10 ms·

All the oxygen trapped in a bubble

253 points by raganwald 14y ago

3pt14159 14y ago
I'm finally coming around to thinking that it is starting. About three years ago people were screaming bubble because YC companies were getting $4m or $5m valuations and I wrote the following: "The truth is this: Bubbles don't exist without my aunt's mutual fund getting involved or my next door neighbor getting told to mortgage his house to invest by his financial advisor. Web 1.0 was all about IPOing on the nasdaq and fleecing the public with business models that disregarded profit. This time around things are different. At every stage of the process you see startups with business models. Guestlist, Github, FreshBooks, heck even Groupon, are making nontrivial money relative to the valuations and expected future growth." And the money is starting to come in from my Aunts pension fund (Facebook buying instagram because they knew they were going to have her money within a couple months). Just barely starting, so we've got probably 2 to 4 years before the pop actually happens. But what are we supposed to do while it is happening? We can warn people for a while, but it won't change anything. Get money while you can, build a warchest like paypal did and get ready for the winter of 2015 to 2018.
- AznHisoka 14y ago
  Or you can just concentrate on building a sustainable business, and worry about more urgent things that will affect your business, rather than the macro-trends.
  - DrJokepu 14y ago
    But "macro-trends" always affect your business even if you are building a sustainable one. Even if you have no investors, if your clients are suffering, you are suffering. If your clients' clients are suffering, you are suffering. If your clients' clients' clients are suffering, you are suffering.
    - loganfrederick 14y ago
      You're right, but a truly valuable and sustainable business/technology will be one that clients consider worth paying for even when they are suffering. There aren't necessarily a lot of modern tech companies that would survive this test though.
  - izak30 14y ago
    Agree or not, that's what DHH is saying here. It's harder for sustainable businesses to hire talent, when talent is getting paid more at places with enormous valuations. This of course falls down if the large valuation and the large pay are justified by things like large revenues, or value to those with large revenues.
    - edwinnathaniel 14y ago
      Sometimes I just wonder: what "talent" are you guys talking about? It's almost as if there exist a group of fresh-grads who just completed their CS degree but can magically write a better compression engine or a revolutionary protocol that is better than TCP.
      - billybob 14y ago
        Why does "talent" have to mean "incredible geniuses"? Lots of companies need programmers who are "pretty good," whatever that means to you.
        randomdata 14y ago
        Or do they? If you look at the big industries of the past, they came with real time constraints. In agriculture, for instance, if the work wasn't completed in time, the food would spoil. While skilled farmhands are more valued, in the absence of them, anyone off the street will be given the job simply because it has to be done one way or another. What are the consequences to not building on your technology by a certain date? Maybe your competition will beat you to the punch. Maybe the costs that could be saved by implementing the software will continue to be expensed. Beyond that, not a whole lot. This leads us to a situation where just having anyone on the job is not viable. It is prudent, in many, cases for a business to simply wait until someone who is "top talent" is freed up to do the work. Simply knowing how to program isn't going to be enough.
      - mcguire 14y ago
        What is this "completed their CS degree" stuff you're talking? That's ancient school.
- borism 14y ago
  It won't last a year with several parallel bubbles (one on the other side of Atlantic, another on the other side of Pacific) imploding.
  - eande 14y ago
    strong pointers without back up info
    - redthrowaway 14y ago
      The Euro faces, if not demise, then a near-certain restructuring that will ripple through global financial markets. China is also showing blemishes on its shiny economy, which was entirely foreseeable given their rather suspicious pegging at an 8% growth in GDP year on year. It won't collapse, but it will definitely cool considerably as even the politburo can't continue to justify building cities with no one in them just to pad GDP.
- ereckers 14y ago
  I agree with the "next door neighbor" allegory. There's only a "bubble" when we can identify a bag holder. That almost inevitably winds up being the plebs, whether it be the general population or via government bailout (still the people). I'm not sure if anyone has yet identified who would be the bagholders in this "bubble", because a bunch of rich guys at Andreesen or Sequoia sure aren't it. You need a vehicle for the commoner to piss away their money. I don't see that yet. Maybe in a couple years, when your local community KickStarter has you pulling money from your 401K to invest in corporate backed internet startups will they have a way to start to attract Joe the Plumber's wealth. And with that, a "bubble" comes with it the psychological idea that it's RISK FREE money. That you can borrow money now, sell later and cash out the gains as your investment surely grows. Add to that the real actual feeling that you'd be stupid not to do it (because everywhere you look people are making money off this). That's when we've got a bubble. When someone can point out a large, wide, gullible, set of people with no access to real fundamental information willing to give up their money through a simple mechanism (stock markets, housing, etc..) then folks, we've got a bubble.
theorique 14y ago
Strategically, it makes sense for a programmer to let his / her skills get bid up and use the surplus to store up some dry powder for the next recession. If you stay focused, bubbles are great times to build up your skills and do something real. Unless you're planning to play the startup lottery by creating a gamified social network for teenaged felines or something, in which case, good luck, and have fun. You can probably still come out ahead in skills and experience.
- aaronblohowiak 14y ago
  This is my strategy. Contract and stash during bubble, then try and start my own thing in the lull.
  - theorique 14y ago
    If you can time it right, it is probably best to start your own thing right before the peak - get funded, and have a nice Series A war chest just as the lean times hit and the water turns red. Although to truly weather the lean times, this would have to be a real business - ideally with customers cash flow - not a fluffy built-to-flip eyeball monetizing engine.
dave1619 14y ago
I know the guys at 37Signals are a smart pack, but I don't understand their hangup with Instagram and Pinterest... and apparently FB (esp. their older posts). FB has proven to be able to make $billions of revenue and substantial profit, and is only growing. Isn't that proof that an ad-based model can work if it's large enough? Instagram was FB's biggest competitor... huge growth and huge adoption amongst young groups of friends. FB was smart to buy them. Pinterest... I'm less bullish on. I can see how they can make money with affiliate commissions on products and such. But I just don't see Everyone using this. Pinterest at $1.5billion might be over-valued for where it's at. But then again, I don't have privy to their internal numbers (ie., traction, metrics, retention, etc). But, I can see Pinterest be worth a lot in the future, just right now I'm not sure about the $1.5b. FB, Instagram and maybe Pinterest are amazing companies with crazy traction. They're all riding on the huge distribution channels of our day (web, mobile, social) and have reached or are close to reaching the 100+million users mark (for FB is the 1+billion user mark). Any service that can garner 100s of millions of users can find a way to monetize. How much in monetization is another story, but I wouldn't bet against them to create some substantial value.
- lmm 14y ago
  They're probably hung up because it's making them look small-time. What do 37Signals actually do, other than generate a steady stream of blog posts for HN? They make some sort of dropbox knockoff, right?
  - spitfire 14y ago
    TODO and project management apps for small business. Unfortunately their success has gone to their heads.
    - tferris 14y ago
      Couldn't upvote this more. Rails was groundbreaking. Yes. DHH did something great but that's now 7 or 8 (!) years ago. Rails has aged, DHH showed often how opinionated he can be and that he just isn't perfect. And the 37signals products live primarily because of DHH's and Rails' reputation and not because there are outstanding (there tons of better Basecamps out there). Still DHH is a smart guy but a Kevin Systrom who built a company, who learned how to build a scalable backend while starting this company and then sold this company after just 2 years for 1 billion achieved something special as well and this should be appreciated instead of ranting. This is just infantile and shows once again DHH's temper and lack of self-control.
dsirijus 14y ago
