7 ms·

Internet start-ups: Another bubble?

69 points by obilgic 16y ago

jdp23 16y ago
"For the first time since 2000, internet and technology entrepreneurs can raise seed capital with little more than a half-formed idea and a dozen PowerPoint slides." Really?
- ccarpenterg 16y ago
  I think the opposite is true since 2000.
- epo 16y ago
  What is your scepticism? That people can do this now or that it ever stopped being that way?
  - jdp23 16y ago
    That it's the case now. I'm pretty active in the Seattle entrepreneurial community and that's not at all the situation here.
- dabent 16y ago
  When did YC start? I'm pretty sure they've been funding ideas for a few years now. I think one of them turned out to be Reddit.
  - jdp23 16y ago
    The ideas that YC funds are much more than half baked, and it's not just a "few powerpoint slides".
    - dabent 16y ago
      I didn't mean that as an insult to YC companies, or YC, but when YC started they were literally funding teams with ideas. In Reddit's case, YC convinced the team to do a different idea than what they had presented. I'm thinking YC now funds more mature companies, but that probably is a sign that there is less of a "bubble" now than there was before.
      - jdp23 16y ago
        Interesting point ... I don't know much about YC back in the early days. Don't get me wrong, I think the right idea should be fundable based on a few PowerPoint slides. I just don't see it happening very often at all.
  - nostrademons 16y ago
    Summer 2005.
- rwhitman 16y ago
  "The first time since 2000". Hmm, I do believe that is not an accurate statement.
swombat 16y ago
The emergence of an active secondary market in shares of start-ups yet to go public has allowed founders and early investors in firms such as Facebook and Twitter to bank fortunes without waiting for a traditional exit by IPO or acquisition. These secondary-market prices feed hype about what these firms might be worth, were they to list on the stockmarket. Not many shares are available; many punters are chasing them. And those punters tend to be outsiders, such as fund managers and private-equity firms, who may not understand the tech business as well as insiders do. Wait a minute. There's an unregulated secondary market where pension fund managers and other non-tech people invest other people's money into stuff they don't understand? Previously the argument was that only wealthy people will lose out on their risk money if this is a new bubble, but if large investors like pensions and the like are also feeding this bubble than maybe we do have a new equity bubble on the way - except this one is happening on unregulated markets and so perhaps even more dangerous.
- roc 16y ago
  It seems to me that bubbles only form to catastrophic sizes around the unregulated edges of markets. e.g. If not for the ineffectual IPO regulation, the dot-com boom couldn't have built so much irrational exuberance. Similarly with nonexistent regulation of derivatives and the ratings thereof during the real-estate bubble. And also with Savings & Loans being deregulated in the late 80s, leading directly to that real estate disaster.
  - lionhearted 16y ago
    > It seems to me that bubbles only form to catastrophic sizes around the unregulated edges of markets. Most recent economic crisis was primarily driven to crazy low interest rates, set by the Federal Reserve. Everything else about the crisis pales in significance compared to the disaster that loads of almost free cash causes. If you set interest rates below the price of inflation, you're always going to have a short, illusory boom, followed by a massive crash. Like, around 100% of the time that's going to happen. Those interest rates were set by regulation. Derivatives shenanigans is nowhere near as scary as effectively-free-money, which always breaks things always.
jacquesm 16y ago
The secondary market is an excellent place to get burned big time.
- bl4k 16y ago
  Real and open market valuations in a market that is semi-real and definitely not open ie. you have investors making investments with no reporting, analysis and imperfect information but the prices are not discounted because of the imperfect information.
- gyardley 16y ago
  No one gets burned without a burner. The secondary market is therefore also an excellent place to burn someone big time.
  - chopsueyar 16y ago
    "Fear and greed, mofo."
revorad 16y ago
http://redeye.firstround.com/2007/10/this-year-i-mea.html http://redeye.firstround.com/2007/10/this-year-i-mea.html
3pt14159 16y ago
The graph on the article is misleading. Show me trending for the last 5 or 10 years. The number of exits over the past two is a completely irrelevant metric because all sorts of investors were squeezed shortly after the recession started. Calling internet startups a bubble in the same breath as the housing market bubble is doing a disservice to the readers. Every single American was seeing housing prices soar. All sorts of people were borrowing 100k against their new found home equity to "invest" in their home, despite the fact that homes have no revenue, while the majority internet companies do. Most people running startups in the community I'm most active in (Toronto) have revenue. For example: dateideas.ca is only 6 months old and they have revenue, guestlistapp.com has been out of beta for about half a year (launched a year before that) and they have fairly substantial traction, then you have the bulk-ward of the Toronto tech scene, freshbooks.com, with over 2 million users and a solid business model. Just look at their hiring page, 22 positions listed for a 50 person company. There is a huge difference between building valuations based on a solid business model and changing public trends (ie, more people getting on/trusting the internet), and building valuations on selling ponzi scheme debt that overvalue non-revenue generating assets like housing. The same article could have been written about clothing manufacturing in England just after the industrial revolution started.
- epo 16y ago
