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Bubble talk

• mathattack 12y ago
  I would take this bet. I'll put 3 caveats: 1 - I don't have 100K lying around to allocate to charity bets. 2 - I'm not an early stage investor. 3 - Perhaps because of 1 and 2, I'm not in Sam's position to take the bet. But Sam has laid 3 very aggressive goals. His position is that the market is significantly undervaluing all 3 stages of investment. The odds are that at least one of these will be wrong. (And it won't take a bubble to prove that - all it will take is just 10% returns in one of the 3 phases of investing rather than 15+%.) If it were a cash bet, it would be worth taking just as a hedge. Net - any true naysayer should take Sam up on it, as it's a good bet for even folks who think we are in for just modestly good times.
  • aetherson 12y ago
    Well, there's an additional tax on the negative bet: if you lose, you lose $100k. If you win, you get no money. The first question for this bet is "How much would I pay to make Sam donate $100k to a charity of my choosing." Would you pay $10k to make that happen? $1k? $50k? $100k? If Sam donating $100k to charity is only worth $20k to you, and you think that Sam is 80% likely to lose his bet, then the bet has an expected -$4k utility to you. EDIT: Sorry, my model above does assume that paying $100k to a charity of Sam's choice has 0 utility to you. If, for example, you strongly expect to donate $100k+ to charity in 2020 anyway and aren't very choosy about which charity, then obviously the bet is a pretty sure winner to you.
• kirinan 12y ago
  The issue is we work in a field that has had a bubble in the past so until it inevitably happens again, the doubters will look for every sign that a bubble exists, contrary to the truth of the matter. In a similar manner to the housing market, technology will always be seen as "bubbly" and every high valuation just feeds the rhetoric. Ebbs and flows in economies is natural and known to anyone that studies macroeconomics even at the basic level, but truth doesn't sell: fear and doubt does unfortunately. It's annoying, but not quite as destructive as the other fear mongering happening with other news around the world.
• jeffwass 12y ago
  Wow, pretty bold bet SamA! Anybody know how Sam's Proposition 3 would have played out for prior years of YC? He's betting that net valuation of the entire YC W15 class will exceed $3B by 1st Jan 2020. That's roughly $30m per startup in 5 years. How many prior YC classes passed that bar?
  • aaronbrethorst 12y ago
    Or one $1bn+ company, a few decent successes, and dozens of corpses.
  • lettergram 12y ago
    Recall that the W15 batch was also much larger than previous batches with billion dollar valuations.
    • jeffwass 12y ago
      That's why it should be normalized per startup. Roughly $30m per, at 5 years.
  • dxbydt 12y ago
    You know, if there was a private ticker say BYC53 on sharespost, which mirrors sama's 3 bets with the 5 year expiry, then a lot of us can trade alongside & quantify the worth of those 3 propositions.
• JimboOmega 12y ago
  The big question I debate with a friend is, if it's a bubble what would it look like if it burst? If the latest startups couldn't raise new funds (because of investor panic), then suddenly the market is flooded with developers, do salaries, real estate, etc, go down? Is the startup economy entirely reliant on outside money? (Especially outside of SV money - money like pension funds and other institutional investors) Or would the Googles and Facebooks of the world - huge profitable companies that they are - absorb the ones that failed, the downturn would be modest, and soon some of those developers would be right back out there starting new things? I'm inclined to believe the latter. People decry a bubble for other reasons than valuations, like San Francisco real estate and how high dev salaries are getting. Companies that don't have any revenue but can still raise lots of money. I do wonder how high dev salaries can go - I think it is tied to how much value a developer can fundamentally produce. It may well be far higher than the current average salary (perhaps multiples of it), so I don't see anything wrong with that. But you could also say developers are themselves in a bubble, and that the proliferation of app academies and their like will soon catch up with the demand.
  • adam419 12y ago
    Everything is connected. If there's a collapse in private equity funding, you could see consequences such as a decrease in advertising on major platforms such as Facebook, which would hurt their earning and market cap. I definitely think it would have some systemic consequences, but not at the magnitude of early 2000s unless it's triggered by a general equity market crash or some sort of global debt crisis.
    • CHaro 12y ago
      If there is going to be a crash my money is it being on Student loans
      • adam419 12y ago
        While I agree student loan debt may be unsustainable and start defaulting, I don't think it's as disastrous as the subprime crash because (from my understanding) most of student loan debt is on the books of the Federal government, and is not being monetized in anywhere near the magnitude that subprime mortgages were being sold on a global market.
• narrator 12y ago
  Typically the thing to look for at the top is a falling marginal utility of capital. That is, capital can't find a place to invest itself so it starts chasing after dumber and dumber investments. The high production cost oil sector (e.g shale) is probably going to be the first thing to go.