Worst thing for me is that I actually feel completely out of place actually building my company up last 6 months so I can take on an idea I have, completely self-funded.
jmduke 14y ago
The issue in my mind is that "all those smart and talented heads" which the article mentions, even if they're aware of the bubble, have no incentive to change directions. Call me jaded, but I don't think most startups are created with the intention of improving society. So long as there's an Ouroboros effect of VCs funding brilliant engineers without truly revolutionary ideas, those engineers are going to create business models revolving around getting a big enough user base to justify high valuations, and eventual acquisition. And businesses shouldn't be about exit strategies.
zackzackzack 14y ago
It's a shame that all of that talent is working on things the author doesn't think are worthwhile. I mean, everyone should work on what everyone can agree on is worth their time, right? Yet, I don't think everybody can really agree on what is worthwhile for a person's time. I can point at people working on things like Linux and Khan Academy and say "Their efforts are worthwhile!" but then Microsoft and that one guy, who bitches about Khan Academy stealing all the VC money or whatever, will wag their fingers and say "They are hurting our business! Their time isn't worthwhile!" Personally, the efforts DHH has put into basecamp and their products is worthless to me. I don't use the products and see no reason to start. That isn't a diss to the products themselves: I literally have no use for them right now. I freelance and study at college and their suite of products doesn't solve any of my problems. So, who decides what's worthwhile? There are at least two instances where two groups of people don't all agree the same thing is worthwhile. It's a hard problem and implying "adopt my values so you will work on things I think are worthwhile" isn't going to solve it. (Also, I agree we are in a bubble. I value economic growth and American strength, not pictures of cats.)
- johnbender 14y ago
  I appreciate your relativistic stance, but there's a part of me that wonders if, as an example, Instagram provided a billion dollars worth of additional photo sharing value over what already existed on Facebook. That is, photo sharing does have value to people who want to stay connected and have shared experiences via the internet, but I don't think that Instagram improved that to the tune of a billion dollars.
  - lincolnq 14y ago
    Counterexample: I was never interested in photo sharing before Instagram. I wasn't a good enough photographer. Now I can make my photos beautiful enough that I want to share them. Is this worth more than a few dollars to me personally? Yes. If I'm at all like a random person, then it's easy to see how Instagram is worth well over a few billion dollars.
    - 14y ago
elorant 14y ago
If it's a bubble then Facebook's IPO could be the turning point.
- pyre 14y ago
  Or not. If Facebook remains profitable, then it could basically be this bubble's Google.
- pyre 14y ago
  Or not. If Facebook remains profitable, then it could basically be this bubble's Google.
tferris 14y ago
> All those smart and talented heads, and all those benjamins, didn’t progress the economic base in a way we’re going to care about tomorrow. He's talking of Facebook, Instagram, Pinterest, etc. and doesn't have the courage to name then. Is this envy? That DHH's products haven't got this far? Or just naive? Because he should know the typical deal terms of a Pinterest and that valuations and raising are blown up for the sake of getting PR and the real milestone payments are much smaller? And that FB IPO can still fail in the long run? Whatever. As much I appreciate DHH and his past work his posts have always the same bitter taste: 37signals is the benchmark and the rest is wrong. EDIT: Hey downvoters, downvoting != disagreeing, just reply if you disagree
- jiggy2011 14y ago
  He is considered a demi-god to a whole generation of programmers and drives a custom pagani zonda, I doubt he is that envious.
- mhartl 14y ago
  The benchmark is profits. "Instapintora" might work out well for its founders, but DHH argues that grabbing a ton of users and hoping for the best isn't a good general strategy for building a business. I'd amend that slightly by saying that companies with a huge number of users are valuable, either as eventual cash cows or as strategic acquisitions, but at best following that route is a risky strategy. Sure, you might win the startup lottery, but you probably won't. Actually charging customers with the goal of becoming profitable in the shorter term is a likelier route to success. Even if you don't end up with a cash cow, you still have a good chance at a cash goat—which is still worth milking.
  - tferris 14y ago
    > ... grabbing a ton of users and hoping for the best isn't a good general strategy for building a business. Everyone has their own way and why do people judge about others? Some grab a ton of users and hoping for the best and others write online tutorials for aged technologies. Let people just do what they like and appreciate if they are successful (grabbing a ton of users is as hard as it is to write good online tutorials).
veyron 14y ago
It is possible to build a sustainable internet business which does not rely on the prospects of an IPO. Unfortunately it seems that few people treat the industry in that way.
kevinpet 14y ago
Well, the key feature of a financial bubble is that no one is behaving irrationally at a micro level. Even if you know its a bubble, it may be worth trying to get in now and get out closer to the top. Same thing with building social local mobile stain removal advice apps -- if someone's buying, then someone will be supplying it. If it is really, no shit, a bubble, then there is a lot of money to be made by determining how to pop it.
will_work4tears 14y ago
I don't have anything really substantial to add to this topic, but I find it interesting I have some serious envy for the "talent" that is so in demand. I went the easy route, chose the web development path in my education, rather than a more math heavy, software engineering direction. I've been slapping myself for years now, but this just rubs salt in my wounds. Granted, I interview very poorly, am not the most articulate person (stutter and stammer a lot, etc) and I certainly can't at this point in my life up and move to San Francisco, so it is probably not important anyway.
- johndavidback 14y ago
  There is still a high demand for talented web developers... You don't need a PhD in computer science to work for a startup. There's a lot of money to be made working on teams building MVP's.
- damoncali 14y ago
  You are not asking for enough because you don't believe you are worth it. Seriously. Adjust your mindset.
rudiger 14y ago
The chance that granny is going to lose her pension fund is much more related to the actions of the banking and financial industries. Granny is already losing her savings with near-zero interest rates.
- SCdF 14y ago
  Is this really true? As in, are savings accounts in the US essentially useless now? I don't know about the rest of the world, but in NZ standard saving accounts are ~2%, and more investment focused (fixed term and variants) are 4-6%.
  - cageface 14y ago
    It's better than stuffing the money in a mattress, but not much more. Typical savings account interest rates are < 1%.
  - jmitcheson 14y ago
    I assume that the parent poster meant that granny is having the real value of her cash savings eroded through inflation because of the zero percent interest rate @ the US fed
pg 14y ago
The pieces of this argument fit together very neatly, but the problem is that they don't correspond to reality. E.g. the cloud about increased VC fundraising. In reality VCs are having a hard time fundraising: http://nvcaccess.nvca.org/index.php/topics/research-and-trends/290-vc-fundraising-contraction-and-concentration.html http://nvcaccess.nvca.org/index.php/topics/research-and-tren... Thus it also isn't true that the cause of higher valuations is that VCs have more money. Valuations are certainly higher, but I think the reason is that founders are increasingly getting the upper hand over investors. Which is why in addition to getting higher valuations, founders are increasingly able to retain board control.
- ForrestN 14y ago
  Clearly there isn't just one reason, right? Can't all of these factors, and others, be contributing? I don't claim to know who's right, or how to weight the various factors, but big exits certainly do free up capital to be reinvested in more companies, don't they? I'm curious in a broader sense what you (or anyone else who is experiencing it first hand) makes of the "bubble question." I'm sure it's unlikely but it would be great to have such people on the record with general predictions about the coming months and years.
  - pg 14y ago
    No, the capital returned to a VC fund after an exit is not reinvested. It's distributed to the LPs. And while yes, strictly speaking, the LPs now have more money to invest than they had before, they are mostly giant endowments, pension funds, and foundations who only have a small fraction of their assets in VC funds, and whose future investment decisions are decided by asset allocation policies and not by recent returns. The way big exits cause more money to be invested by VCs is not that capital is freed up thereby, but rather that news of them makes more people want to start or invest in VC funds. But that process is much slower.