  Calling both the housing market and internet startups a bubble is not doing anyone a disservice. Both sectors experienced irrational valuation increases in which the bad rose with the good. These increases were not based on economic fundamentals but on the half witted belief that everyone could be a winner and that prices would rise today because they rose yesterday. A classic description of a bubble, in both cases.
  - rdtsc 16y ago
    > Calling both the housing market and internet startups a bubble is not doing anyone a disservice. Well it is. It is hurting the egos of many people here as many are involved in startups. Accepting the fact that it might be a bubble would mean somehow joining the ranks of the hated housing market speculators and bankers. I am not saying whether it is a bubble or not. But if you see a large rationalization effort into making this "not a bubble" that might be a plausable explanation.
w1ntermute 16y ago
I love reading about world affairs in The Economist, but seeing how poorly they covered this topic is making me take a second look at my preferred magazine.
- jdp23 16y ago
  agreed that the coverage in this article was very superficial. hopefully they'll look more deeply at it one of these days.
- chopsueyar 16y ago
  I read a copy last week that I grabbed while in an airport. It had some good articles on China and its military capabilities, but then had a horribly written, pompous article about Google with factually incorrect information and exaggerations. Very disappointing. What is happening to the Economist?
  - w1ntermute 16y ago
    > What is happening to the Economist? Perhaps they are just out of their depth wrt technology articles. They should have probably just stuck to politics/economics.
  - aristidb 16y ago
    Possibly it's just that their writers are of different quality?
    - aristidb 16y ago
      I was just trying to say that it need not say much about the newspaper when some articles are good and some are bad, because they employ many writers (anonymously, of course). So perhaps saying that there is a decline in quality is over-analyzing it...
  - maxawaytoolong 16y ago
    On the other hand, does any casual reader of the Economist really know if articles about China's military capabilities are accurate or not?
tybris 16y ago
Yes, except for the ones that aren't...
palewery 16y ago
Is there going to be a time in the next 5 years where most people change their views about the [usefulness/profitability] of [investing/creating/buying] [housing/start-ups/restaurants]? If your answer is yes then there is currently a bubble.
- nostrademons 16y ago
  Only if the change is negative. If the change is positive, then you have a trend.
maxawaytoolong 16y ago
A big reason the dot-com bubble was bad was because normal people with more to lose were depleting their retirement savings buying stock in stupid companies that recently went public. There are no more IPOs. The public at large cannot participate in this bubble. This financial part of this bubble involves a bunch of rich guys and even richer investment firms. Who cares if these people lose .001% of their net worth betting on startups?
- jwh 16y ago
  The problem is the 'rich guys' are using the average Joes money, often lent to/invested with them by banks and pensions funds to try and secure the largest return possible. Even if they're using their own money, the cynic inside me predicts that if/when the house of cards comes crashing down, Mr and Mrs Taxpayer will be asked to 'stabilise' the industry in the interests of national economic security.
JimboOmega 16y ago
I've used up my 5 free views on the economist... anybody have a link that avoids that problem?
- drpancake 16y ago
  http://www.economist.com/products/subscribe http://www.economist.com/products/subscribe
  - JimboOmega 16y ago
    My SO bought the economist groupon for me yesterday, so I have a new print subscription, but the details are still on their way.
aristidb 16y ago
It says that founders are less technical, and more likely to be based in NYC not SV. But YC, the poster-child of the new wave, is totally "technical founder", and I also read that the share of VC investments in California vs Rest Of The World has risen from 47% in ~2000 to over 50% now. Discrepancy?
- nostrademons 16y ago
  I think the Economist is describing a different wave than YC. The poster child for its wave is Groupon, which has lately stole the press cycle by turning down the $6B acquisition offer from Google. (Which was a masterful PR move, BTW - we don't even know if there was an acquisition offer, yet by leaking that they turned it down, Groupon has become the new hotness in every media outlet's eyes.) YC seems to invest much more in B2SmallB startups, which are less visible from a media perspective and require more technical savvy. Reddit's their most famous success because it was one of the few that is purely consumer web, but their other investments have included Wufoo, Heroku, ClickFacts, Auctomactic, FrogMetrics, and RescueTime, all of which are aimed at small businesses.
diziet 16y ago
I think this article fails to understand a fundamental trend that has been going on from 2000 to 2010 and wasn't going on in 1998. Increased market penetration of web based devices. Having a business in 1999, when the potential population of internet users is roughly 1/10th what it is now, when you do not have such a large population of non-tech people using very sophisticated devices and the web constantly. Of course, even in such a favorable environment, it is possible to have a bubble, however the numbers even they themselves use are both statistically insignificant and not telling the whole story.
sabat 16y ago
Why are they calling overvaluation by private investors a stock market bubble? I know -- they didn't say "stock market", but that's what "bubble" refers to. It's a word that conjures up images of the the dot-bomb era with a crashing stock market and thousands out of work. Having a few startups overvalued by some private investors is not going to create the same effect. Why is it that the media can't go for more than two years without making a big fuss about tech bubbles? There is no bubble. We're in a financial downturn -- a bad one.
radioactive21 16y ago
jesus what's with this new trend of calling everything a bubble?
- ScottBurson 16y ago
  It's a bubble bubble! (Sorry, couldn't resist)