• staunch 12y ago
  There are now high speed internet, unix powered, quad-core pocket computers in the hands of billions. You can't understand the implications of that and think there's a bubble by any meaningful definition. There should probably be 10000x more companies than there are. The 1+ million mobile apps that exist hint at the true scale.
  • johansch 12y ago
    Quad-core devices are probably in the 100s of millions for now, not billions, but I agree with the rest. :) (Globally speaking, the most common type of smartphone today is probably a one-core 0.6-0.8 GHz Android device running Android 2.x. With a crappy 320x480 TN display and not nearly enough RAM.)
  • jeffreyrogers 12y ago
    Things can be overpriced (and therefore in a bubble), while still adding value. The people saying we're in a bubble aren't claiming that the companies affected by the bubble are bad companies. They're saying that the price required to buy into them isn't commensurate with the future revenue those companies will generate. Think about it this way. Wikipedia adds a tremendous amount of value to the world, but it can't capture any of that value, since people don't really want to pay for it, so if in some hypothetical world you could buy equity in Wikipedia valuing Wikipedia at say, $10b, then Wikipedia would be overvalued, even though it may in fact have generated many times more than $10b of value. Of course, you could argue that if Wikipedia were for profit it would be able to find some way to capture that value. In effect, this is where the disagreement arises between those who say there is no bubble and those who say there is.
  • frandroid 12y ago
    We had Internet "everywhere" in 2000, all these new doors were being opened! And yet we crashed. The investment has to remain in step with the economic returns, or else eventually a crash happens. The possibilities are one thing, the returns are something else. Of course there are a lot more viable online/mobile businesses now than there were in 2000, so a bubble has that much more space to grow before crashing. If there's a bubble.
• vasilipupkin 12y ago
  My only quibble with this is that Sam is assuming about 15% a year appreciation of market value for the established >= $10B companies between now and 2020. That seems unrealistic, given historical returns of US equity markets. I am sure those companies will innovate going forward, but given how large and established they are, this should be priced into their current valuations. But, I hope Sam wins the bet !
  • jeffreyrogers 12y ago
    > That seems unrealistic, given historical returns of US equity markets. Especially considering we've just had 5 years of pretty remarkable returns in the equity markets, so if anything you'd expect low returns over the next few years. US equity as a whole is valued pretty high relative to earnings at the moment, and the technology sector is in line with that.
    • vasilipupkin 12y ago
      This also provides some context http://avc.com/2013/02/venture-capital-returns/ http://avc.com/2013/02/venture-capital-returns/
• washedup 12y ago
  Even if he is right about his bets, it does not prove that there was no bubble. A lot of times when bubbles burst, many small competitors are whipped out of the market, while the ones that have been successful up to that point have a better chance of surviving. Not only survive, but once the dust settles they are the few left to soak up any new investments. Boom/bust cycles can be thought of as a redistribution of bad investments, which often time results in the demise of fresh competitors or, at best, the assimilation of "failed" capital (human, tech, infrastructure) of those ventures into the companies which successfully navigate the transition at a very low cost. The bubble that different parties speak about when talking about the tech world has to do not so much with the amount of money flowing into that sector as an aggregate, but the near-exponential growth in new companies and the unfathomable valuations of some of them which are hard to justify.
  • jmcatani 12y ago
    >>> Of course, there could be a macro collapse in 2018 or 2019, which wouldn’t have time to recover by 2020. I think that’s the most likely way for me to lose. Macro collapse = Bubble Bursting. The performance of YC's personal portfolio is irrelevant to the idea of bubble bursting if there are other investors running a pump and dump on the industry at large.
    • etruong42 12y ago
      I took "macro collapse" to mean some tumultuous event independent of existing market valuations, such as natural (or man-made) disasters, epidemics, war, etc. I've never heard the term myself, so I am speculating.
  • baddox 12y ago
    What then would you propose as a decision procedure for whether we are in a bubble?
    • washedup 12y ago
      Bubble bursts are generally large-scale psychological phenomena. Nothing can be done to avoid them, and boom bust cycles will continue in small sectors, larger sectors, and the entire economy for the foreseeable future. As investors slowly start struggling to find valuable places to put their money, an idea that it isn't worth while begins to circulate through the investment world. The best advice is to always invest wisely. It makes no difference whether you are in a bubble or a contraction. Doing so will put you in a better position to succeed even when the bubble bursts.
• rckrd 12y ago
  [1] For context, this may be in response to the twitter conversation between Sam Altman and Chris Sacca https://twitter.com/sacca/status/579731109753159680 https://twitter.com/sacca/status/579731109753159680
• ProAm 12y ago
  Of course we are in a bubble, it's impossible to agree with the fact that Uber is truly valued at 41 billion and Google only at ~364 billion. It's hard to swallow that Uber is roughly 10% of Google in value.... That goes for all these companies many who still are not really profitable. Of course SamA is going to say we are not in a bubble, when his company's only goal is to take 1 penny and turn it into 4 pennies based on valuation and further outside investment and growth. The tech bubble will burst, but likely will not hurt society at large, but it will likely dent the VC ecosystem.