    - ForrestN 14y ago
      Thanks! That makes sense. I just hear so many names of individuals being associated with these windfalls it's easy to imagine them continuing to invest on the basis of their holdings being liquidated.
mxfh 14y ago
I was expecting some illustration like this: http://ga.water.usgs.gov/edu/earthhowmuch.html http://ga.water.usgs.gov/edu/earthhowmuch.html Just with oxygen instead of water.
michaelpinto 14y ago
talent can't get "trapped" by a bubble: if a bubble is really a bubble then it will burst and the talent will become free. in fact if you feel there is a bubble then you should encourage it because over the long term the market will be flooded by talent which will be cheaper. but something that everyone here has to think about: even if you don't think there is a bubble, the nature of tech is that it is cyclical in nature. this means that sooner or later there will be winners, and those looking for a job. although i dare say that those down cycles are in fact THE best times to start a new business or venture. i would also say that at this point in time that most of the costs of most startups are talent. years ago this wasn't the case, and one of the things that screwed me over in the original dot.com bust was the fact that my real estate costs tripled in the same space at the high point of the bubble. i also wasted a ton of money on hardware and have bitter memories of owning expensive servers that were destined for eBay. i should add that deeply respect 37signals, and i've found myself following their model -- but it's not the only model.
postfuturist 14y ago
I'm just a working developer. I'm not looking to start a business of my own any time soon. I'll say one thing: I don't work for companies that cut paychecks out of rapidly dwindling venture capital funds and I don't work for large corporations that hire and fire teams like chattel. If the bubble burst tomorrow, it wouldn't affect my life in any meaningful way. I'd probably get fewer recruiters bugging me, which would be nice for a change.
cletus 14y ago
I've called the kneejerk "bubble" reactions "boring" [1] and I stand by that. That doesn't mean I disagree (or agree for that matter). It just means that banal perjoratives with nothing to back them up are boring. To call this a bubble, one must first describe what one means by a bubble. A bubble in my mind is a period of rapid growth in valuations followed by a massive devaluation on such a scale that it hinders investment and innovation. The subprime collapse was a bubble. Many people were left underwater on their mortgages. Building in many places stopped for years. This has a knock-on effect on jobs, related industries and so on. That's a bubble. The dotcom collapse was also a bubble. But there are several differences this time around: 1. Startup costs now, for most Internet startups, are essentially zero. 10+ years ago you had to spend $5-10M to do anything (once you paid for Sun servers, Oracle licenses and so on); 2. Lax listing requirements, particularly on the NASDAQ, helped perpetuate fraud; 3. There was no experience to draw on (from living memory at least). Now we hopefully know a little better; 4. Sarbanes-Oxley, clusterfuck that it is, has at least kept the number of Internet companies IPOing relatively low. This has some negative consequences too but it means that retail investors and mutual funds have largely been excluded from the startup scene, which honestly is a Good Thing [tm]; and 5. Now, as opposed to then, there are real businesses operating in the tech space who are generating profits on a scale not seen in probably a century or more. Apple, for example, is worth >$500B market cap now and by some estimates that's still cheap given their profits. 10+ years ago investment dried up, capital dried up and legitimate businesses couldn't start or continue to operate, which had a domino effect. What happens if next month Facebook goes from $100B valuation to $10B? Honestly, not a lot. Late stage investors will lose their shirts. That's fine. VC is a high-risk business. Individuals who participate in the IPO will lose a lot of money. That's not ideal but so be it. But the important thing to ask is: what will happen to the system as a whole? Startups will still start. When you can build a mobile app and business for $50k the capital markets are basically irrelevant to you. Apple, Google, Microsoft and others will remain. Life will go on. The low cost of startups is itself a barrier to institutional investment (by pension funds and the like) because the amounts are too small. Again, that's a Good Thing [tm]. What's really happening here is a lot of money is changing hands between VCs and endowment funds and honestly in relative terms it's not that much money. Speaking to some examples (recent and otherwise): - Instagram: I think this purchase was overvalued but, if anything, it demonstrates just what a high-risk investment Facebook is if a company can go from nothing to being an existential threat in 2 years. I honestly believe Facebook was taking them out of the market with this buy; - Pinterest: through affiliate and advertising revenue I see potential for this company to be a huge business with massive ability to drive traffic to commerce sites. Make no mistake, this is a real business. It's not without risk but the potential is huge; - Youtube: I bring this one up because it went, in 18 months, from being nothing to being bought by Google for >$1.5B (IIRC). Some said now it was overpaying. Honestly, in hindsight I think that price may well have been a massive bargain. Just because you don't see potential doesn't mean there isn't any. Just because something ends up failing doesn't mean the risk wasn't worth taking. The reason the kneejerk bubble accusations annoy me is that they come from the sort of people who seem so averse to risk that they neve take any. That is, until the very peak of the bubble (when they finally convince themselves this can go on forever). Please, I beg of you, if you're going to jump and down and yell "bubble" at least add something to the conversation or back it up with something. A >$1B valuation on a funding round doesn't actually mean anything. Disclaimer: I work for Google. EDIT: I forgot to address a couple of points. Firstly, I too find it depressing what a lot of us are working on [2] [3]. The fact that SpaceX can revolutionize launch costs for less money than was spent on Instagram is sobering and depressing. Secondly, it is incredibly hard to hire good engineers. I don't see this as evidence of a bubble. I see this as evidence that: a) (good) engineering is hard; b) when other costs (bandwidth, servers, software) go to zero, demand for manpower will go up because businesses that once weren't possible or viable will become so; and c) in a world where anyone can be a founder, it makes no sense to stick to 90s era equity arrangements. To be honest, being an early employee is a lottery ticket and, generally speaking, a shitty deal. Last cofounder = 25-50%. First employee = 1-2%. If good talent is better off working on their own startup you shouldn't be surprised that they do. [1]: http://news.ycombinator.com/item?id=3985393 http://news.ycombinator.com/item?id=3985393 [2]: http://news.ycombinator.com/item?id=3876897 http://news.ycombinator.com/item?id=3876897 [3]: http://www.youtube.com/watch?v=vKmQW_Nkfk8 http://www.youtube.com/watch?v=vKmQW_Nkfk8
drewinglis 14y ago
This article left a bad taste in my mouth. Companies that have millions of active users are hardly bridges to nowhere that are devoid of economic or public value.
lifeisstillgood 14y ago
To me the most convincing part is the bridge to nowhere. So, just build bridges to somewhere. Build what people want, and preferably, will pay for. Even if you build it in a bubble, its still a bridge, somewhere.
mpg33 14y ago
as long as companies have good product's and can consistently generate revenue...the industry should be fine
endlessvoid94 14y ago
> Rapidly increasing demand for an only steadily increasing supply. Thus, inflation. I think it might be possible to rapidly increase the supply. I'm working on Bloc (http://bloc.io http://bloc.io) and have been privileged enough to hang out at dev bootcamp (http://devbootcamp.com http://devbootcamp.com), and if I've learned anything, it's that people want to fill this supply. The challenge is taking the lessons we've learned and scaling them up to meet something like an economic demand. I don't think it's impossible.
bluedanieru 14y ago
What about "creative destruction?" Part of the process is resources being diverted to shit that goes nowhere. Eventually the people who made that shit go out of business and then go to work on something else (and hopefully for them, this time, it doesn't suck). I suspect the author's point is that lately there is much more destruction and less creativity, but he doesn't state it explicitly or even do a very good job of implying it. In fact, this almost reads like a critique of basic capitalism. Certainly the ratio of expensive but worthless shit to good and useful stuff seems headed up. I agree that it is. However the boom-bust cycle is a feature of capitalism, not something you set about to correct. The author doesn't propose any solution here, which is convenient. If he had, he would have come to the sudden realization: Aha! There isn't one. Is Instagram worth $1B? Definitely not. But neither is Facebook worth $100B, or whatever made-up number they're valued at these days. Evaluating the value of ideas is not an easy task. Capitalism arrives at a solution eventually, but no one ever said it was efficient about it. (Okay, lots of people say that, but they're deluded assholes.)
