pretty much the definition of a bubble. Another interesting tidbit: over 200 private tech terms are currently considered unicorns. 200 of what is supposed to be a rare phenomenon. When the NYT starts talking about it you know the structure of the bubble is weak. Stories like this only popped up in the months before the housing crash. Prior to that all the stories were all about what a great investment real estate is. Bubbles are odd things though, it could keep going until there are 400 unicorns, but I doubt it.
- paavokoya 10y ago
  “The market can stay irrational longer than you can stay solvent.”
  - daveguy 10y ago
    I agree 100%! That's why I said the bubble could continue until there are 400 unicorns (or just 50 more), regargless a continuation would exhaust my solvency. I wouldn't bet against it because I don't know if it will pop tomorrow or a year from now or later, but I am almost certain we are in somewhere in the top 25% of a bubble. The breathless arguments that this will continue indefinitely has slowed.
    - dnautics 10y ago
      If we're in the top 25% of a bubble you should be able to calculate an upper limit to when it will pop. If you say you don't know when it will pop that means you don't know how close we are to the end because these things are characterized by measurable growth dynamics and spend very little time at the top.
- deleted 10y ago
  [deleted]
- morgante 10y ago
  > When the NYT starts talking about it you know the structure of the bubble is weak. The NYT (together with all media) has been saying there's a bubble for years. They've written nearly 200 articles about this bubble between 2008 and 2015. For example: http://dealbook.nytimes.com/2010/12/03/a-silicon-bubble-shows-signs-of-reinflating/ http://dealbook.nytimes.com/2010/12/03/a-silicon-bubble-show... There will always be naysayers. Plenty of people thought the notion of Facebook being worth even $50bn was ludicrous. Bubbles exist, but so does growth. It's all but impossible to differentiate the two until after the fact. That being said, we probably are in something of a bubble.
  - cardiffspaceman 10y ago
    I always say that the crash comes after the last skeptic buys in. I honestly don't have any anecdotes to specifically back that up, but plenty of people at cocktail parties have nodded in agreement.
    - thaumasiotes 10y ago
      This would immediately imply that no one ever gets rich shorting the crash.
      - cardiffspaceman 10y ago
        Because no skeptics would be short when the crash came.
        ktRolster 10y ago
        But of course, some people do make money in the crashes. John Paulson made billions in the 2008 crash. Mark Cuban at least forsaw the .com bomb.
doctorpangloss 10y ago
I think it's a good summary of the tone and generalities that the journalist likely heard from the investors he spoke with. Does it sound ridiculous? Yeah. Professional investors complain about people whose only qualification to invest is their bank account. They do realize they are investors right? Well a dollar is a dollar, it doesn't have a brand. The scary thing to professional investors isn't dumb money and large valuations per se. It's the competition that gets the best deals just because it offers more money. How ironic. To take a more nuanced opinion, I don't think the distinct is between dumb and smart money, but between branded and unbranded money. There is in fact somewhat of a "brand" for a dollar. If A16Z invests in you, their dollars have some built-in, unwritten-but-real future bonus in the professional VC circus that will pile onto your next deal. Some nobody can offer the same deal on paper today as A16Z, but it won't guarantee that brand-name pile on in a later investment. The question is, how often does the A16Z actually pay off in that future-bonus way, or how many VC firms actually provide a meaningful bonus in that way? If the "Emirati home office" just offers more money up front, the branded dollar's future brand bonus is less valuable in comparison. This helps explain a firm like A16Z's increasingly generous (and preposterous) first investments. Increasing competition, not "dumb money," has negated a valuable competitive advantage American VC firms once had.
x0x0 10y ago
Well, this cuts a bit close to home The weird thing about dumb money, unfortunately, is that it can act with fiendish intelligence, insisting on stipulations that guarantee returns at the expense of founders, employees and other investors.

gonyea 10y ago

The Bubble talk is getting old. There's far, far more real money in the Bay Area than "dumb money." Amazon will double WalMart's valuation this year. WalMart is desperately pumping money into their new Sunnyvale tech office to catch up. Consumers aren't going to wake up one day, realize the Internet is a stupid fad, and throw their iPhones in the trashcan.

boulos 10y ago
I enjoy that your example (Amazon) is not actually a Bay Area example. Your point is still valid though: Apple, Google, etc. are awash in revenue. The article though is about private companies that aren't so clearly generating cash flow.
- deleted 10y ago
  [deleted]
mindslight 10y ago
However, consumers may wake up one day and realize the surveillance web is indeed a stupid fad. And that covers the business models (explicit or implied) for most contemporary "startups".
jeffreyrogers 10y ago
Bubble != valueless.