  • sskates 12y ago
    If you're so sure, why don't you take the bet that Sam offered? All this cheap talk on HN and no one wants to put their money where their mouth is.
    • headsupftw 12y ago
      1. $100k is a lot of money for most of the folks here. Simply put, I can't afford to lose $100k on a bet but Sam can. 2. Even if I won the bet (impossible because I'm not a VC), I would not gain anything financially. So what's in it for me? 3. If he changes the terms to $100 a pop and winner gets to keep loser's $100 then I'm game.
  • imh 12y ago
    >only goal is to take 1 penny and turn it into 4 pennies That reminds me of what he said about "the thing that feels least reasonable is some early-stage valuations." His interests lie in driving early stage valuations down and later stage values up. And that's exactly what he's saying here.
  • chm 12y ago
    Well you have a lot of people chipping in for Uber to be valued at $41G. While that doesn't tell us much about each actor's rationality, it does indicates that some people think there's value in the company's future. I can personally imagine a world where I don't own a car and pay 300-500$ a month to a company such as Uber so that a robot comes drive me from A to B whenever I want.
• untog 12y ago
  Man with vested interest in avoiding bubble says there is no bubble, more at 11...
  • outericky 12y ago
    Not sure if you read the whole post, but he's willing to put $100k on the line...
  • simonw 12y ago
    ... and bets $100,000 of his own money on it.
    • danans 12y ago
      $100k might be a big bet or a small bet for him, depending on what his net worth is. In any case, he's probably not betting his IRA on this, so I'm not sure the amount really matters beyond getting people to pay attention.
• pkaye 12y ago
  Always this talk about valuations. Never about revenues and profits. Reminds me of the dotcom days when people used every other metric when they couldn't talk about profitability. Like eyeballs, clicks, etc. There will be a few winners but a vast many will do down in smokes or get acquired for pennies on the dollar.
  • gdilla 12y ago
    Business vs startup When Twitter went public in 2013, it was valued at $24B — 12 times higher than Times market cap. Twitter was losing money while Times earned $133M the same year. Why do startups have such big valuations? The answer is: cash flow. It is different between high-growth startups and low-growth businesses. Startups would usually be profitable in the future. Startup’s main metric is growth. [1] [1]https://medium.com/@paulmillr/zero-to-one-summary-8dbda22e1559 https://medium.com/@paulmillr/zero-to-one-summary-8dbda22e15...
• ojbyrne 12y ago
  I enjoyed (and mostly agreed with) the article but the dollar amount of the bet gave me pause. 10 years ago (aka before the bubble in long bets) that would have been $10k.
• PublicEnemy111 12y ago
  "House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals." -Ben Bernanke, circa 2005. I couldn't help myself. I really admire Sam and the current tech bubble(if there is one) is nothing like the credit crisis. Funds existed in 2008 whose sole investment strategy was to buy the opposing side of credit default swaps just so the bears had something to buy. Just wanted to poke fun :P
  • jpmattia 12y ago
    Your example is actually quite good: Are there people who think they are better informed than the chairman of the Federal Reserve? And to amplify: This was Ben Bernanke's assessment as late as March 28, 2007 > At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. http://www.federalreserve.gov/newsevents/testimony/bernanke20070328a.htm http://www.federalreserve.gov/newsevents/testimony/bernanke2... Bear Sterns went to firesale less than a year later. To actually make money off of the market situation then (both on the long and short side), you had to also recognize the Keynesian wisdom: Markets can remain irrational longer than you can remain solvent. I don't begrudge Sam for talking his book, but pretending to have knowledge about what constitutes "bubble valuations" is tricky at best.
• steven2012 12y ago
  "I am pretty paranoid about bubbles, but things still feel grounded in reason." Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006. They have a self-interest to believe that the good times will keep going. During the dot-com bubble and the housing bubble, the rationalizations that were being spouted by those in the midst of it were incredible. The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users. The only thing keeping the valuations high are because people delude themselves into believing that Google or Facebook will pay billions for customers. If Google and/or Facebook declared they would be doing no more acquisitions, valuations would plummet immediately. The valuations given to companies with no real revenues, or profits to justify ridiculous valuations. But the rationalizations that get spouted to justify them are what is a big indicator of a bubble to me.
  • tptacek 12y ago
    A "bubble" isn't defined as the absence of any irrational valuations.
    • hawkice 12y ago
      Not sure if you're still in the edit window, but there is a triple negative thing going on that makes this statement both confusing and less interesting (if there were no irrational valuations, no one would call it a bubble).