waratuman 14y ago
Inflation isn't an increase in demand that leads to higher cost. Inflation is a general increase in supply. A rise in prices is not the same as inflation. Inflation will eventually cause a rise in prices but it is not the only reason for an increase in prices.
grandalf 14y ago
While David's argument is interesting, how would his claims be falsified? The economy is a noisy mess of contemporaneous booms and busts. What we typically call a "bubble" is a boom that lasts long enough that the bust is socially noteworthy. What if the information age is simply arriving faster and faster? Parents and grandparents are now buying tablets and laptops, uploading photos, liking wall posts, etc. There could be a huge shift toward the digital economy even if no bubble is occurring. How many wall posts result in a greeting card not sent, paper not manufactured, trees not felled, shipped, and processed? What other efficiencies are occurring to divert so much capital to information tech? Most of the technologies that are getting the most money are things that save people serious time/money/effort. This is equivalent to big dollars. So not only should capital be diverted from other industries, but certain existing ones become more valuable -- photo finishing has more value when you are sending in 30 favorite pics chosen from 1000 digital photos you took, rather than sending in a roll of film and hoping that a few out of the 24 on the roll turned out as expected. Travel has more value when you can use yelp to find great restaurants, AirBnB to find the perfect lodging at a great price, and Facebook to reconnect with old friends who it turns out live there. Technology brings value to so many areas, both expected and unexpected. This is why capital is flowing. And it will continue to flow. Yes there are meta factors such as monetary policy that impact the cost of credit and to some extent influence the risk-appetites of investors, but I think that's likely to be a small fraction of what we're seeing. The reason it's less obvious to us is b/c we've lived in this world of tech for at least 5-10 years before the rest of society started to arrive.
ericson578 14y ago
What would the difference be between a market correction and a bubble bursting? Is it just a buzz word or a quantifiable difference in size?
wildmXranat 14y ago
What I want to know is, what kind of business service do I need to build on the upswing and downswing to hedge the risk - anybody ?
crusso 14y ago
Really, all these bubbles are just an economic manifestation of the hyper-information processing problem that our society has yet to learn to deal with. Just like it took quite a while for my Dad to learn to stop passing around "Bill Gates pays you for every email forwarded" email, members of our society have to learn to ignore all the internet marketing and media-generated hype. Just like snopes.com was a valuable piece of infrastructure in weeding out the urban legends and reducing our forwarded crap email -- other societal/internet support is going to need to come into place to help investors weed through all the media and marketing hype. The sad part is that change like this always produces victims who didn't catch on quickly enough. Given the magnitude of the changes brought on by this stage of the "Information Age", there's a lot of learning to be done and it's going to take another generation to develop the infrastructure and mind share needed so that typical members of society aren't so easily fooled by the falseness of the latest investment bubbles. The genie is out of the bottle now, though. We need to get to learning, informing, and building solutions to the bubble problems. My biggest fear is that governments will [continue to] use this time of change as a power-grabbing excuse to drastically curtail our liberties and destroy many of the advantages of the Free Market.
deleted 14y ago
[deleted]
wisty 14y ago
http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture-capital-is-broken/ http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture... The bubble is not in IPOs, it's in VC. Venture capitalists having been losing money for a decade. Their General Partners are starting to cotton on, and will start pulling funding. Yes, there's good VCs which do make a bit, and a few lucky ones, but many VCs are taking money from "bucket fillers" - institutions who are told "put X% in VC". These "bucket fillers" have to invest the money, and the top VCs already have enough cash, so it goes to less savvy VCs who invest it in the startups who couldn't get funded by the good VCs.
- adventureful 14y ago
  Some of it is definitely in stocks / IPOs. RAX had a 100 pe ratio recently. That's as high as Cisco was during the dotcom bubble. CRM has no PE ratio at all, despite their monstrous market cap. Amazon has a zillion PE ratio because they're not making much money any longer. There's a very long list at this point of tech stocks with crazy valuations. When people do their anti-bubble refutes, they only list stocks like HP or EBAY or MSFT or INTC or AAPL, and they ignore the big pile of other tech stocks with massive valuations. ZNGA and GRPN were both bubble stocks, priced to extremes, and worth nowhere near what they IPO'd at. Pandora, HomeAway, and on the list goes. I bet I can name 40 from the last three years.
adventureful 14y ago
If it makes everybody feel better, the temporary bubble has already popped. It's over, it's just that very few people know it yet. The Facebook IPO is timed to get out the door before the stock market falls any further. It signals the end of this micro era, just as Apple's stock at $644 was the big monster stock of this time frame (referring to the small bubble periods that the Fed generates with their monetization programs and rate manipulation). The previous two Fed liquidity bubbles, 1997/99 and 2005/07, both had all the same trimmings. Chin up, it's over, now comes the winter. Hope you've got your funding.
tsotha 14y ago
>There just aren’t enough programmers, designers, operations people, and other warm bodies to man all the hot air balloons. So you have a predictable effect: Rapidly increasing demand for an only steadily increasing supply. Thus, inflation. As one of those warm bodies manning a balloon, I don't mind seeing this happen. I enjoyed having a little market power during the last bubble, and I'll enjoy it this time around as well. Sure, when the bubble pops it will suck, but mostly for people trying to get into the field and not people with experience.
patio11 14y ago
Numerically, it is difficult to credit VC-fueled startups for driving the quick increase in engineering wages. First, they don't pay top salaries. If a bidding war erupts for a particular candidate it is highly unlikely that a VC startup wins. It will be won by everyone's favorite multinational advertising company which will this quarter hire enough engineers to staff approximately 1023signals worth of product dev companies, or their close bretheren AppAmaFaceSoft, which together could a) fill the SuperDome with engineers making more than $120k apiece (and substantially more these days) and b) which cannot reasonably be said to be paying engineers with money they swindled out of gullible investors. No, they pay the money with the hundreds of billions of dollars of sales they make directly attributable to software. The price of butter is the price of butter. If one hypothetically thinks butter is too expensive, sell butter, don't buy butter. (i.e. offer your services as an engineer rather than trying to hire engineers.) It think it is highly unlikely that anything happening in the capital markets, positive or negative, will make cause engineering (and related trades) to re-transition to the days where you could e.g. find perfectly adequate programmers for $40k. (P.S. Not to slight anybody making that, as I was at $30k like two years ago. Get a wee bit more sophisticated about who you work for and what you work on. You'll do better monetarily and quite possibly have more fun.) There exist repeatable ways to scalably build product businesses with millions of dollars of actual revenue out of a few man months of work. Unless that economic reality goes away, engineers (&etc) will continue to be cheap at essentially any price. This is great news for everyone selling talent here. Is it bad news for those buying talent? Meh. If you could pick any time in the history of the world to start a software business, it would probably be now, because the markets are bigger than ever, the distribution channels are fantastic, the SaaS billing model allows us to 10x prices without business customers perceiving any increased difficulty to justify the purchase, the non-human capital costs associated with a software business are asymptotically approaching zero, etc etc.
389401a 14y ago
This sounds like DHH is predicting an imminent drop in his income. Call it a bubble. Call it inflation. Call it whatever you like. But he's probably right.

