5 ms·

One interesting thing about the high valuations of tech startups now is where the money is coming from. It's not stock markets. At or near the bottom (or is it

by netcan 13y ago

One interesting thing about the high valuations of tech startups now is where the money is coming from. It's not stock markets. At or near the bottom (or is it top?) of this "bubble" funnel a lot of high valuation investments from "private" money acquisitions & other supposedly smart money, like the recent AirBnB investment. Were $10bn valuations possible without public markets before recently? Does that make us daffier if this is a bubble? IE, is this proper risk capital that is less fragile and sensitive to death spirals? Facebook has been aggressively scaling up (in my opinion successfully) their ad business since the IPO. Facebook has/had 2 big make-or-break risks: (1) losing popularity/users (2) failing to turn users/visits into into ad revenue. There was also some risk that in trying to fix #2, #1 would break. Risk, reward, uncertainty. Nothing unusual here. Risk #1 is constant ambient risk. Risk #2 is/was more of a "what's under that rock" risk. The rock is being turned as we speak and so far the news has been good. FB value has roughly doubled in the last 9 months and IMO, that's the product of "information" about the viability of facebook as an advertising platform. Here is the subtle point.^ They could have turned that rock just as eerily before IPO. They could have worked on the ad platform sooner or they could have delayed the IPO. I think that move was deliberate. Facebook chose to make that unavoidable, but timeable risky step after the IPO. As an analogy, imagine a widget company. They get investment design & manufacture a warehouse full of widgets. Then they pause, take some more investment, don't spend it and go public before finding out if their widgets sell. What role does this pre-IPO money play? FB didn't seem to need it to operate. ^I'm not sure about this. It's a speculation and I don't know or understand enough to be confident at all about it.

