9 ms·

A few points about the “tech bubble” debate

56 points by icey 16y ago

dpapathanasiou 16y ago
"I don't know whether successful private companies like Groupon, Zynga, Facebook and Twitter are over or under priced since I don't have access to their financials" To play devil's advocate, how can anyone call FB, Twitter, Zygna, etc., "successful" (in the financial sense) without that information?
- icey 16y ago
  I was under the impression that everyone believes these companies are printing money, but don't know how much money they're making relative to their valuations. Although, I'm not sure about Twitter, are they considered to be significantly profitable?
redthrowaway 16y ago
I find the argument that this isn't a bubble because the people driving up valuations are private investors to be a bit of a red herring. That doesn't affect bubbletude, just who gets hurt if and when it pops. Inflationary bidding with the expectation of continued growth forms bubbles wherever it happens. Otherwise, the point about bubbledom being determined by the strength of the companies involved is valid. So too, is the point about diversified revenue streams speaking to a stronger underlying market. I'd actually like to see more on this last point. We can all agree that it makes sense that a market that relies on a single revenue stream (advertising) would be shakier than a diversified one, but I'd like to see some analysis into how diversified the current market is, and what that says about it's fundamental strength.
- gruseom 16y ago
  the argument that this isn't a bubble because the people driving up valuations are private investors Whose argument is that? Chris certainly didn't make it. His argument (implicitly) is that this isn't a bubble because the tech sector has sound fundamentals. The point about private investors is unrelated. If anything it's somewhat at odds with the rest of the post.
  - redthrowaway 16y ago
    You're right, I was imprecise with my statement. His argument is that it's better that inflationary investing is happening in private markets, and while that's true for the general public, I'd still say that that has no impact on whether or not we're in a bubble. If there is a bubble, and it does pop, that would be very bad for the HN crowd. The fact that VCs and investment bankers would be losing most of the money doesn't change the fact that a whole lot of devs will be out of work, and there will be a few lean years of funding for people trying to launch. In fact, for just about anyone who cares whether or not there's a tech bubble, its existence would be bad. So yes, while it may be better for the economy as a whole to have the risk taken by a select few, it won't matter much to the rest of us.
d2 16y ago
Chris is conflating the startup bubble with a general tech bubble and using the strength of profitable companies to defend startups. Twitter and Color are startups with no clear business model. Groupon and Google are going concerns. As per the blog entry: "A bubble is a decoupling of asset prices (valuations) from their underlying economic fundamentals". [Agreed!] Throwing $45 million at Color with nothing more than an idea and the hint of an app is evidence of a bubble. So is Twitter's recent $7.7 billion valuation based on a predicted $150 million in 2011 revenue. I know it hurts - hell it's going to hurt all of us - but you better believe it. Prepare to be profitable or die.
- gsmaverick 16y ago
  Twitter has a very clear business model: advertising. They are on track to make $150+ million this year from it.
  - il 16y ago
    I thought much of Twitter's revenue came from licensing their firehose to Google, etc.
    - thesethings 16y ago
      That was true for a moment. They did the Google/Bing firehose deals before they had promoted tweets/trends program.
  - d2 16y ago
    Which means they're valued at 51 times revenue. To put that in perspective, Google is valued at just over 6 times revenue.
    - nikcub 16y ago
      Totally different stages of business and incomparable. Google revenue is growing steadily, since $30B p.a for a single revenue stream is about as big as you can get. If you want a proper comparison, Google's PE ratio was 150 at IPO (and 300 at the high range of estimates, and it eventually reached that) A lot of smart people thought that was a bad buy at the time, as well: http://nikcub.appspot.com/the-google-ipo-skeptics http://nikcub.appspot.com/the-google-ipo-skeptics
grishick 16y ago
I don't think Facebook's valuation is "bubbly". However, the valuations of many early stage startup companies are inherently speculative, because they are based on projections which rely on assumptions, and only time will show whether this assumptions were true or false. This bubble is only as "bubbly" as these assumptions are overly optimistic. This is why investors learned to bet on people and teams, rather then on ideas, because the quality of the team is a better predictor of its success then the business idea.