253 points by raganwald 14y ago

I'm finally coming around to thinking that it is starting. About three years ago people were screaming bubble because YC companies were getting $4m or $5m valuations and I wrote the following: "The truth is this: Bubbles don't exist without my aunt's mutual fund getting involved or my next door neighbor getting told to mortgage his house to invest by his financial advisor. Web 1.0 was all about IPOing on the nasdaq and fleecing the public with business models that disregarded profit. This time around things are different. At every stage of the process you see startups with business models. Guestlist, Github, FreshBooks, heck even Groupon, are making nontrivial money relative to the valuations and expected future growth." And the money is starting to come in from my Aunts pension fund (Facebook buying instagram because they knew they were going to have her money within a couple months). Just barely starting, so we've got probably 2 to 4 years before the pop actually happens. But what are we supposed to do while it is happening? We can warn people for a while, but it won't change anything. Get money while you can, build a warchest like paypal did and get ready for the winter of 2015 to 2018.

AznHisoka 14y ago
Or you can just concentrate on building a sustainable business, and worry about more urgent things that will affect your business, rather than the macro-trends.
- DrJokepu 14y ago
  But "macro-trends" always affect your business even if you are building a sustainable one. Even if you have no investors, if your clients are suffering, you are suffering. If your clients' clients are suffering, you are suffering. If your clients' clients' clients are suffering, you are suffering.
  - loganfrederick 14y ago
    You're right, but a truly valuable and sustainable business/technology will be one that clients consider worth paying for even when they are suffering. There aren't necessarily a lot of modern tech companies that would survive this test though.
- izak30 14y ago
  Agree or not, that's what DHH is saying here. It's harder for sustainable businesses to hire talent, when talent is getting paid more at places with enormous valuations. This of course falls down if the large valuation and the large pay are justified by things like large revenues, or value to those with large revenues.
  - edwinnathaniel 14y ago
    Sometimes I just wonder: what "talent" are you guys talking about? It's almost as if there exist a group of fresh-grads who just completed their CS degree but can magically write a better compression engine or a revolutionary protocol that is better than TCP.
    - billybob 14y ago
      Why does "talent" have to mean "incredible geniuses"? Lots of companies need programmers who are "pretty good," whatever that means to you.
      - randomdata 14y ago
        Or do they? If you look at the big industries of the past, they came with real time constraints. In agriculture, for instance, if the work wasn't completed in time, the food would spoil. While skilled farmhands are more valued, in the absence of them, anyone off the street will be given the job simply because it has to be done one way or another. What are the consequences to not building on your technology by a certain date? Maybe your competition will beat you to the punch. Maybe the costs that could be saved by implementing the software will continue to be expensed. Beyond that, not a whole lot. This leads us to a situation where just having anyone on the job is not viable. It is prudent, in many, cases for a business to simply wait until someone who is "top talent" is freed up to do the work. Simply knowing how to program isn't going to be enough.
    - mcguire 14y ago
      What is this "completed their CS degree" stuff you're talking? That's ancient school.
borism 14y ago
It won't last a year with several parallel bubbles (one on the other side of Atlantic, another on the other side of Pacific) imploding.
- eande 14y ago
  strong pointers without back up info
  - redthrowaway 14y ago
    The Euro faces, if not demise, then a near-certain restructuring that will ripple through global financial markets. China is also showing blemishes on its shiny economy, which was entirely foreseeable given their rather suspicious pegging at an 8% growth in GDP year on year. It won't collapse, but it will definitely cool considerably as even the politburo can't continue to justify building cities with no one in them just to pad GDP.
ereckers 14y ago
I agree with the "next door neighbor" allegory. There's only a "bubble" when we can identify a bag holder. That almost inevitably winds up being the plebs, whether it be the general population or via government bailout (still the people). I'm not sure if anyone has yet identified who would be the bagholders in this "bubble", because a bunch of rich guys at Andreesen or Sequoia sure aren't it. You need a vehicle for the commoner to piss away their money. I don't see that yet. Maybe in a couple years, when your local community KickStarter has you pulling money from your 401K to invest in corporate backed internet startups will they have a way to start to attract Joe the Plumber's wealth. And with that, a "bubble" comes with it the psychological idea that it's RISK FREE money. That you can borrow money now, sell later and cash out the gains as your investment surely grows. Add to that the real actual feeling that you'd be stupid not to do it (because everywhere you look people are making money off this). That's when we've got a bubble. When someone can point out a large, wide, gullible, set of people with no access to real fundamental information willing to give up their money through a simple mechanism (stock markets, housing, etc..) then folks, we've got a bubble.

theorique 14y ago

Strategically, it makes sense for a programmer to let his / her skills get bid up and use the surplus to store up some dry powder for the next recession. If you stay focused, bubbles are great times to build up your skills and do something real. Unless you're planning to play the startup lottery by creating a gamified social network for teenaged felines or something, in which case, good luck, and have fun. You can probably still come out ahead in skills and experience.

aaronblohowiak 14y ago
This is my strategy. Contract and stash during bubble, then try and start my own thing in the lull.
- theorique 14y ago
  If you can time it right, it is probably best to start your own thing right before the peak - get funded, and have a nice Series A war chest just as the lean times hit and the water turns red. Although to truly weather the lean times, this would have to be a real business - ideally with customers cash flow - not a fluffy built-to-flip eyeball monetizing engine.

dave1619 14y ago

I know the guys at 37Signals are a smart pack, but I don't understand their hangup with Instagram and Pinterest... and apparently FB (esp. their older posts). FB has proven to be able to make $billions of revenue and substantial profit, and is only growing. Isn't that proof that an ad-based model can work if it's large enough? Instagram was FB's biggest competitor... huge growth and huge adoption amongst young groups of friends. FB was smart to buy them. Pinterest... I'm less bullish on. I can see how they can make money with affiliate commissions on products and such. But I just don't see Everyone using this. Pinterest at $1.5billion might be over-valued for where it's at. But then again, I don't have privy to their internal numbers (ie., traction, metrics, retention, etc). But, I can see Pinterest be worth a lot in the future, just right now I'm not sure about the $1.5b. FB, Instagram and maybe Pinterest are amazing companies with crazy traction. They're all riding on the huge distribution channels of our day (web, mobile, social) and have reached or are close to reaching the 100+million users mark (for FB is the 1+billion user mark). Any service that can garner 100s of millions of users can find a way to monetize. How much in monetization is another story, but I wouldn't bet against them to create some substantial value.

lmm 14y ago
They're probably hung up because it's making them look small-time. What do 37Signals actually do, other than generate a steady stream of blog posts for HN? They make some sort of dropbox knockoff, right?
- spitfire 14y ago
  TODO and project management apps for small business. Unfortunately their success has gone to their heads.
  - tferris 14y ago
    Couldn't upvote this more. Rails was groundbreaking. Yes. DHH did something great but that's now 7 or 8 (!) years ago. Rails has aged, DHH showed often how opinionated he can be and that he just isn't perfect. And the 37signals products live primarily because of DHH's and Rails' reputation and not because there are outstanding (there tons of better Basecamps out there). Still DHH is a smart guy but a Kevin Systrom who built a company, who learned how to build a scalable backend while starting this company and then sold this company after just 2 years for 1 billion achieved something special as well and this should be appreciated instead of ranting. This is just infantile and shows once again DHH's temper and lack of self-control.

dsirijus 14y ago

Worst thing for me is that I actually feel completely out of place actually building my company up last 6 months so I can take on an idea I have, completely self-funded.