    • IgorPartola 12y ago
      Yes, but wouldn't you agree that the high profile valuations are over way over the top? Facebook, Instagram, Twitter, WhatsApp, etc. were/are valued extremely highly, I would say unjustifiably so. If there was a mechanism to go long against them and I had money to gamble with, I would. My go to example for this is Facebook's IPO. Their valuation was at the time at $50/user. Can they extract that much lifetime value out of every user they have? It seems rather high to me. I don't believe there is an industry-wide bubble going on. But it seems to me that if you hit the right keywords (social, sharing, advertising), you will be valued at the top of the range, not the bottom. Moreover, I believe these particular valuations will get market corrected sooner or later.
• icedchai 12y ago
  Yes, this time, it's different...
  • cookiecaper 12y ago
    To be fair, speculation of a "new tech bubble" has been rampant since a few years after the dotcom bust, and there hasn't been a major tech-specific crash yet. At some point the guys talking about a bubble will probably eventually become correct, but that doesn't mean they're correct now.
• SilasX 12y ago
  >Investors that think companies are overpriced are always free not to invest. Not to detract from the general point, but during the last bubble crash, we ended up being forced to invest via bailouts.
  • marincounty 12y ago
    You have a large amount of workers who are paid to invest. They can't put it in the bank, and count on the interest. In order to keep their job they need to invest. They will invest until it crashes? (When it does crash, I hope the haves will take pity on the have-nots; just a little, and not just to the obvious ones.)
• foobarqux 12y ago
  I think its laudable to back firmly held beliefs with a large bet. One of the nice things about making a bet is that you need to be precise about the terms, in this case what everyone means by "bubble". The terms in this bet imply that it would not be a bubble if most of the companies went to zero but 1-2 dramatically increased in value. That makes sense if you are an investor in all of these companies, like YC (nearly) is. But most VCs hold only 1-2, so if there is a wide variance in outcomes (which is characteristic for startups) and the rest of the VC's portfolio are not quite as great as the listed companies (i.e. much more likely to go to zero) then there is a big risk of large drawdowns in VC funds. I think that is a reasonably likely scenario, which many people would call a bubble, but which wouldn't be reflected in the bet. Put another way, the bet is like saying YC's portfolio (or at least the synthetic portfolio described in the bet) is undervalued in aggregate, not that many specific companies are.
• jacquesm 12y ago
  > This bet is open to the first VC who would like to take it (though it is not clear to me anyone who wants to take the other side should be investing in startups.) That sentence misses a 'why' I believe. As for the subject matter: bubble or not, who cares? Those that will not invest for fear of being in a bubble would do better to keep their money anyway, and those that look at individual companies rather than the market as a whole will always have a huge edge over the investors that simply follow the herd. It's the followers that really get burned by bubbles, not the originals, they'll survive one way or another on their own merits rather than on endless capital being poured into their corporate coffers. Bubbles are bad, corrections are good news for the real movers. In a bubble you can find yourself with a whole slew of competitors trying to go after the same market polluting pricing and models by using investor money to prop up their essentially broken propositions. Right after a bubble pops is when the real fortunes are made, that's when all the nonsense goes away for a couple of years. It's a saw-tooth like curve and even though we're not technically in what I'd call a bubble we're definitely no longer on the ground floor either. It's not a binary thing.
  • rudolf0 12y ago
    I believe that sentence is grammatically correct without the "why".
  • jholman 12y ago
    I think you mis-parsed. I think Sam intended "(though it is not clear to me [that] anyone who wants to .... should be ...)", with the word "that" elided.
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• ayb 12y ago
  Bubbles don't happen when everyone says "we're in a bubble". Bubbles happen when everyone is excited, they all want in to the next pets.com no matter what, and the general consensus is "this time is different".
  • washedup 12y ago
    Bubbles BURST when everyone says "we're in a bubble."
• roadbeats 12y ago
  Successful examples don't change the fact that how much money is wasted unnecessarily. I see startups spending lots of money on fancy offices with massage rooms, when you can't find anyone around if you try to find donation for a village in Cambodia where people living with 5 dollars monthly budget. Some startups do good things exceptionally but how do people feel good about hundred thousand dollars monthly office expense for a startup that doesn't generate any revenue ? I don't know much about bubble and stocks etc since it's kinda not my focus in general, but when I see something like Yo valued as 10 million... There is something wrong with this culture because you know this planet we're living on, I can point you hundreds of cities where the currency is a package of baby food. Millions of people struggle accessing water and food but here we see 300 million dollars are thrown to the table for a dating site. I don't know what exactly bubble refers to but as an engineer honestly I feel bad about being a part of this culture and I'm waiting for the first chance to quit this industry completely.
  • vasilipupkin 12y ago
    this is a weird argument. It amounts to saying that since things are bad in many places, it would be good if things were also bad in places where they are currently good.