nikcub 16y ago
Analysts are searching for simple analogies to explain what is happening - and in tech it is either bubble or not bubble. Nobody is bothered or able to explain in any real terms how a company like GroupOn can go from unknown to a billion in revenue in 24 months. They only know to take the easy analysis by looking at valuations and calling bubble.
deleted 16y ago
[deleted]
staunch 16y ago
It takes a hell of a lot to bore me when the topic relates to startups/tech/silicon valley but all this Bubble Talk seems so silly and pointless. Why is this topic so damn fascinating to people?
- jerf 16y ago
  There is a strange and powerful drive to be the first person to declare that something has jumped the shark. I don't know exactly what it is about the Internet that has done this, but the time it takes for someone to leap up and declare that something is "over" just keeps going down, to the point that it has now reached somewhat absurd levels. Maybe we're in a bubble, maybe not, but either way the declaration seems to be getting made on awfully scanty evidence... but it's important to be first. Of course on a long enough time scale a bubble in tech is inevitable almost no matter how you slice it.
  - BenWGarton 16y ago
    I think that it isn't necessarily to be the first to declare it, but people want too see it coming. Where the first tech bubble surprised a lot of people and they lost money. If you know your going to lose some, it doesn't hurt as bad. Kind of like playing roulette. You expect to lose but it feels good when you win.
- jdp23 16y ago
  From a strategy perspective, it matters hugely to anybody in or thinking of launching a startup. If there's no bubble, then the current happy days are likely to continue: lots of money chasing after good ideas, huge rewards for the winners and so as a result easy access to angel investments and high valuations. Yay! So it makes sense to think of a strategy focused raising a lot of money on great terms. On the other hand, if there is a bubble, a very different strategy is called for. One option is to sneak in and raise money at bubbleicious valuations before it pops. But that risks setting expectations with investors that will be impossible to meet in a post-bubble environment -- a recipe for a rocky medium term. Another option is to batten down the hatches and focus on getting to cash-flow positive ASAP to leave yourself in the best position to pick up the pieces as other unsustainable companies crumble. Or as I said elsewhere in the thread, maybe it's a good time to be contrarian: work out where the bubble is likely to be, and position yourself differently so that when it pops you can be there as one of the first exciting post-bubble companies. And it's also possible to take a straddling strategy, ready to go either way depending on whether or not it's a bubble. Of course it's impossible to know for sure what the answer is. But hearing and understanding various perspectives (right and wrong) and others' reaction to them really helps map out the strategy space and highlight the best places to be.
JSig 16y ago
"It's not a surprise that we know we have crises every five or ten years. My daughter came home from school one day and said, 'daddy, what's a financial crisis?' And without trying to be funny, I said, 'it's the type of thing that happens every five, ten, seven, years.' And she said: 'why is everybody so surprised?' So we shouldn't be surprised..." - Jamie Dimon (Chairman & CEO @ JP Morgan; Dir of the NY Federal Reserve) If you agree with Mr. Dimon, the party will come to an end sooner or later - bubble or no bubble. Your best bet is to relax, enjoy yourself, have some drinks and ensure you have a driver to take you home when the party is over. As John Wooden said, "Failure to prepare is preparing to fail." Personally, I don't know if there is a bubble. But, I see plenty of cracks in the system that are cause for concern.
stretchwithme 16y ago
Since Sarbanes Oxley has made it unpalatable to sell to the public directly, we really don't know much like the dotcom bubble the current situation is. But we do know that the Fed has pumped massive amounts of liquidity into the economy and that it has to go somewhere. And the Fed is the number one creator of bubbles in the world.
larryfreeman 16y ago
As long as we are seriously having this debate, we are not in the middle of a bubble. It might be an overvaluation, fine, but that's not a bubble. A bubble occurs when the overvaluation crosses an unsustainable threshold. It's when the values are rising faster than people can properly evaluate the risk. We are definitely getting closer to a bubble. The euphoria associated with a Facebook IPO might get us there.