jmduke 14y ago

The issue in my mind is that "all those smart and talented heads" which the article mentions, even if they're aware of the bubble, have no incentive to change directions. Call me jaded, but I don't think most startups are created with the intention of improving society. So long as there's an Ouroboros effect of VCs funding brilliant engineers without truly revolutionary ideas, those engineers are going to create business models revolving around getting a big enough user base to justify high valuations, and eventual acquisition. And businesses shouldn't be about exit strategies.

zackzackzack 14y ago

It's a shame that all of that talent is working on things the author doesn't think are worthwhile. I mean, everyone should work on what everyone can agree on is worth their time, right? Yet, I don't think everybody can really agree on what is worthwhile for a person's time. I can point at people working on things like Linux and Khan Academy and say "Their efforts are worthwhile!" but then Microsoft and that one guy, who bitches about Khan Academy stealing all the VC money or whatever, will wag their fingers and say "They are hurting our business! Their time isn't worthwhile!" Personally, the efforts DHH has put into basecamp and their products is worthless to me. I don't use the products and see no reason to start. That isn't a diss to the products themselves: I literally have no use for them right now. I freelance and study at college and their suite of products doesn't solve any of my problems. So, who decides what's worthwhile? There are at least two instances where two groups of people don't all agree the same thing is worthwhile. It's a hard problem and implying "adopt my values so you will work on things I think are worthwhile" isn't going to solve it. (Also, I agree we are in a bubble. I value economic growth and American strength, not pictures of cats.)

johnbender 14y ago
I appreciate your relativistic stance, but there's a part of me that wonders if, as an example, Instagram provided a billion dollars worth of additional photo sharing value over what already existed on Facebook. That is, photo sharing does have value to people who want to stay connected and have shared experiences via the internet, but I don't think that Instagram improved that to the tune of a billion dollars.
- lincolnq 14y ago
  Counterexample: I was never interested in photo sharing before Instagram. I wasn't a good enough photographer. Now I can make my photos beautiful enough that I want to share them. Is this worth more than a few dollars to me personally? Yes. If I'm at all like a random person, then it's easy to see how Instagram is worth well over a few billion dollars.
  - 14y ago

elorant 14y ago

If it's a bubble then Facebook's IPO could be the turning point.

pyre 14y ago
Or not. If Facebook remains profitable, then it could basically be this bubble's Google.
pyre 14y ago
Or not. If Facebook remains profitable, then it could basically be this bubble's Google.

tferris 14y ago

> All those smart and talented heads, and all those benjamins, didn’t progress the economic base in a way we’re going to care about tomorrow. He's talking of Facebook, Instagram, Pinterest, etc. and doesn't have the courage to name then. Is this envy? That DHH's products haven't got this far? Or just naive? Because he should know the typical deal terms of a Pinterest and that valuations and raising are blown up for the sake of getting PR and the real milestone payments are much smaller? And that FB IPO can still fail in the long run? Whatever. As much I appreciate DHH and his past work his posts have always the same bitter taste: 37signals is the benchmark and the rest is wrong. EDIT: Hey downvoters, downvoting != disagreeing, just reply if you disagree

jiggy2011 14y ago
He is considered a demi-god to a whole generation of programmers and drives a custom pagani zonda, I doubt he is that envious.
mhartl 14y ago
The benchmark is profits. "Instapintora" might work out well for its founders, but DHH argues that grabbing a ton of users and hoping for the best isn't a good general strategy for building a business. I'd amend that slightly by saying that companies with a huge number of users are valuable, either as eventual cash cows or as strategic acquisitions, but at best following that route is a risky strategy. Sure, you might win the startup lottery, but you probably won't. Actually charging customers with the goal of becoming profitable in the shorter term is a likelier route to success. Even if you don't end up with a cash cow, you still have a good chance at a cash goat—which is still worth milking.
- tferris 14y ago
  > ... grabbing a ton of users and hoping for the best isn't a good general strategy for building a business. Everyone has their own way and why do people judge about others? Some grab a ton of users and hoping for the best and others write online tutorials for aged technologies. Let people just do what they like and appreciate if they are successful (grabbing a ton of users is as hard as it is to write good online tutorials).

veyron 14y ago

It is possible to build a sustainable internet business which does not rely on the prospects of an IPO. Unfortunately it seems that few people treat the industry in that way.

kevinpet 14y ago

Well, the key feature of a financial bubble is that no one is behaving irrationally at a micro level. Even if you know its a bubble, it may be worth trying to get in now and get out closer to the top. Same thing with building social local mobile stain removal advice apps -- if someone's buying, then someone will be supplying it. If it is really, no shit, a bubble, then there is a lot of money to be made by determining how to pop it.

will_work4tears 14y ago

I don't have anything really substantial to add to this topic, but I find it interesting I have some serious envy for the "talent" that is so in demand. I went the easy route, chose the web development path in my education, rather than a more math heavy, software engineering direction. I've been slapping myself for years now, but this just rubs salt in my wounds. Granted, I interview very poorly, am not the most articulate person (stutter and stammer a lot, etc) and I certainly can't at this point in my life up and move to San Francisco, so it is probably not important anyway.

johndavidback 14y ago
There is still a high demand for talented web developers... You don't need a PhD in computer science to work for a startup. There's a lot of money to be made working on teams building MVP's.
damoncali 14y ago
You are not asking for enough because you don't believe you are worth it. Seriously. Adjust your mindset.

rudiger 14y ago

The chance that granny is going to lose her pension fund is much more related to the actions of the banking and financial industries. Granny is already losing her savings with near-zero interest rates.

SCdF 14y ago
Is this really true? As in, are savings accounts in the US essentially useless now? I don't know about the rest of the world, but in NZ standard saving accounts are ~2%, and more investment focused (fixed term and variants) are 4-6%.
- cageface 14y ago
  It's better than stuffing the money in a mattress, but not much more. Typical savings account interest rates are < 1%.
- jmitcheson 14y ago
  I assume that the parent poster meant that granny is having the real value of her cash savings eroded through inflation because of the zero percent interest rate @ the US fed

pg 14y ago

The pieces of this argument fit together very neatly, but the problem is that they don't correspond to reality. E.g. the cloud about increased VC fundraising. In reality VCs are having a hard time fundraising: http://nvcaccess.nvca.org/index.php/topics/research-and-trends/290-vc-fundraising-contraction-and-concentration.html http://nvcaccess.nvca.org/index.php/topics/research-and-tren... Thus it also isn't true that the cause of higher valuations is that VCs have more money. Valuations are certainly higher, but I think the reason is that founders are increasingly getting the upper hand over investors. Which is why in addition to getting higher valuations, founders are increasingly able to retain board control.