    • roadbeats 12y ago
      That's what you understood. in fact, I'm talking about the big amount of money wasted bountifully for luxury offices with massage rooms, startups with no revenue but hundred thousand dollars monthly office expenses. Of course I'm happy that there is wealthy countries in the world, as well. But I do know one thing too, we owe this wealth to those who struggle and accept working for 2$ per day. And Uber or Snapchat doesn't have any impact in their lives. When people who make those jeans that we buy from the fancy stores here, many of work in underground textile factories starting in very young age like 11, and they die at twenties suffering from Silicosis disease. Just one example. You can ignore all the world and talk about Uber, Snapchat every day for sure. I'm not saying startups shouldn't be invested, or I'm not against venture capitalism. Try to get my point without arriving to that kind of conclusions.
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• cookiecaper 12y ago
  Let's try to convert all this navel-gazing into something usable by your average HN reader. How can the average dev best exploit the current market conditions, whether these are considered "bubblicious" or not? Should we all high-tail it out to the Valley and get funded now so that we can cash out with billions for something very airy and non-substantive that we "made" with VC money? What kind of self-marketing and self-promotion needs to be done to ensure that we are seen as something hip like Whatsapp and bought at a massively unreasonable price? What are the less invasive ways for Joe Developer to take an appreciable slice of the pie, meaning getting something more than long-shot lottery tickets as options and/or kind-of OK salaries? How can a developer make $1 million for himself/herself this year without founding a company? Surely that lowly sum is attainable by the humble developer what with the current valuations being "grounded in reason" and VCs going gangbusters.
  • beatpanda 12y ago
    Yeah, if I'm going to live in a culturally dessicated Bay Area I'd at least like to be getting a piece of the pie. Other reasons for living here are getting chased out at an accelerating clip.
• dataker 12y ago
  Sam shows a great attitude that's quite different from many VCs and entrepreneurs. Some are quite dogmatic and won't even discuss the possibility of a bubble. If you ever question it, you're taken as old-fashioned, ignorant and heretic.
  • outericky 12y ago
    The main differentiator being that he wants companies to grow to be great (and valuation is a measure of that success), whereas traditional VC's and even entrepreneurs are looking for high valuation/exits as success, whether the company is truly great being irrelevant.
• kposehn 12y ago
  > The gleeful anticipation of a correction by investors and pundits is not helping the world get better in any meaningful way. So very true. I think it is important for us all to remember that quotes from sources in a marketplace are often about forwarding their own interests, as opposed to being realistic or dispassionate and truthful. This is often something people do unknowingly, especially well meaning people that are discussing a subject of great import to them. Something to keep in mind.
• myth_buster 12y ago
  I think this is quite a risky wager. I'm not sure how much of external factors are accounted for. The economists and financial journalists are quite excited about the whole QE and ZIRP effect. It's been deemed an unprecedented experiment. Cheap money has flooded the market. If we look at each industry of itself, most of them are in the similar state. Housing has become very expensive, stocks are at all time high, executive compensation has increased, commercial real-estate is popping up everywhere and the wealth gap is broadening. So when someone looks at statup evaluations and see them getting higher and higher, an expectation of market correction is in order just as it would be with the stock market. Perhaps the inevitable will get delayed once Euro takes up on the QE. P.S: I think when someone talks about bubble, it doesn't imply that the current crop of startup ideas are bad. It just reflects inflation in the VC market.
• toddsiegel 12y ago
  I believe he is right. We are not in a bubble. VCs make big bets, assuming that many (most?) of their bets will fail, but they make it up on the winners. That is fine, I guess. What made the dot-com bubble was that the public did not understand this and the VCs were able to shovel many of these bets off in the form of IPOs, and many of these companies had no business model whatsoever. That is not happening here. These people are smart and learned their lesson, a rare trait in our economy. There is a lot of exuberance, let's call it, in the VC world right now. On the one hand I see lots of good companies that have a good service and actually make money, or are getting close, but I also see a lot of social media companies with dubious business models, like in the dot-com days. I get very worried however when I see a sector of the economy starting to defy the laws of nature, so to speak. What worries me are the valuations. Most of the companies he mentions are good companies, as defined above, but few if any of them I believe are worth these amounts. Sorry. I don't buy it. Accounting shenanigans aside, public companies are relatively easy to value. These startups are black boxes with astronomical valuations. It's really tough to swallow. These valuations are clearly in the VCs interests. What I see in the future are that some of these companies will succeed, some will be bought at an overvalued price and a whole bunch will die as startups do. The latter two circumstances will certainly be a drag on the economy if it causes a dip in further investment, write-downs, etc. I do not see a bubble as I said, but I see a whole lot of risk building up. It's not scary like the housing and dot-com bubbles, but it's definitely concerning.
  • hnnewguy 12y ago
    >That is not happening here. That's not happening here...yet. We could be at the very beginning. Who knows for sure?