69 points by obilgic 16y ago

jdp23 16y ago

"For the first time since 2000, internet and technology entrepreneurs can raise seed capital with little more than a half-formed idea and a dozen PowerPoint slides." Really?

ccarpenterg 16y ago
I think the opposite is true since 2000.
epo 16y ago
What is your scepticism? That people can do this now or that it ever stopped being that way?
- jdp23 16y ago
  That it's the case now. I'm pretty active in the Seattle entrepreneurial community and that's not at all the situation here.
dabent 16y ago
When did YC start? I'm pretty sure they've been funding ideas for a few years now. I think one of them turned out to be Reddit.
- jdp23 16y ago
  The ideas that YC funds are much more than half baked, and it's not just a "few powerpoint slides".
  - dabent 16y ago
    I didn't mean that as an insult to YC companies, or YC, but when YC started they were literally funding teams with ideas. In Reddit's case, YC convinced the team to do a different idea than what they had presented. I'm thinking YC now funds more mature companies, but that probably is a sign that there is less of a "bubble" now than there was before.
    - jdp23 16y ago
      Interesting point ... I don't know much about YC back in the early days. Don't get me wrong, I think the right idea should be fundable based on a few PowerPoint slides. I just don't see it happening very often at all.
- nostrademons 16y ago
  Summer 2005.
rwhitman 16y ago
"The first time since 2000". Hmm, I do believe that is not an accurate statement.

swombat 16y ago

The emergence of an active secondary market in shares of start-ups yet to go public has allowed founders and early investors in firms such as Facebook and Twitter to bank fortunes without waiting for a traditional exit by IPO or acquisition. These secondary-market prices feed hype about what these firms might be worth, were they to list on the stockmarket. Not many shares are available; many punters are chasing them. And those punters tend to be outsiders, such as fund managers and private-equity firms, who may not understand the tech business as well as insiders do. Wait a minute. There's an unregulated secondary market where pension fund managers and other non-tech people invest other people's money into stuff they don't understand? Previously the argument was that only wealthy people will lose out on their risk money if this is a new bubble, but if large investors like pensions and the like are also feeding this bubble than maybe we do have a new equity bubble on the way - except this one is happening on unregulated markets and so perhaps even more dangerous.

