7 ms·

An interesting twist in the current incarnation is this story is how big "private" money is taking risks on the tech sector. Overall, I don't really find this

by netcan 12y ago

An interesting twist in the current incarnation is this story is how big "private" money is taking risks on the tech sector. Overall, I don't really find this story convincing for a few of reasons, though I suppose there is plenty of room for disagreement. (1)T he first boom actually did get a lot right. The PC-internet revolutions was intense and did create a lot of new value. The mistake was treating it like a land grab where all major players would be established by the year 2000. (2) Scale does matter when we are talking about bubbles.Smaller means safer. (3) There is real revenue being generated by Google, Facebook and every reason to think it will be generated by Uber too. (4) Private money doesn't (I hope) break the economy in the same way that public money can. If VCs go bust there are ramifications, but these markets are not that liquid. There aren't margin calls going off and forcing fire sales. (5) War chests: The big boys and many of the up-and-comers have nice big war chests. They are obviously concerned about equity, but Facebook would be very hard to kill with a sharp decrease in stock price. Options might need to give way to bonuses, but the Facebook is no longer in the business of selling equity. They have plenty of cash. This goes doubly for Google, MSFT, Apple & a surprising number of no-rush-to-IPO mega startups like Uber , Airbnb, Dropbox Snapchat, etc. Their continued existence is not dependent on the market for tech stock. Bubbles are some sort of unstable financial complex that can be brought down as soon as the equilibrium is broken. In 99' the money was ultimately coming from IPOs and public markets. When that well dried, everything went bottom up. The recent financial crash was bullet on financial instrument tautologies, a system that created correlated risk. It could only continue to exist so long as everyone could maintain that the risk was much smaller than it was. Think of the companies in question. Most could continue to survive if investors hid in a hole for two years, that's robust. Smaller, younger startups would be in for hard times if investment stopped coming in, but 1,000 $10m (on paper) startups going under is a just 1,000 individual failures. This is correlated in the sense that a shortage of cash would effect them all, but it's not systemic in that their failure would extend far beyond the investors, founders & employees that understand the risk.