• aabajian 12y ago
  I appreciate Sam's perspective. He has much more experience with startups and identifying businesses that solve real problems. My perspective is somewhat naively stuck in the viewpoint of a software engineer who used to deliver pizzas. When I was a pizza delivery driver I made under-the-table minimum wage, $8 per hour. It was very clear to me where that money came from. People would order an everything pizza for $20, we'd subtract the cost of ingredients (mainly cheese), absorb some profit for the business, and pay our salaries out of the remainder. As a software engineer making upwards of $50 per hour, I question where my salary comes from. If I worked for FB, Google, or Pinterest, surely it'd be from advertising revenue. But isn't there AdBlock Plus, AdBlock, and uBlock? I install uBlock immediately after downloading a new browser. I think anyone in tech does the same. Which makes me worry about Twitter, Reddit, and Snapchat. These apps are mostly used by people under 40 who are tech-savvy. They are all in the red (maybe Twitter is green now?), but they plan on making money through advertising. Their prime user base knows about AdBlock. What happens when ad blocking is ubiquitous? That's one way the bubble could burst. Here's another. I work for a company that's venture-backed. My salary comes from venture capital. We've spent the past few years building a healthcare product that's finally gotten some traction. There are currently major incentives for hospitals to adopt emerging technologies. These governmental initiates have made it easier for us to approach customers. Federal funding fluctuates rapidly and while it may be advantageous to start a health tech company today, that could change depending on election outcomes and other spending. Our investors are keenly aware of this situation. Should the environment shift, they would be unlikely to perform another investment round. Venture capital is not a sure footing to build a business on - at least not as sure as selling pizzas. And I think this defines my idea of a bubble. Too many venture-backed companies with extreme evaluations that are planning on making money someday using strategies that worked in the past (e.g. advertising), or assuming that the next round of capital will be there should their plan fail.
  • hullo 12y ago
    The use of the web has continued to expand at a much greater rate than the use of ad blockers, even if it were true that everyone in tech installs one (they don't). And now mobile web grows at a great clip each year as well. I imagine use of ad blockers is much lower on smart phones; in particular given the large share of market non-jailbroken iPhones have. I gather it's possible for Android, but I haven't seen enough folks talking about it for me to believe it's that common.
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• austenallred 12y ago
  It seems to me that the moral of the story for early-stage founders is this: Don't (over)-optimize for valuation. Naturally you want to raise at the highest valuation you can, but it's not quite as simple as supply-meets-demand economics. There are different parties that bring different sets of skill and enthusiasm to the table, and all not only have to justify their investments to LPs, but are actually hoping to make a return on the investment. If I were to raise a seed round again (and we were oversubscribed - not best-of-YC-oversubscribed but oversubscribed), I would optimize purely for investors that would be most helpful, and let the valuation be an afterthought. My guess is 90% of founders who have gone through it would say the same. Doubly so if they had a really bad set of investors. If you are a YC founder and you want to start a bidding war, can you find some sucker wiling to give you money at a an absurd valuation? Probably. But when Series A/B time comes you have to justify that absurd valuation. The day of reckoning is ~1 year away. That's a hell of a lot of pressure on a short time-frame for a company just barely getting off the ground. To a certain extent (and I recognize this is a very flawed analogy), your seed round valuation is like getting somebody to bet on what you'll score when test time truly comes. So if you want to say, "I'm going to score X" and you get somebody to believe you, that's great, but now you have to fulfill on that promise or nastiness comes. That could mean a lot of dilution, a down-round, CEO firings... not fun stuff. That being said, every company is different, and a lot of the time I see people saying, "Look at that valuation, it's 1999!" while knowing absolutely nothing about the company, its founders, the market, the trajectory, the metrics, the revenue, etc. There are relatively few metrics someone outside of the deal could use to determine whether or not we're in a bubble, so we mostly look at how many zeroes are behind a valuation and determine according to that if it's "a bubble." Pretty difficult, but everyone will have their say. Personally I wouldn't mind things being deflated a little bit. We didn't raise the highest valuation possible, mostly because we wanted to go with people we trusted and get back to work. I'd like to think taking a little bit of the valuation edge off would make hiring less competitive, rent in Silicon Valley cheaper, etc, and I'd be OK with it being less hot than it is now. Obviously I hope a 2000-like scenario never happens again, but I'll be around no matter what happens, so let what may come.
• lukasm 12y ago
  The problem is nobody knows what's in the contract. What is the liquidation preference? etc.
• malthaus 12y ago
  Of course we (or better: silicon valley startups) are in a bubble, fueled by cheap money and short memory. And of course the VC-ecosystem is denying that for as long as possible. Nobody is saying that the 1bn+ club startups are not adding value, just that it's magnitudes smaller than valuations would imply. They are driven primarely by VCs and because they constantly push it as a valid success metric. Investors have to deny it because they're betting their money on it, if they show doubt - their money is gone before they can flip it. The startup kids have to deny it because they want a shot at the big payout. Where are the future profits/dividends that validate those insane numbers? User growth was a ridiculous measure in '99, it's a ridiculous measure now. Once the cheap money dries out, the bubble will burst. AirBnB and co will probably survive but i doubt in 5years that many of them are valued >1bn. Once weakened / no longer hip, regulatory pressure will increase by a lot and bring down convenience & margins. I respect YC for what they have built over the years, especially how they can attract top talent. But boasting with valuations is insane and had me lose all respect. Let's see what's left once its portfolio rides out more than half of a economic cycle.