roc 16y ago
It seems to me that bubbles only form to catastrophic sizes around the unregulated edges of markets. e.g. If not for the ineffectual IPO regulation, the dot-com boom couldn't have built so much irrational exuberance. Similarly with nonexistent regulation of derivatives and the ratings thereof during the real-estate bubble. And also with Savings & Loans being deregulated in the late 80s, leading directly to that real estate disaster.
- lionhearted 16y ago
  > It seems to me that bubbles only form to catastrophic sizes around the unregulated edges of markets. Most recent economic crisis was primarily driven to crazy low interest rates, set by the Federal Reserve. Everything else about the crisis pales in significance compared to the disaster that loads of almost free cash causes. If you set interest rates below the price of inflation, you're always going to have a short, illusory boom, followed by a massive crash. Like, around 100% of the time that's going to happen. Those interest rates were set by regulation. Derivatives shenanigans is nowhere near as scary as effectively-free-money, which always breaks things always.

jacquesm 16y ago

The secondary market is an excellent place to get burned big time.

bl4k 16y ago
Real and open market valuations in a market that is semi-real and definitely not open ie. you have investors making investments with no reporting, analysis and imperfect information but the prices are not discounted because of the imperfect information.
gyardley 16y ago
No one gets burned without a burner. The secondary market is therefore also an excellent place to burn someone big time.
- chopsueyar 16y ago
  "Fear and greed, mofo."

revorad 16y ago

http://redeye.firstround.com/2007/10/this-year-i-mea.html http://redeye.firstround.com/2007/10/this-year-i-mea.html

3pt14159 16y ago

The graph on the article is misleading. Show me trending for the last 5 or 10 years. The number of exits over the past two is a completely irrelevant metric because all sorts of investors were squeezed shortly after the recession started. Calling internet startups a bubble in the same breath as the housing market bubble is doing a disservice to the readers. Every single American was seeing housing prices soar. All sorts of people were borrowing 100k against their new found home equity to "invest" in their home, despite the fact that homes have no revenue, while the majority internet companies do. Most people running startups in the community I'm most active in (Toronto) have revenue. For example: dateideas.ca is only 6 months old and they have revenue, guestlistapp.com has been out of beta for about half a year (launched a year before that) and they have fairly substantial traction, then you have the bulk-ward of the Toronto tech scene, freshbooks.com, with over 2 million users and a solid business model. Just look at their hiring page, 22 positions listed for a 50 person company. There is a huge difference between building valuations based on a solid business model and changing public trends (ie, more people getting on/trusting the internet), and building valuations on selling ponzi scheme debt that overvalue non-revenue generating assets like housing. The same article could have been written about clothing manufacturing in England just after the industrial revolution started.

epo 16y ago
Calling both the housing market and internet startups a bubble is not doing anyone a disservice. Both sectors experienced irrational valuation increases in which the bad rose with the good. These increases were not based on economic fundamentals but on the half witted belief that everyone could be a winner and that prices would rise today because they rose yesterday. A classic description of a bubble, in both cases.
- rdtsc 16y ago
  > Calling both the housing market and internet startups a bubble is not doing anyone a disservice. Well it is. It is hurting the egos of many people here as many are involved in startups. Accepting the fact that it might be a bubble would mean somehow joining the ranks of the hated housing market speculators and bankers. I am not saying whether it is a bubble or not. But if you see a large rationalization effort into making this "not a bubble" that might be a plausable explanation.

w1ntermute 16y ago

I love reading about world affairs in The Economist, but seeing how poorly they covered this topic is making me take a second look at my preferred magazine.