ChuckMcM 10y ago

I largely agreed with this article. The interesting thing about wealth is that it, in itself, is useless. A bank account with a billion dollars in it does no work, garners no fame other than the "Hey, I got a Beeeelllion dollars!" joke that gets old fast with your friends. And since nobody really needs a billion dollars to "live on" its kind of like a pet rock in its utility. Unless you put it to work. And since nothing has been paying returns like tech startups, well you get a lot of tech startups. But those aren't "real" returns if you can't cash the money out. So that is where it gets weird. The lack of IPOs is unnatural in that sense, as late stage investors always seemed to cash out then. I'm all in favor of more meaningful bets though. But to pull them off you have to think about very large interconnected systems and that is a hard thing to do in a 3 year horizon.

Avshalom 10y ago
They sold over a million pet rocks. Don't underestimate the desire some people have to keep score.
voodootrucker 10y ago
That kind of money should be investing in cutting edge stuff. Real cutting edge stuff. Computational biology, heteromorphic computer chips of various kinds, automation of the construction industry, post-capitalistic economic experiments, and a million other things I can't even think of. Instead they have tried to play it "safe" and they all propped up the same kind of investment: "the uber of ___" or the "airbnb of ___". The gains are illusory, because they've all been bidding up each other's bets, and these companies haven't created any real productivity gain. Sadly, I suspect the "dumb money" is largely your average Joe's retirement money, and it's not "dumb", there's just a lot of it, so it can't be moved out quickly without collapsing the market. Joe's going to take another big hit, but his fund manager is going to get his bonus either way. And it will keep happening, because IRAs and 401ks artificially limit what can be invested in, and because Joe doesn't have enough savings on his own to bother to manage it himself.
- mac01021 10y ago
  Googling "heteromorphic computer chip" doesn't yield much. What kind of R&D are you referring to here? It sounds like something I'd like to know about.

deleted 10y ago

[deleted]

partiallypro 10y ago

One thing the article ignores about a bubble popping, saying it's "mostly people who can afford to lose money" and "rich people" is that...rich people, much like everyone don't like to lose money. So in order to preserve capital, they are going to pull their money out of big gainers in the public market to offset any loss from the private market. Not only that but this private equity bubble has made housing prices in some cities absolutely explode. Those will go down too, and many people will be underwater on their $300K studio condos in mid-size cities, or $1M studio condos in larger cities. Then of course you have massive building projects that projected those prices to remain steady flooding the market with supply...who knows when this will hit the fan, but we can all see it coming. But let's face it, there is dumb money in real estate too. I don't think "smart money" is effected by FOMO. When this all happens it certainly hurts the retail investors, pension plans etc. The private market can absolutely act as a contagion to the public markets. I don't think private equity will be the first to go, usually there is some sort of contraction in credit (high yield anyone?) that begins to effect the other markets and it dominoes from there.

ryandamm 10y ago
I dunno, that's a lot of causal links that aren't necessarily backed up by quantitative analysis. I don't think the scale of VC/PE in the tech sector is anywhere near large enough to have macro effects. (Zenefits and Theranos aren't going to move valuation for GE.) Real estate moves locally in sync with the local economy, and the SF Bay Area does see bubble effects in the local housing market... though the dips aren't anywhere near as deep as you think; post-2008/9 implosion, home values took a minor hit then were back to pre-crisis highs within a couple of years. (Source: I was looking to buy a house during that period.) It's popular to predict doom and gloom, and you can show connections between different events... but understanding the actual dynamics is far trickier, and usually way less sexy.
- partiallypro 10y ago
  There's plenty of analysis available, people have been sounding the alarm for the past 6-8 months. Not a bunch of nobodies and doom and gloom blogs either, big money movers have been saying this. If you don't think it only takes one sneeze for an entire market to get the cold, you haven't been paying attention. If VCs are illiquid, and credit markets are illiquid...and there are securities above them that has a valuation based on the premise that there's liquidity in the underlying market...when people pull money out of those top level securities and the underlying market doesn't actually have the money (think ETF-like securities), you're gonna have a bad time. San Francisco is not the only market that's going to be effected in real estate. Austin, Nashville, Seattle, Charlotte; there a lot of mid-level cities that saw explosive growth over the past 6 years because of VC. The rust belt probably won't be effected like it was in 2008, because it hasn't moved as explosively. It won't be a 2008 style crisis, it will likely not be so severe, it will probably be more like a 2000-lite. It will probably rebound relatively quickly too, that's perfectly normal, it's a sling shot effect due to inventory depletion after a short period. It's just a market correction. Don't fear the correction, it's necessary; and it's how the smart money gets in cheaper with dollar cost averaging.