• quipp 12y ago
  His three propositions can occur even though a bubble bursts and may even have a better chance to do so because of it. i.e. The amount of money a company is worth becomes insignificant when the value of money decreases due to the fed dumping it from helicopters to avoid a depression. That's the reason why bubble talk is not boring... because the very unnatural successes that occurred post 2008 (due to market manipulations by the fed) now being set to unwind. It's become a game of jenga, with everyone watching the fed make its moves. Like it or not bubbles will burst and when they do lookout below!
• dharma1 12y ago
  2020 is not far off but there is room for another recession before then. There has been a lot of money flowing into equities and startups as well past few years - I guess it's at least partly because of QE (in the US, Japan and Europe). But in general I think it's great there is money flowing into innovative companies, whether in some cases they are overvalued or not.
• dnautics 12y ago
  Sam will win this bet. A macro collapse I think is more likely due before 2018, with plenty of time to recover. The only proposition he might lose is the first one, because all of those companies except possibly Palantir may fall victim to "trend cycles" (e.g. "nobody uses myspace anymore")... Although Snapchat, the likeliest victim of trend cycles, is not in his analysis.
• kyledrake 12y ago
  Though I agree with you that it's important to stay positive and work to create rather than destroy, I share many people's concerns about potential misallocation of investment capital in tech startups right now, because the current model largely depends on it for it's continued sustainability. VCs need liquidity events in order to make a return, which are provided by going public, or by being acquired by companies that have already gone public and thus have large slush funds for acquisitions. If that goes away, it could be a problem for the current model, because it's not designed to work for small success or failure mitigation. So if the stock market bottom falls out, it potentially takes down a lot of very promising startups that could have been successful and profitable with a different strategy. Their failures may not even be their fault, but simply bad market timing. This isn't a new thing, of course - it's been happening since the Panic of 1873. We're not exceptional to this risk, but I don't think we should ignore it.
• ggonweb 12y ago
  On the counter argument: just because there were survivors from .dotcom era or 'RIP times' doesn't mean that there was no bubble. Investing or startup funding should be buy low sell high at your comfort level. Yes there will be survivors after all bubbles and good for you if you had picked them all.
• nosuchthing 12y ago
  Is there a bubble in the tech/startup/web business scene? Probably not, this is where we're at with modern day services and business making use of modern infrastructures and newly developed technologies. Is there a bubble specific to San Francisco / Bay Area startups? I would assume so, granted all it takes to run a startup is a sensible business plan, talent, and an office space. There's a lot of factors at play. Advertising and data mining analysis seems to be fueling the value of services like WhatsApp/Facebook. SV has attracted a lot of talent because it's a great area to live around, there's plenty of fresh blood from the good schools in the area, and SV is where a lot of big companies have set up shop. There's always been charlatans and swindlers in the business world, and there will be many interesting innovators to come. There's an excessive amount of cash flying around [1]. It's not a tech bubble, it seems like a San Fransisco/Silicon Valley real estate bubble. [1] https://xkcd.com/980/ https://xkcd.com/980/
• scelerat 12y ago
  "I would much rather read about what companies are doing than the state of the markets." This statement rings true for me when applied to much writing that passes for journalism. "Horse race journalism," is the word for it when talking about political journalism.
• netcan 12y ago
  Content aside, there's something to a blog that ends with: 'I'm pretty confident that I'm right. If you disagree, I'll bet you $100,000.'
  • gojomo 12y ago
    Altman has 10X'd the bet that made Mitt Romney seem "an out-of-touch rich guy"! [http://www.politico.com/news/stories/1211/70246.html http://www.politico.com/news/stories/1211/70246.html]
• porter 12y ago
  Don't forget about MR MARKET as described by Ben Graham and popularized by Warren Buffet. Also, you are not distinguishing between price and value. Markets can be quite irrational at times, but intrinsic values are not irrational. There is a difference.
• aliston 12y ago
  The problem with this "bet" is that it's made in terms of valuations that VCs make up in the first place. To say that Pinterest is worth 11 billion in a private, non-liquid market means nothing -- If you give me a 2x liquidation preference / full ratchet / board seats etc., yeah, sure, I'll invest at a ridiculous valuation because there is no downside risk. I would take this bet without blinking if it were in terms of a reasonable multiple on earnings in 5 years. However, my prediction is that the companies Sam mentions won't go public for another 10+ years. The high valuations in SV circles right now are influenced by increasingly complex balance sheets, which will take a long time to unwind. As a result, this bubble in valuations will eventually deflate, but a lot more slowly than the 2000 bubble did.