luma 12y ago
I think point (4) is the key here. The original bubble happened on the public exchanges with public money. The "IPO" was the big deal that everyone wanted to get in on after Netscape, et al valuations went crazy. Institutional investors were investing people's retirement accounts into companies they didn't understand. When that finally fell over, the impact was felt across the economy because it involved everybody's money. This time the money is largely coming from private equity and there's not a lot of splashy IPOs happening. The people who are investing aren't mom and pop planning for their retirement. If a big VC firm looses it's shirt it's not as likely to have the impact on "Main Street" as we saw the last time around. I'd like to say that I don't care one whit if a bunch of rich people suddenly loose their money, but if history has anything to show, it's that they'll somehow figure out a way to make the rest of us feel the pain too.
- 7Figures2Commas 12y ago
  > This time the money is largely coming from private equity and there's not a lot of splashy IPOs happening. This is an amusing statement in light of the fact that the largest IPO in history (Alibaba) took place last week.
  - marcosdumay 12y ago
    Compare to the 99's. One couldn't keep track of all the IPOs back then. Anyway, the VC bubble will not pop alone. It'll take stocks with it (or the other way around), and people will suffer worldwide again.
    - 7Figures2Commas 12y ago
      > Compare to the 99's. One couldn't keep track of all the IPOs back then. There have been close to 200 IPOs this year. How many people here can, by memory alone, name more than 10? I'm not at all arguing that the IPO market of 2014 is the IPO market of 2000 reincarnated (it absolutely isn't), but anecdotal analyses that boil down to "it was crazier in 2000!" aren't very meaningful.
  - nmjohn 12y ago
    I'll paraphrase a comment I wrote on reddit about this yesterday. Alibaba has a PE ratio one tenth of amazon - and is already a profitable company. This is the exact opposite of what a bubble is. This is not at all like the kind of IPOs leading to the 2000 crash.
    - 7Figures2Commas 12y ago
      I didn't comment on Alibaba's financials. I simply responded to the statement that "there's not a lot of splashy IPOs happening," which I found somewhat amusing in light of the fact that the arguably "splashiest" IPO just took place. That said, Alibaba's profitability and PE ratio compared to Amazon is meaningless in the context of a bubble discussion. A bubble does not merely consist of unprofitable companies becoming ridiculously valued; it consists of profitable companies becoming more highly valued than their fundamentals can support. If Amazon's stock price fell by 25%, and Alibaba's did the same, as an Alibaba shareholder would you take comfort in the fact that Alibaba still has a PE ratio one tenth Amazon's? Of course not.
AJ007 12y ago
Even small start ups should continue to do ok -- the hardware overhead for early stage stuff now is so cheap it is nearly free. Models that require huge scale before the revenue comes in could be a problem. I self-funded so my opinion is likely wrong, but it seems like a lot of the excess money is going to questionable things in addition to paid growth (no clue how much Uber, Lyft, and others are spending, Groupon certainly took the paid acquisition to the extreme buying up huge chunks of available online inventory.) Luxurious offices are nice but hardly necessary for a serious coder or designer. Perhaps the most vulnerable are the start ups that already exist and are dependent on investor money to operate. In the event of a market pull back desperate companies should be easy pickings for the big boys to acquire talent and other interesting goodies. Leverage -- that makes bubbles very dangerous and unpredictable. Investor leverage is one thing, companies' own leverage is quite another. Last I looked (a year ago), tech was the best of the best by this metric. For public companies in other sectors, its a wonder if they would be worth anything in another major credit crunch. The corporations we keep hearing about having massive cash stock piles have liabilities to match. A concern would be Facebook's or Apple's market cap dropping 50%+ . Go to 0? No.
- deleted 12y ago
  [deleted]
7Figures2Commas 12y ago
> Private money doesn't (I hope) break the economy in the same way that public money can. If VCs go bust there are ramifications, but these markets are not that liquid. There aren't margin calls going off and forcing fire sales. Too many people trying to compare today's bubble to the first bubble are making the mistake of assuming that it's being led by tech. It isn't. The current "tech bubble" is just one of multiple bubbles being driven by an even larger bubble in public equities. When the public equities bubble bursts, Silicon Valley will this time be a victim, not the culprit. And there are going to be lots of other victims as well. > Smaller, younger startups would be in for hard times if investment stopped coming in, but 1,000 $10m (on paper) startups going under is a just 1,000 individual failures. This is correlated in the sense that a shortage of cash would effect them all, but it's not systemic in that their failure would extend far beyond the investors, founders & employees that understand the risk. How many people are employed by these startups? How would a glut of now-unemployed startup workers affect wage trends? How many non-tech businesses in the Bay Area are thriving on the tech funny money? Companies like Google and Facebook aren't going anywhere, even if their stock prices become heavily depressed for some time. And despite tech's prominence, the Bay Area economy is still fairly diverse. But it's short-sighted to believe that a significant decline in the number of funded startups would be of minimal impact to anyone but investors, founders and employees.
- avn2109 12y ago
  >> "The current "tech bubble" is just one of multiple bubbles being driven by an even larger bubble in public equities..." This is interesting. Could you elaborate on some of the other sub-bubbles? Not being facetious, am really curious.
  - orbifold 12y ago
    I know nothing about finance but the Federal Reserve has provided new money at almost no interest to banks for a fairly long period of time from ~2008 onwards (this was called quantitative easing). This essentially forced the EU and countries like Switzerland to do the same, if they did not want their currency to get too strong. It is not a stretch of imagination that this fueled much of the current stock market boom, both Euro and Dollar have lost a lot of value at roughly the same pace.
jboy55 12y ago
Well, one thing about 1999 is where the actual revenue for the big players was coming from. That is, when Yahoo reporting their income what % just came from startups spending VC money without a business plan? The whole dot-com thing in 99 was pretty much a pyramid scheme, where the first players showed there was promise, then when everyone rushed in with their VC money to spend, they looked solid. When the leaf nodes ran out of VC money though, everything dried up. And that hit not just Yahoo, but software/hardware vendors, and just about everyone else. What could be dangerous now, is how much of Google's and/or Facebook's money is advertisers who are selling goods/services, or Advertisers wanting traffic for their ads. Facebook seems to have a lot of ads from Answers.com, which is ad driven itself. Pretty much every mobile ad I get is an add for either Google or a different mobile product. I would say the whole 'freemium' game thing has put a lucrative revenue model to those eyeballs, but how much of that is a fad? If those advertisers disappear, how badly will Facebook's revenue or Google's mobile revenue be affected?
- netcan 12y ago
  There is some of that. but for the most part (1) advertising revenues come from across industries, (2) startup revenues as a whole are fairly diverse coming from advertising, saas, transaction fees on rooms or rides and (3) most importantly I don't think Dropbox's value will hit critical levels because twitter's business model fails. its all a lot less speculative. multiples are high, but not the imaginary. most of the mature 2.0 startups are real businesses with a company value derived from revenue and profit.