ForrestN 14y ago
Clearly there isn't just one reason, right? Can't all of these factors, and others, be contributing? I don't claim to know who's right, or how to weight the various factors, but big exits certainly do free up capital to be reinvested in more companies, don't they? I'm curious in a broader sense what you (or anyone else who is experiencing it first hand) makes of the "bubble question." I'm sure it's unlikely but it would be great to have such people on the record with general predictions about the coming months and years.
- pg 14y ago
  No, the capital returned to a VC fund after an exit is not reinvested. It's distributed to the LPs. And while yes, strictly speaking, the LPs now have more money to invest than they had before, they are mostly giant endowments, pension funds, and foundations who only have a small fraction of their assets in VC funds, and whose future investment decisions are decided by asset allocation policies and not by recent returns. The way big exits cause more money to be invested by VCs is not that capital is freed up thereby, but rather that news of them makes more people want to start or invest in VC funds. But that process is much slower.
  - ForrestN 14y ago
    Thanks! That makes sense. I just hear so many names of individuals being associated with these windfalls it's easy to imagine them continuing to invest on the basis of their holdings being liquidated.

mxfh 14y ago

I was expecting some illustration like this: http://ga.water.usgs.gov/edu/earthhowmuch.html http://ga.water.usgs.gov/edu/earthhowmuch.html Just with oxygen instead of water.

michaelpinto 14y ago

talent can't get "trapped" by a bubble: if a bubble is really a bubble then it will burst and the talent will become free. in fact if you feel there is a bubble then you should encourage it because over the long term the market will be flooded by talent which will be cheaper. but something that everyone here has to think about: even if you don't think there is a bubble, the nature of tech is that it is cyclical in nature. this means that sooner or later there will be winners, and those looking for a job. although i dare say that those down cycles are in fact THE best times to start a new business or venture. i would also say that at this point in time that most of the costs of most startups are talent. years ago this wasn't the case, and one of the things that screwed me over in the original dot.com bust was the fact that my real estate costs tripled in the same space at the high point of the bubble. i also wasted a ton of money on hardware and have bitter memories of owning expensive servers that were destined for eBay. i should add that deeply respect 37signals, and i've found myself following their model -- but it's not the only model.

postfuturist 14y ago

I'm just a working developer. I'm not looking to start a business of my own any time soon. I'll say one thing: I don't work for companies that cut paychecks out of rapidly dwindling venture capital funds and I don't work for large corporations that hire and fire teams like chattel. If the bubble burst tomorrow, it wouldn't affect my life in any meaningful way. I'd probably get fewer recruiters bugging me, which would be nice for a change.

cletus 14y ago

I've called the kneejerk "bubble" reactions "boring" [1] and I stand by that. That doesn't mean I disagree (or agree for that matter). It just means that banal perjoratives with nothing to back them up are boring. To call this a bubble, one must first describe what one means by a bubble. A bubble in my mind is a period of rapid growth in valuations followed by a massive devaluation on such a scale that it hinders investment and innovation. The subprime collapse was a bubble. Many people were left underwater on their mortgages. Building in many places stopped for years. This has a knock-on effect on jobs, related industries and so on. That's a bubble. The dotcom collapse was also a bubble. But there are several differences this time around: 1. Startup costs now, for most Internet startups, are essentially zero. 10+ years ago you had to spend $5-10M to do anything (once you paid for Sun servers, Oracle licenses and so on); 2. Lax listing requirements, particularly on the NASDAQ, helped perpetuate fraud; 3. There was no experience to draw on (from living memory at least). Now we hopefully know a little better; 4. Sarbanes-Oxley, clusterfuck that it is, has at least kept the number of Internet companies IPOing relatively low. This has some negative consequences too but it means that retail investors and mutual funds have largely been excluded from the startup scene, which honestly is a Good Thing [tm]; and 5. Now, as opposed to then, there are real businesses operating in the tech space who are generating profits on a scale not seen in probably a century or more. Apple, for example, is worth >$500B market cap now and by some estimates that's still cheap given their profits. 10+ years ago investment dried up, capital dried up and legitimate businesses couldn't start or continue to operate, which had a domino effect. What happens if next month Facebook goes from $100B valuation to $10B? Honestly, not a lot. Late stage investors will lose their shirts. That's fine. VC is a high-risk business. Individuals who participate in the IPO will lose a lot of money. That's not ideal but so be it. But the important thing to ask is: what will happen to the system as a whole? Startups will still start. When you can build a mobile app and business for $50k the capital markets are basically irrelevant to you. Apple, Google, Microsoft and others will remain. Life will go on. The low cost of startups is itself a barrier to institutional investment (by pension funds and the like) because the amounts are too small. Again, that's a Good Thing [tm]. What's really happening here is a lot of money is changing hands between VCs and endowment funds and honestly in relative terms it's not that much money. Speaking to some examples (recent and otherwise): - Instagram: I think this purchase was overvalued but, if anything, it demonstrates just what a high-risk investment Facebook is if a company can go from nothing to being an existential threat in 2 years. I honestly believe Facebook was taking them out of the market with this buy; - Pinterest: through affiliate and advertising revenue I see potential for this company to be a huge business with massive ability to drive traffic to commerce sites. Make no mistake, this is a real business. It's not without risk but the potential is huge; - Youtube: I bring this one up because it went, in 18 months, from being nothing to being bought by Google for >$1.5B (IIRC). Some said now it was overpaying. Honestly, in hindsight I think that price may well have been a massive bargain. Just because you don't see potential doesn't mean there isn't any. Just because something ends up failing doesn't mean the risk wasn't worth taking. The reason the kneejerk bubble accusations annoy me is that they come from the sort of people who seem so averse to risk that they neve take any. That is, until the very peak of the bubble (when they finally convince themselves this can go on forever). Please, I beg of you, if you're going to jump and down and yell "bubble" at least add something to the conversation or back it up with something. A >$1B valuation on a funding round doesn't actually mean anything. Disclaimer: I work for Google. EDIT: I forgot to address a couple of points. Firstly, I too find it depressing what a lot of us are working on [2] [3]. The fact that SpaceX can revolutionize launch costs for less money than was spent on Instagram is sobering and depressing. Secondly, it is incredibly hard to hire good engineers. I don't see this as evidence of a bubble. I see this as evidence that: a) (good) engineering is hard; b) when other costs (bandwidth, servers, software) go to zero, demand for manpower will go up because businesses that once weren't possible or viable will become so; and c) in a world where anyone can be a founder, it makes no sense to stick to 90s era equity arrangements. To be honest, being an early employee is a lottery ticket and, generally speaking, a shitty deal. Last cofounder = 25-50%. First employee = 1-2%. If good talent is better off working on their own startup you shouldn't be surprised that they do. [1]: http://news.ycombinator.com/item?id=3985393 http://news.ycombinator.com/item?id=3985393 [2]: http://news.ycombinator.com/item?id=3876897 http://news.ycombinator.com/item?id=3876897 [3]: http://www.youtube.com/watch?v=vKmQW_Nkfk8 http://www.youtube.com/watch?v=vKmQW_Nkfk8

drewinglis 14y ago

This article left a bad taste in my mouth. Companies that have millions of active users are hardly bridges to nowhere that are devoid of economic or public value.

lifeisstillgood 14y ago

To me the most convincing part is the bridge to nowhere. So, just build bridges to somewhere. Build what people want, and preferably, will pay for. Even if you build it in a bubble, its still a bridge, somewhere.

mpg33 14y ago

as long as companies have good product's and can consistently generate revenue...the industry should be fine

endlessvoid94 14y ago

> Rapidly increasing demand for an only steadily increasing supply. Thus, inflation. I think it might be possible to rapidly increase the supply. I'm working on Bloc (http://bloc.io http://bloc.io) and have been privileged enough to hang out at dev bootcamp (http://devbootcamp.com http://devbootcamp.com), and if I've learned anything, it's that people want to fill this supply. The challenge is taking the lessons we've learned and scaling them up to meet something like an economic demand. I don't think it's impossible.

bluedanieru 14y ago

What about "creative destruction?" Part of the process is resources being diverted to shit that goes nowhere. Eventually the people who made that shit go out of business and then go to work on something else (and hopefully for them, this time, it doesn't suck). I suspect the author's point is that lately there is much more destruction and less creativity, but he doesn't state it explicitly or even do a very good job of implying it. In fact, this almost reads like a critique of basic capitalism. Certainly the ratio of expensive but worthless shit to good and useful stuff seems headed up. I agree that it is. However the boom-bust cycle is a feature of capitalism, not something you set about to correct. The author doesn't propose any solution here, which is convenient. If he had, he would have come to the sudden realization: Aha! There isn't one. Is Instagram worth $1B? Definitely not. But neither is Facebook worth $100B, or whatever made-up number they're valued at these days. Evaluating the value of ideas is not an easy task. Capitalism arrives at a solution eventually, but no one ever said it was efficient about it. (Okay, lots of people say that, but they're deluded assholes.)