mcmullen 13y ago
One of the later episodes of the a16z podcast featured Marc Andreessen and Benedict Evans. They were discussing technology valuations and made some good points. Though I disagreed with their "no bubble" consensus, they were right in mentioning the classic "Russian oil money" and "new players" argument. Previously, most tech investing was done by U.S. venture capitalists. (One of the reasons why non-U.S. start-ups find it hard to fund themselves.) However with multi-billion dollar technology floats like Facebook taking place - many, many people are taking notice and bringing lots of money with them. This, obviously, increases demand which in-turn increases prices. That's all. If, or indeed when, the bubble pops and people realise that these businesses aren't worth the price paid, I suspect it won't lead to the type of crisis that occurred in 00/08 - just lots of rich people with less money.
- pyoung 13y ago
  "just lots of rich people with less money." My original take on the "bubble" was somewhat in line with this. However, the more I think about it, the more I am inclined to believe that this will "trickle down" in many ways. Fewer investments will lead to fewer jobs. In SV, this could lead to a cooling down (or worse) of the labor market. The established players (Google, Apple, Amazon, etc) will probably pull through alright, but the VC money will thin out. If I was a software engineer and I wanted to hedge my bets, I would probably try get a job at one of the bigger, more stable companies in the next year. If things do cool down, I imagine that programmer jobs and salaries will be the most noticeable side effect. Of course I could be entirely wrong. It's possible that VC money makes up only a small fraction of the demand for software engineers. After all, almost every industry under the sun is shifting towards (or wants to shift towards) higher levels of automation and efficiency using computers and software.
  - mcmullen 13y ago
    You're absolutely right that "trickle down" occurs. Basic logic suggests that if lots of businesses have lots of funding, and that funding dries up, there will inevitably be job losses because they have to be funded from somewhere. However, I wouldn't worry too much because technology is clearly the future and the need for technology professionals will continue to grow. These stupidly high valuations are for, I hope, decent businesses. By that virtue, they will get the funding they need - just not the scale that we have seen. Hence, I used "just lots of rich people will less money" because the people set to lose out are the huge investment vehicles who seem to be huddled around the Valley at present. The highly skilled engineers needn't worry because the likes of Mr. Wilson and Mr. Andreessen aren't going anywhere, and the average Joe Bloggs needn't worry because their pensions aren't at risk. The people who should worry are those who watched the Facebook float and said, "Shit, I need some of that action!" As always, it's the stupid that lose out. Fortunately, the stupid ones aren't providing our mortgages or issuing our credit cards this time. (Namely, Royal Bank of Scotland, Bank of America, et al.) But, hey - I'm just a 24 year old CS grad come IT consultant, what do I know?
JonFish85 13y ago
> One interesting thing about the high valuations of tech startups now is where the money is coming from. It's not stock markets. See, I think that it is coming from the stock markets. These valuations are there because the investors think that they can dump the stock onto the market for above that amount. Look at KING--investors in KING knew that the jig was up, they dumped it onto the stock market and got out. $10bn valuations are possible because of the public markets. If the investors weren't extremely optimistic that the stock market will eventually buy their stock for more than that valuation, they wouldn't do the investing. That's the only time they'll get their money back. Make no mistake: they're (VCs) not in it to keep it private and to keep the profits to themselves. They're in it to take it public or get bought by someone even bigger. That's all it is. The stock market is their end-game, and that's what they're targeting with these investments. The intermediate money isn't coming from it, but ultimately that's where the money comes from, in my view.
- netcan 13y ago
  I think the £1bn+ acquisitions must be playing a role as well (obviously that's is stock money too). That is an IPO scale exist without an IPO.
hagbardgroup 13y ago
VC is private equity, so generally we do not know who invests in whom. But many of the ways that VCs receive investment are through highly diversified means. VC is some fractional line item allocation for diversified investors. The Sultan of Brunei or whatever is not calling Fred Wilson to yell at him about how USV is performing, unless the Sultan invested directly for some reason. The Sultan has 7% of the 5% of his funds that he handed to his asset management guy at investment bank X to handle. It's possible that the asset management guy will yell at Fred Wilson about Zynga being a turkey, but not likely, because that fraction of the Sultan's money was supposed to be high risk anyway. It is playtime fun money for him anyway. Similarly, CALPERS bureaucrats do not actually need to show a stupendous return -- they just need to maintain the appearance that their allocations have the possibility of providing a stupendous return. They won't get fired if they tried to hit 8% and can show that some model shows that according to previous decades of performance they were on track to hit 8% until some act-of-god prevented it from occurring. Their VC allocation helps them maintain this appearance so that they can maintain their 3rd wife to the lifestyle she has become accustomed to and continue to golf.
tpeng 13y ago
Keep in mind that this generation of startups is delaying IPO as long as possible. The main reason appears to be a desire to delay public company reporting requirements, not a lack of capital needs. Since the IPO market remains strong, a set of new investors has entered the market to play this "public/private arbitrage" opportunity, buying private stock shortly before IPO for apparently* sure gains. This group of players includes hedge funds (Tiger Global), mutual funds (TROW), and private equity funds (TPG). Traditional growth-stage funds are starting to pull back as this competition is pushing up valuations. Note that the arb players are betting on near-term market reception to the stocks that they are buying, and less sensitive to absolute valuation. Without commenting on current valuations, I will say that these dynamics certainly have the potential to create significant overvaluation in the private markets. * I call them apparently safe gains because if the IPO market collapses, these investors will be stuck with some very large, illiquid investments.
- netcan 13y ago
  That's the straightforward reason, but it doesn't sound big enough to me. First, AirBnB just got valued at 10bn. FB's IPO broke valuations records. Reporting requirements are a drag and I'm sure they impact IPOs on the margin, but 10bn is not marginal. Reporting for a company like AirBnB is not that hard. They have a straightforward business model with one business. It's not like they have 50 years of hair, cross ownership, JVs and zombie businesses. Second, FBs timing indicates (to me) that something else is going on. Third, WTF is the reason for these arbitragers. Arbitrage requires a willing seller. Why raise capital (sell shares) at a lower cap 9 months before an expected IPO?
  - tpeng 13y ago
    It's not the administrative cost of reporting, it's the cost of having to run your business differently based on being measured quarterly.

by netcan 13y ago

mcmullen 13y ago

One of the later episodes of the a16z podcast featured Marc Andreessen and Benedict Evans. They were discussing technology valuations and made some good points. Though I disagreed with their "no bubble" consensus, they were right in mentioning the classic "Russian oil money" and "new players" argument. Previously, most tech investing was done by U.S. venture capitalists. (One of the reasons why non-U.S. start-ups find it hard to fund themselves.) However with multi-billion dollar technology floats like Facebook taking place - many, many people are taking notice and bringing lots of money with them. This, obviously, increases demand which in-turn increases prices. That's all. If, or indeed when, the bubble pops and people realise that these businesses aren't worth the price paid, I suspect it won't lead to the type of crisis that occurred in 00/08 - just lots of rich people with less money.