ryandamm 10y ago

Question for the field: what's the connection (if any) between late stage private valuations (Zenefits, Theranos, etc) and early-stage startup investing? Seems most popular discussions conflate the two, but it seems like they're wildly different markets. Yes, some large VC firms blur the line a bit, with seed funds and large, late-stage checks that are nearly private equity-esque. But by and large, the companies and backers involved in the seed stage are not competing with Emirati funds and PE arms to make investments. I ask because I'm raising a seed round, and occasionally investors cite the macro landscape as a check on valuation, but I can't see the direct connection. Negotiating tactic, misconception, or real phenomenon? Deeply curious....

cj 10y ago
> Negotiating tactic, misconception, or real phenomenon? I think a combination of all 3 depending on the situation. If you have a solid business with real traction, $6-7m cap is seen as very reasonable. Investors probably wouldn't cite a market downturn for deals like this, and if they do it's most likely a negotiating tactic. If you're raising money for "the next big app" with no traction and asking for a $10-12m cap, there will probably be a lot more skepticism than there would have been a year or 2 ago. Note: This is based on my anecdotal experience in the bay area market. Numbers are probably lower across the board in other cities.

csours 10y ago

Kinda OT: Market Capitalization is the total amount that all the shares of stock for a company is worth. Is there a term or measure for how much people have actually paid for the stock? ie, as a founder I have 20% of the stock, but I never paid for it. As the stock goes up, the highest bids raise the nominal value for the whole body, but for most of that value (for a startup at least), the stock owner has not had to pay anything.

roymurdock 10y ago
There are 2 reasons (income stream-wise) to own stock: capital gains and/or dividends. Capital gains = sale price - purchase price
n00b101 10y ago
I think the accounting term you're looking for is "paid-in capital"
- csours 10y ago
  That sounds like the term I was looking for, thanks!
- cgio 10y ago
  Paid in capital would be only with regards to what the company received when issuing the stock. For transactions thereafter in the secondary market, paid in capital remains the same regardless the market price. You can calculate what you ask for by using market data (i.e. volume of transactions at each price point in the life of the instrument, taking into account splits etc.)
  - csours 10y ago
    Is volume at price recorded, tracked and reported? I know people pay a lot of attention to stock prices and volume
adventured 10y ago
> Is there a term or measure for how much people have actually paid for the stock? Cost basis. That's what the IRS will want to know when it comes time to sell.

crabasa 10y ago

Quote #1 - "They should focus on using capital as a way to take really big bets on things that seem totally audacious." Quote #2 - "Operating expenses and burn rates will come way down, and companies that didn't worry about profitability or unit economics will." I'd love to hear how you square those two incompatible desires that the "smart money" have.

adventured 10y ago
Don't have the same expectations for each company, depending on its unique opportunities. Obviously exceptionally few companies will end up the size of Amazon, Google, Facebook, etc. There is no scenario under which most companies need to bleed red ink to the tune of hundreds of millions in capital. Most companies also will never need to make audacious bets with hundreds of millions in capital, there's no outcome scenario for them in which that makes sense. If you happen to find a potential monster company, you don't worry so much about whether they're burning $40m+ per quarter - they get a larger reprieve than everyone else (Tesla is being given that exception in the public markets today for example; much like in the Amazon / Bezos case, investors want Musk to bet big and they buy into the long-term story).
maxander 10y ago
I think you find these incompatible simply due to the Valley's own particular brand of "audacity." What #2 predicts the end of are build-fast-and-break-things concept-startups that throw tons of energy, developer-wages, and hype into their product, for indefinite periods of time and with umpteen pivots, with no notion of what their eventual business model will be. "We'll figure out money later" has become a startup trope, and while its worked out for several big names (Facebook, Twitter, etc.) its not exactly a good idea. There are other kinds of audacity, though! Elon Musk has his picture in the dictionary next to "audacious," but likely could have told you on day one how he hoped Tesla would wind up making money, and how he thought he could get there. And by all accounts he's running a tight ship- employees aren't treated lavishly, money isn't being spent where its not needed- all very standard, non-audacious stuff on the business side. Much of this is of course that Tesla is making cars, not webpages or apps, and the latter categories are much more forgiving in terms of things like unit economics[1]. I think the point is, though, that investors are no longer going to be so happy about founders taking such flagrant advantage of that forgivingness. [1] What even is a "unit of sale" for something like Facebook? An ad display? Does anyone calculate exactly what operating Facebook costs on a per-ad basis?

nemo44x 10y ago

The best time to hire the very best is when the industry craters. Google and Facebook both rose from the ashes of 2 separate crashes and were able to hire unbelievable talent at a discount in part because the demand was so low. The best time to create or join a startup is when the industry is broken. The best to invest is then too.

brooklyndude 10y ago

Chamath Palihapitiya is quoted in the article. He is about to rock Silicon Valley. He is a new voice, keep your radar up. The guy is for real. Source: Futurist