waratuman 14y ago

Inflation isn't an increase in demand that leads to higher cost. Inflation is a general increase in supply. A rise in prices is not the same as inflation. Inflation will eventually cause a rise in prices but it is not the only reason for an increase in prices.

grandalf 14y ago

While David's argument is interesting, how would his claims be falsified? The economy is a noisy mess of contemporaneous booms and busts. What we typically call a "bubble" is a boom that lasts long enough that the bust is socially noteworthy. What if the information age is simply arriving faster and faster? Parents and grandparents are now buying tablets and laptops, uploading photos, liking wall posts, etc. There could be a huge shift toward the digital economy even if no bubble is occurring. How many wall posts result in a greeting card not sent, paper not manufactured, trees not felled, shipped, and processed? What other efficiencies are occurring to divert so much capital to information tech? Most of the technologies that are getting the most money are things that save people serious time/money/effort. This is equivalent to big dollars. So not only should capital be diverted from other industries, but certain existing ones become more valuable -- photo finishing has more value when you are sending in 30 favorite pics chosen from 1000 digital photos you took, rather than sending in a roll of film and hoping that a few out of the 24 on the roll turned out as expected. Travel has more value when you can use yelp to find great restaurants, AirBnB to find the perfect lodging at a great price, and Facebook to reconnect with old friends who it turns out live there. Technology brings value to so many areas, both expected and unexpected. This is why capital is flowing. And it will continue to flow. Yes there are meta factors such as monetary policy that impact the cost of credit and to some extent influence the risk-appetites of investors, but I think that's likely to be a small fraction of what we're seeing. The reason it's less obvious to us is b/c we've lived in this world of tech for at least 5-10 years before the rest of society started to arrive.

ericson578 14y ago

What would the difference be between a market correction and a bubble bursting? Is it just a buzz word or a quantifiable difference in size?

wildmXranat 14y ago

What I want to know is, what kind of business service do I need to build on the upswing and downswing to hedge the risk - anybody ?

crusso 14y ago

Really, all these bubbles are just an economic manifestation of the hyper-information processing problem that our society has yet to learn to deal with. Just like it took quite a while for my Dad to learn to stop passing around "Bill Gates pays you for every email forwarded" email, members of our society have to learn to ignore all the internet marketing and media-generated hype. Just like snopes.com was a valuable piece of infrastructure in weeding out the urban legends and reducing our forwarded crap email -- other societal/internet support is going to need to come into place to help investors weed through all the media and marketing hype. The sad part is that change like this always produces victims who didn't catch on quickly enough. Given the magnitude of the changes brought on by this stage of the "Information Age", there's a lot of learning to be done and it's going to take another generation to develop the infrastructure and mind share needed so that typical members of society aren't so easily fooled by the falseness of the latest investment bubbles. The genie is out of the bottle now, though. We need to get to learning, informing, and building solutions to the bubble problems. My biggest fear is that governments will [continue to] use this time of change as a power-grabbing excuse to drastically curtail our liberties and destroy many of the advantages of the Free Market.

deleted 14y ago

[deleted]

wisty 14y ago

http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture-capital-is-broken/ http://blogs.reuters.com/felix-salmon/2012/05/07/how-venture... The bubble is not in IPOs, it's in VC. Venture capitalists having been losing money for a decade. Their General Partners are starting to cotton on, and will start pulling funding. Yes, there's good VCs which do make a bit, and a few lucky ones, but many VCs are taking money from "bucket fillers" - institutions who are told "put X% in VC". These "bucket fillers" have to invest the money, and the top VCs already have enough cash, so it goes to less savvy VCs who invest it in the startups who couldn't get funded by the good VCs.

adventureful 14y ago
Some of it is definitely in stocks / IPOs. RAX had a 100 pe ratio recently. That's as high as Cisco was during the dotcom bubble. CRM has no PE ratio at all, despite their monstrous market cap. Amazon has a zillion PE ratio because they're not making much money any longer. There's a very long list at this point of tech stocks with crazy valuations. When people do their anti-bubble refutes, they only list stocks like HP or EBAY or MSFT or INTC or AAPL, and they ignore the big pile of other tech stocks with massive valuations. ZNGA and GRPN were both bubble stocks, priced to extremes, and worth nowhere near what they IPO'd at. Pandora, HomeAway, and on the list goes. I bet I can name 40 from the last three years.

adventureful 14y ago

If it makes everybody feel better, the temporary bubble has already popped. It's over, it's just that very few people know it yet. The Facebook IPO is timed to get out the door before the stock market falls any further. It signals the end of this micro era, just as Apple's stock at $644 was the big monster stock of this time frame (referring to the small bubble periods that the Fed generates with their monetization programs and rate manipulation). The previous two Fed liquidity bubbles, 1997/99 and 2005/07, both had all the same trimmings. Chin up, it's over, now comes the winter. Hope you've got your funding.

tsotha 14y ago

>There just aren’t enough programmers, designers, operations people, and other warm bodies to man all the hot air balloons. So you have a predictable effect: Rapidly increasing demand for an only steadily increasing supply. Thus, inflation. As one of those warm bodies manning a balloon, I don't mind seeing this happen. I enjoyed having a little market power during the last bubble, and I'll enjoy it this time around as well. Sure, when the bubble pops it will suck, but mostly for people trying to get into the field and not people with experience.

patio11 14y ago

Numerically, it is difficult to credit VC-fueled startups for driving the quick increase in engineering wages. First, they don't pay top salaries. If a bidding war erupts for a particular candidate it is highly unlikely that a VC startup wins. It will be won by everyone's favorite multinational advertising company which will this quarter hire enough engineers to staff approximately 1023signals worth of product dev companies, or their close bretheren AppAmaFaceSoft, which together could a) fill the SuperDome with engineers making more than $120k apiece (and substantially more these days) and b) which cannot reasonably be said to be paying engineers with money they swindled out of gullible investors. No, they pay the money with the hundreds of billions of dollars of sales they make directly attributable to software. The price of butter is the price of butter. If one hypothetically thinks butter is too expensive, sell butter, don't buy butter. (i.e. offer your services as an engineer rather than trying to hire engineers.) It think it is highly unlikely that anything happening in the capital markets, positive or negative, will make cause engineering (and related trades) to re-transition to the days where you could e.g. find perfectly adequate programmers for $40k. (P.S. Not to slight anybody making that, as I was at $30k like two years ago. Get a wee bit more sophisticated about who you work for and what you work on. You'll do better monetarily and quite possibly have more fun.) There exist repeatable ways to scalably build product businesses with millions of dollars of actual revenue out of a few man months of work. Unless that economic reality goes away, engineers (&etc) will continue to be cheap at essentially any price. This is great news for everyone selling talent here. Is it bad news for those buying talent? Meh. If you could pick any time in the history of the world to start a software business, it would probably be now, because the markets are bigger than ever, the distribution channels are fantastic, the SaaS billing model allows us to 10x prices without business customers perceiving any increased difficulty to justify the purchase, the non-human capital costs associated with a software business are asymptotically approaching zero, etc etc.

389401a 14y ago

This sounds like DHH is predicting an imminent drop in his income. Call it a bubble. Call it inflation. Call it whatever you like. But he's probably right.