jdp23 16y ago
agreed that the coverage in this article was very superficial. hopefully they'll look more deeply at it one of these days.
chopsueyar 16y ago
I read a copy last week that I grabbed while in an airport. It had some good articles on China and its military capabilities, but then had a horribly written, pompous article about Google with factually incorrect information and exaggerations. Very disappointing. What is happening to the Economist?
- w1ntermute 16y ago
  > What is happening to the Economist? Perhaps they are just out of their depth wrt technology articles. They should have probably just stuck to politics/economics.
- aristidb 16y ago
  Possibly it's just that their writers are of different quality?
  - aristidb 16y ago
    I was just trying to say that it need not say much about the newspaper when some articles are good and some are bad, because they employ many writers (anonymously, of course). So perhaps saying that there is a decline in quality is over-analyzing it...
- maxawaytoolong 16y ago
  On the other hand, does any casual reader of the Economist really know if articles about China's military capabilities are accurate or not?

tybris 16y ago

Yes, except for the ones that aren't...

palewery 16y ago

Is there going to be a time in the next 5 years where most people change their views about the [usefulness/profitability] of [investing/creating/buying] [housing/start-ups/restaurants]? If your answer is yes then there is currently a bubble.

nostrademons 16y ago
Only if the change is negative. If the change is positive, then you have a trend.

maxawaytoolong 16y ago

A big reason the dot-com bubble was bad was because normal people with more to lose were depleting their retirement savings buying stock in stupid companies that recently went public. There are no more IPOs. The public at large cannot participate in this bubble. This financial part of this bubble involves a bunch of rich guys and even richer investment firms. Who cares if these people lose .001% of their net worth betting on startups?

jwh 16y ago
The problem is the 'rich guys' are using the average Joes money, often lent to/invested with them by banks and pensions funds to try and secure the largest return possible. Even if they're using their own money, the cynic inside me predicts that if/when the house of cards comes crashing down, Mr and Mrs Taxpayer will be asked to 'stabilise' the industry in the interests of national economic security.

JimboOmega 16y ago

I've used up my 5 free views on the economist... anybody have a link that avoids that problem?

drpancake 16y ago
http://www.economist.com/products/subscribe http://www.economist.com/products/subscribe
- JimboOmega 16y ago
  My SO bought the economist groupon for me yesterday, so I have a new print subscription, but the details are still on their way.

aristidb 16y ago

It says that founders are less technical, and more likely to be based in NYC not SV. But YC, the poster-child of the new wave, is totally "technical founder", and I also read that the share of VC investments in California vs Rest Of The World has risen from 47% in ~2000 to over 50% now. Discrepancy?

nostrademons 16y ago
I think the Economist is describing a different wave than YC. The poster child for its wave is Groupon, which has lately stole the press cycle by turning down the $6B acquisition offer from Google. (Which was a masterful PR move, BTW - we don't even know if there was an acquisition offer, yet by leaking that they turned it down, Groupon has become the new hotness in every media outlet's eyes.) YC seems to invest much more in B2SmallB startups, which are less visible from a media perspective and require more technical savvy. Reddit's their most famous success because it was one of the few that is purely consumer web, but their other investments have included Wufoo, Heroku, ClickFacts, Auctomactic, FrogMetrics, and RescueTime, all of which are aimed at small businesses.

diziet 16y ago

I think this article fails to understand a fundamental trend that has been going on from 2000 to 2010 and wasn't going on in 1998. Increased market penetration of web based devices. Having a business in 1999, when the potential population of internet users is roughly 1/10th what it is now, when you do not have such a large population of non-tech people using very sophisticated devices and the web constantly. Of course, even in such a favorable environment, it is possible to have a bubble, however the numbers even they themselves use are both statistically insignificant and not telling the whole story.

sabat 16y ago

Why are they calling overvaluation by private investors a stock market bubble? I know -- they didn't say "stock market", but that's what "bubble" refers to. It's a word that conjures up images of the the dot-bomb era with a crashing stock market and thousands out of work. Having a few startups overvalued by some private investors is not going to create the same effect. Why is it that the media can't go for more than two years without making a big fuss about tech bubbles? There is no bubble. We're in a financial downturn -- a bad one.

radioactive21 16y ago

jesus what's with this new trend of calling everything a bubble?

ScottBurson 16y ago
It's a bubble bubble! (Sorry, couldn't resist)