pyoung 13y ago
"just lots of rich people with less money." My original take on the "bubble" was somewhat in line with this. However, the more I think about it, the more I am inclined to believe that this will "trickle down" in many ways. Fewer investments will lead to fewer jobs. In SV, this could lead to a cooling down (or worse) of the labor market. The established players (Google, Apple, Amazon, etc) will probably pull through alright, but the VC money will thin out. If I was a software engineer and I wanted to hedge my bets, I would probably try get a job at one of the bigger, more stable companies in the next year. If things do cool down, I imagine that programmer jobs and salaries will be the most noticeable side effect. Of course I could be entirely wrong. It's possible that VC money makes up only a small fraction of the demand for software engineers. After all, almost every industry under the sun is shifting towards (or wants to shift towards) higher levels of automation and efficiency using computers and software.
- mcmullen 13y ago
  You're absolutely right that "trickle down" occurs. Basic logic suggests that if lots of businesses have lots of funding, and that funding dries up, there will inevitably be job losses because they have to be funded from somewhere. However, I wouldn't worry too much because technology is clearly the future and the need for technology professionals will continue to grow. These stupidly high valuations are for, I hope, decent businesses. By that virtue, they will get the funding they need - just not the scale that we have seen. Hence, I used "just lots of rich people will less money" because the people set to lose out are the huge investment vehicles who seem to be huddled around the Valley at present. The highly skilled engineers needn't worry because the likes of Mr. Wilson and Mr. Andreessen aren't going anywhere, and the average Joe Bloggs needn't worry because their pensions aren't at risk. The people who should worry are those who watched the Facebook float and said, "Shit, I need some of that action!" As always, it's the stupid that lose out. Fortunately, the stupid ones aren't providing our mortgages or issuing our credit cards this time. (Namely, Royal Bank of Scotland, Bank of America, et al.) But, hey - I'm just a 24 year old CS grad come IT consultant, what do I know?

JonFish85 13y ago

> One interesting thing about the high valuations of tech startups now is where the money is coming from. It's not stock markets. See, I think that it is coming from the stock markets. These valuations are there because the investors think that they can dump the stock onto the market for above that amount. Look at KING--investors in KING knew that the jig was up, they dumped it onto the stock market and got out. $10bn valuations are possible because of the public markets. If the investors weren't extremely optimistic that the stock market will eventually buy their stock for more than that valuation, they wouldn't do the investing. That's the only time they'll get their money back. Make no mistake: they're (VCs) not in it to keep it private and to keep the profits to themselves. They're in it to take it public or get bought by someone even bigger. That's all it is. The stock market is their end-game, and that's what they're targeting with these investments. The intermediate money isn't coming from it, but ultimately that's where the money comes from, in my view.

netcan 13y ago
I think the £1bn+ acquisitions must be playing a role as well (obviously that's is stock money too). That is an IPO scale exist without an IPO.

hagbardgroup 13y ago

VC is private equity, so generally we do not know who invests in whom. But many of the ways that VCs receive investment are through highly diversified means. VC is some fractional line item allocation for diversified investors. The Sultan of Brunei or whatever is not calling Fred Wilson to yell at him about how USV is performing, unless the Sultan invested directly for some reason. The Sultan has 7% of the 5% of his funds that he handed to his asset management guy at investment bank X to handle. It's possible that the asset management guy will yell at Fred Wilson about Zynga being a turkey, but not likely, because that fraction of the Sultan's money was supposed to be high risk anyway. It is playtime fun money for him anyway. Similarly, CALPERS bureaucrats do not actually need to show a stupendous return -- they just need to maintain the appearance that their allocations have the possibility of providing a stupendous return. They won't get fired if they tried to hit 8% and can show that some model shows that according to previous decades of performance they were on track to hit 8% until some act-of-god prevented it from occurring. Their VC allocation helps them maintain this appearance so that they can maintain their 3rd wife to the lifestyle she has become accustomed to and continue to golf.

tpeng 13y ago

Keep in mind that this generation of startups is delaying IPO as long as possible. The main reason appears to be a desire to delay public company reporting requirements, not a lack of capital needs. Since the IPO market remains strong, a set of new investors has entered the market to play this "public/private arbitrage" opportunity, buying private stock shortly before IPO for apparently* sure gains. This group of players includes hedge funds (Tiger Global), mutual funds (TROW), and private equity funds (TPG). Traditional growth-stage funds are starting to pull back as this competition is pushing up valuations. Note that the arb players are betting on near-term market reception to the stocks that they are buying, and less sensitive to absolute valuation. Without commenting on current valuations, I will say that these dynamics certainly have the potential to create significant overvaluation in the private markets. * I call them apparently safe gains because if the IPO market collapses, these investors will be stuck with some very large, illiquid investments.

netcan 13y ago
That's the straightforward reason, but it doesn't sound big enough to me. First, AirBnB just got valued at 10bn. FB's IPO broke valuations records. Reporting requirements are a drag and I'm sure they impact IPOs on the margin, but 10bn is not marginal. Reporting for a company like AirBnB is not that hard. They have a straightforward business model with one business. It's not like they have 50 years of hair, cross ownership, JVs and zombie businesses. Second, FBs timing indicates (to me) that something else is going on. Third, WTF is the reason for these arbitragers. Arbitrage requires a willing seller. Why raise capital (sell shares) at a lower cap 9 months before an expected IPO?
- tpeng 13y ago
  It's not the administrative cost of reporting, it's the cost of having to run your business differently based on being measured quarterly.