by netcan 12y ago

luma 12y ago

I think point (4) is the key here. The original bubble happened on the public exchanges with public money. The "IPO" was the big deal that everyone wanted to get in on after Netscape, et al valuations went crazy. Institutional investors were investing people's retirement accounts into companies they didn't understand. When that finally fell over, the impact was felt across the economy because it involved everybody's money. This time the money is largely coming from private equity and there's not a lot of splashy IPOs happening. The people who are investing aren't mom and pop planning for their retirement. If a big VC firm looses it's shirt it's not as likely to have the impact on "Main Street" as we saw the last time around. I'd like to say that I don't care one whit if a bunch of rich people suddenly loose their money, but if history has anything to show, it's that they'll somehow figure out a way to make the rest of us feel the pain too.

7Figures2Commas 12y ago
> This time the money is largely coming from private equity and there's not a lot of splashy IPOs happening. This is an amusing statement in light of the fact that the largest IPO in history (Alibaba) took place last week.
- marcosdumay 12y ago
  Compare to the 99's. One couldn't keep track of all the IPOs back then. Anyway, the VC bubble will not pop alone. It'll take stocks with it (or the other way around), and people will suffer worldwide again.
  - 7Figures2Commas 12y ago
    > Compare to the 99's. One couldn't keep track of all the IPOs back then. There have been close to 200 IPOs this year. How many people here can, by memory alone, name more than 10? I'm not at all arguing that the IPO market of 2014 is the IPO market of 2000 reincarnated (it absolutely isn't), but anecdotal analyses that boil down to "it was crazier in 2000!" aren't very meaningful.
- nmjohn 12y ago
  I'll paraphrase a comment I wrote on reddit about this yesterday. Alibaba has a PE ratio one tenth of amazon - and is already a profitable company. This is the exact opposite of what a bubble is. This is not at all like the kind of IPOs leading to the 2000 crash.
  - 7Figures2Commas 12y ago
    I didn't comment on Alibaba's financials. I simply responded to the statement that "there's not a lot of splashy IPOs happening," which I found somewhat amusing in light of the fact that the arguably "splashiest" IPO just took place. That said, Alibaba's profitability and PE ratio compared to Amazon is meaningless in the context of a bubble discussion. A bubble does not merely consist of unprofitable companies becoming ridiculously valued; it consists of profitable companies becoming more highly valued than their fundamentals can support. If Amazon's stock price fell by 25%, and Alibaba's did the same, as an Alibaba shareholder would you take comfort in the fact that Alibaba still has a PE ratio one tenth Amazon's? Of course not.