56 points by icey 16y ago

"I don't know whether successful private companies like Groupon, Zynga, Facebook and Twitter are over or under priced since I don't have access to their financials" To play devil's advocate, how can anyone call FB, Twitter, Zygna, etc., "successful" (in the financial sense) without that information?

icey 16y ago
I was under the impression that everyone believes these companies are printing money, but don't know how much money they're making relative to their valuations. Although, I'm not sure about Twitter, are they considered to be significantly profitable?

redthrowaway 16y ago

I find the argument that this isn't a bubble because the people driving up valuations are private investors to be a bit of a red herring. That doesn't affect bubbletude, just who gets hurt if and when it pops. Inflationary bidding with the expectation of continued growth forms bubbles wherever it happens. Otherwise, the point about bubbledom being determined by the strength of the companies involved is valid. So too, is the point about diversified revenue streams speaking to a stronger underlying market. I'd actually like to see more on this last point. We can all agree that it makes sense that a market that relies on a single revenue stream (advertising) would be shakier than a diversified one, but I'd like to see some analysis into how diversified the current market is, and what that says about it's fundamental strength.

gruseom 16y ago
the argument that this isn't a bubble because the people driving up valuations are private investors Whose argument is that? Chris certainly didn't make it. His argument (implicitly) is that this isn't a bubble because the tech sector has sound fundamentals. The point about private investors is unrelated. If anything it's somewhat at odds with the rest of the post.
- redthrowaway 16y ago
  You're right, I was imprecise with my statement. His argument is that it's better that inflationary investing is happening in private markets, and while that's true for the general public, I'd still say that that has no impact on whether or not we're in a bubble. If there is a bubble, and it does pop, that would be very bad for the HN crowd. The fact that VCs and investment bankers would be losing most of the money doesn't change the fact that a whole lot of devs will be out of work, and there will be a few lean years of funding for people trying to launch. In fact, for just about anyone who cares whether or not there's a tech bubble, its existence would be bad. So yes, while it may be better for the economy as a whole to have the risk taken by a select few, it won't matter much to the rest of us.

d2 16y ago

Chris is conflating the startup bubble with a general tech bubble and using the strength of profitable companies to defend startups. Twitter and Color are startups with no clear business model. Groupon and Google are going concerns. As per the blog entry: "A bubble is a decoupling of asset prices (valuations) from their underlying economic fundamentals". [Agreed!] Throwing $45 million at Color with nothing more than an idea and the hint of an app is evidence of a bubble. So is Twitter's recent $7.7 billion valuation based on a predicted $150 million in 2011 revenue. I know it hurts - hell it's going to hurt all of us - but you better believe it. Prepare to be profitable or die.

gsmaverick 16y ago
Twitter has a very clear business model: advertising. They are on track to make $150+ million this year from it.
- il 16y ago
  I thought much of Twitter's revenue came from licensing their firehose to Google, etc.
  - thesethings 16y ago
    That was true for a moment. They did the Google/Bing firehose deals before they had promoted tweets/trends program.
- d2 16y ago
  Which means they're valued at 51 times revenue. To put that in perspective, Google is valued at just over 6 times revenue.
  - nikcub 16y ago
    Totally different stages of business and incomparable. Google revenue is growing steadily, since $30B p.a for a single revenue stream is about as big as you can get. If you want a proper comparison, Google's PE ratio was 150 at IPO (and 300 at the high range of estimates, and it eventually reached that) A lot of smart people thought that was a bad buy at the time, as well: http://nikcub.appspot.com/the-google-ipo-skeptics http://nikcub.appspot.com/the-google-ipo-skeptics

grishick 16y ago

I don't think Facebook's valuation is "bubbly". However, the valuations of many early stage startup companies are inherently speculative, because they are based on projections which rely on assumptions, and only time will show whether this assumptions were true or false. This bubble is only as "bubbly" as these assumptions are overly optimistic. This is why investors learned to bet on people and teams, rather then on ideas, because the quality of the team is a better predictor of its success then the business idea.

nikcub 16y ago

Analysts are searching for simple analogies to explain what is happening - and in tech it is either bubble or not bubble. Nobody is bothered or able to explain in any real terms how a company like GroupOn can go from unknown to a billion in revenue in 24 months. They only know to take the easy analysis by looking at valuations and calling bubble.

deleted 16y ago

[deleted]

staunch 16y ago

It takes a hell of a lot to bore me when the topic relates to startups/tech/silicon valley but all this Bubble Talk seems so silly and pointless. Why is this topic so damn fascinating to people?

jerf 16y ago
There is a strange and powerful drive to be the first person to declare that something has jumped the shark. I don't know exactly what it is about the Internet that has done this, but the time it takes for someone to leap up and declare that something is "over" just keeps going down, to the point that it has now reached somewhat absurd levels. Maybe we're in a bubble, maybe not, but either way the declaration seems to be getting made on awfully scanty evidence... but it's important to be first. Of course on a long enough time scale a bubble in tech is inevitable almost no matter how you slice it.
- BenWGarton 16y ago
  I think that it isn't necessarily to be the first to declare it, but people want too see it coming. Where the first tech bubble surprised a lot of people and they lost money. If you know your going to lose some, it doesn't hurt as bad. Kind of like playing roulette. You expect to lose but it feels good when you win.
jdp23 16y ago
From a strategy perspective, it matters hugely to anybody in or thinking of launching a startup. If there's no bubble, then the current happy days are likely to continue: lots of money chasing after good ideas, huge rewards for the winners and so as a result easy access to angel investments and high valuations. Yay! So it makes sense to think of a strategy focused raising a lot of money on great terms. On the other hand, if there is a bubble, a very different strategy is called for. One option is to sneak in and raise money at bubbleicious valuations before it pops. But that risks setting expectations with investors that will be impossible to meet in a post-bubble environment -- a recipe for a rocky medium term. Another option is to batten down the hatches and focus on getting to cash-flow positive ASAP to leave yourself in the best position to pick up the pieces as other unsustainable companies crumble. Or as I said elsewhere in the thread, maybe it's a good time to be contrarian: work out where the bubble is likely to be, and position yourself differently so that when it pops you can be there as one of the first exciting post-bubble companies. And it's also possible to take a straddling strategy, ready to go either way depending on whether or not it's a bubble. Of course it's impossible to know for sure what the answer is. But hearing and understanding various perspectives (right and wrong) and others' reaction to them really helps map out the strategy space and highlight the best places to be.

JSig 16y ago

"It's not a surprise that we know we have crises every five or ten years. My daughter came home from school one day and said, 'daddy, what's a financial crisis?' And without trying to be funny, I said, 'it's the type of thing that happens every five, ten, seven, years.' And she said: 'why is everybody so surprised?' So we shouldn't be surprised..." - Jamie Dimon (Chairman & CEO @ JP Morgan; Dir of the NY Federal Reserve) If you agree with Mr. Dimon, the party will come to an end sooner or later - bubble or no bubble. Your best bet is to relax, enjoy yourself, have some drinks and ensure you have a driver to take you home when the party is over. As John Wooden said, "Failure to prepare is preparing to fail." Personally, I don't know if there is a bubble. But, I see plenty of cracks in the system that are cause for concern.

stretchwithme 16y ago

Since Sarbanes Oxley has made it unpalatable to sell to the public directly, we really don't know much like the dotcom bubble the current situation is. But we do know that the Fed has pumped massive amounts of liquidity into the economy and that it has to go somewhere. And the Fed is the number one creator of bubbles in the world.

larryfreeman 16y ago

As long as we are seriously having this debate, we are not in the middle of a bubble. It might be an overvaluation, fine, but that's not a bubble. A bubble occurs when the overvaluation crosses an unsustainable threshold. It's when the values are rising faster than people can properly evaluate the risk. We are definitely getting closer to a bubble. The euphoria associated with a Facebook IPO might get us there.