AJ007 12y ago

Even small start ups should continue to do ok -- the hardware overhead for early stage stuff now is so cheap it is nearly free. Models that require huge scale before the revenue comes in could be a problem. I self-funded so my opinion is likely wrong, but it seems like a lot of the excess money is going to questionable things in addition to paid growth (no clue how much Uber, Lyft, and others are spending, Groupon certainly took the paid acquisition to the extreme buying up huge chunks of available online inventory.) Luxurious offices are nice but hardly necessary for a serious coder or designer. Perhaps the most vulnerable are the start ups that already exist and are dependent on investor money to operate. In the event of a market pull back desperate companies should be easy pickings for the big boys to acquire talent and other interesting goodies. Leverage -- that makes bubbles very dangerous and unpredictable. Investor leverage is one thing, companies' own leverage is quite another. Last I looked (a year ago), tech was the best of the best by this metric. For public companies in other sectors, its a wonder if they would be worth anything in another major credit crunch. The corporations we keep hearing about having massive cash stock piles have liabilities to match. A concern would be Facebook's or Apple's market cap dropping 50%+ . Go to 0? No.

deleted 12y ago
[deleted]

7Figures2Commas 12y ago

> Private money doesn't (I hope) break the economy in the same way that public money can. If VCs go bust there are ramifications, but these markets are not that liquid. There aren't margin calls going off and forcing fire sales. Too many people trying to compare today's bubble to the first bubble are making the mistake of assuming that it's being led by tech. It isn't. The current "tech bubble" is just one of multiple bubbles being driven by an even larger bubble in public equities. When the public equities bubble bursts, Silicon Valley will this time be a victim, not the culprit. And there are going to be lots of other victims as well. > Smaller, younger startups would be in for hard times if investment stopped coming in, but 1,000 $10m (on paper) startups going under is a just 1,000 individual failures. This is correlated in the sense that a shortage of cash would effect them all, but it's not systemic in that their failure would extend far beyond the investors, founders & employees that understand the risk. How many people are employed by these startups? How would a glut of now-unemployed startup workers affect wage trends? How many non-tech businesses in the Bay Area are thriving on the tech funny money? Companies like Google and Facebook aren't going anywhere, even if their stock prices become heavily depressed for some time. And despite tech's prominence, the Bay Area economy is still fairly diverse. But it's short-sighted to believe that a significant decline in the number of funded startups would be of minimal impact to anyone but investors, founders and employees.

avn2109 12y ago
>> "The current "tech bubble" is just one of multiple bubbles being driven by an even larger bubble in public equities..." This is interesting. Could you elaborate on some of the other sub-bubbles? Not being facetious, am really curious.
- orbifold 12y ago
  I know nothing about finance but the Federal Reserve has provided new money at almost no interest to banks for a fairly long period of time from ~2008 onwards (this was called quantitative easing). This essentially forced the EU and countries like Switzerland to do the same, if they did not want their currency to get too strong. It is not a stretch of imagination that this fueled much of the current stock market boom, both Euro and Dollar have lost a lot of value at roughly the same pace.

jboy55 12y ago

Well, one thing about 1999 is where the actual revenue for the big players was coming from. That is, when Yahoo reporting their income what % just came from startups spending VC money without a business plan? The whole dot-com thing in 99 was pretty much a pyramid scheme, where the first players showed there was promise, then when everyone rushed in with their VC money to spend, they looked solid. When the leaf nodes ran out of VC money though, everything dried up. And that hit not just Yahoo, but software/hardware vendors, and just about everyone else. What could be dangerous now, is how much of Google's and/or Facebook's money is advertisers who are selling goods/services, or Advertisers wanting traffic for their ads. Facebook seems to have a lot of ads from Answers.com, which is ad driven itself. Pretty much every mobile ad I get is an add for either Google or a different mobile product. I would say the whole 'freemium' game thing has put a lucrative revenue model to those eyeballs, but how much of that is a fad? If those advertisers disappear, how badly will Facebook's revenue or Google's mobile revenue be affected?

netcan 12y ago
There is some of that. but for the most part (1) advertising revenues come from across industries, (2) startup revenues as a whole are fairly diverse coming from advertising, saas, transaction fees on rooms or rides and (3) most importantly I don't think Dropbox's value will hit critical levels because twitter's business model fails. its all a lot less speculative. multiples are high, but not the imaginary. most of the mature 2.0 startups are real businesses with a company value derived from revenue and profit.