  • 2arrs2ells 12y ago
    sama addresses the liquidation preference point: "Private companies are valued as of their last round that sold stock with at most a 1x liquidation preference or last secondary transaction of at least $100MM of stock."
    • aliston 12y ago
      Whatever -- a 1x liquidation preference in the form of a nearly full ratchet, which is how most of these late stage investments are being structured, is still a far cry from the way that an investor in a public market would value these companies.
    • aliston 12y ago
      By the way, this isn't some theoretical situation. Box did exactly what I'm describing. Even in a frothy Fed-fueled stock market, they IPO'd at a lower valuation than their last private market round, which I'm sure was full of all sorts of balance sheet gimmicks, and the stock has been on a downward trajectory since.
• dkrich 12y ago
  I respect putting in writing for all to see your predictions for the future on a controversial topic. Not easy to do. However there are a large number of companies lumped in together which sort makes this a hard metric to measure definitively. The logic seems to follow in the following way: "A lot of people believe there's a bubble." -> "Those people believe all new techy companies are part of this bubble." -> "Those people think all new techy companies are overvalued." I don't think that that logic is accurate. I think it's totally possible for somebody to believe (as I do) that a large number of tech companies are overvalued (Pinterest), while simultaneously believing that there are some that are not (SpaceX). So predicting that that entire group will exceed $200B in value in five years is making a broader argument that some tech companies that have already exhibited an unambiguous amount of success will continue that trend in the next five years. But what if four of those companies go belly-up or drop in value by 50%, while one outlier becomes the next Google? Is the argument correct? Technically speaking, yes. But I think in that case the overall point would be proven wrong. Ultimately I think the entire "bubble" conversation centers on the argument of whether private tech companies that are < 5-10 years old who's primary product is a captive audience of users is overvalued when a single group of VC's choose to value them in the 9-10 figures. It isn't bubble in the dot-com/real estate sense that actually has a meaningful negative impact on the economy, but more or less a disagreement on whether that value would be proven on a public market after a meaningful amount of time.
• mcintyre1994 12y ago
  > Private companies are valued as of their last round that sold stock with at most a 1x liquidation preference or last secondary transaction of at least $100MM of stock. Sorry for the ignorance but can someone help me get through the jargon here? What happens if a company stagnates, never managing to raise again and never IPOs? Am I right in thinking they'd remain valued at their current valuation by this metric? I guess my question is, assuming a company never raises below its current valuation (and if that happens I don't think we'll need any bets to decide they were overvalued) is there anything here that allows the valuation of a private company to actually decrease?
• systemtrigger 12y ago
  We might not be in a tech bubble but as sama said: > Of course, there could be a macro collapse in 2018 or 2019, which wouldn’t have time to recover by 2020. I think that’s the most likely way for me to lose. ... The potential for global economic collapse in the next ~5 years is significant. Read James Rickards (or watch his performance in the recent Intelligence Squared debate "Declinists be Damned: Bet on America") for a smart rationale in support of the pessimistic projection.
• pudo 12y ago
  Sam talks only about internal factors of the industry: is there enough value generated by startups to justify their valuations? This ignores the economic environment. There's just way too much capital floating around US stock markets and private equity funds, and it urgently to be invested in something. What that something is matters only marginally, as long as it is capable to sustain a consensual fiction that an investment is being stored. A bubble may well be an externally induced one, not just dotcom craziness.
• brayton 12y ago
  Bubble or not - seems a little self interested to release this blog post the day YC's latest batch is judged and valued (Demo Day). The last part "The loser donates $100,000 to a charity of the winner’s choice" is pretty badass though!
  • etrautmann 12y ago
    This strikes me as a bit cringe worthy, though perhaps it's my puritanical modesty. I like Sama, but putting up significantly more than the national average household income to make a point reminds everyone just how little the money matters.
• dennisgorelik 12y ago
  (1) "the thing that feels least reasonable is some early-stage valuations" Sam means here that early-stage valuations are possibly too high. (2) "Proposition 3: The current YC Winter 2015 batch—currently worth something that rounds down to $0—will be worth at least $3B on Jan 1st, 2020." So now (1) seems to contradict to (2): if 2020 expectation of batch worth is $3B+ then current evaluations should be higher, right?
• pw 12y ago
  I know it's largely for show, but does anyone else think it's a bad look to publicly offer a $100k bet (a la Romney's $10k proposition to Rick Perry)? I think this might be the moment YC jumps the shark for me.
• pdq 12y ago
  Proposition 3: The current YC Winter 2015 batch—currently worth something that rounds down to $0—will be worth at least $3B on Jan 1st, 2020. This is a clever way of wording to the VCs: "You should invest in the whole batch of YC W15 companies because in 5 years your investments will own part of a $3 billion group of companies."
• ChuckMcM 12y ago
  Interesting proposition. I've got a counter offer, invest $100,000 in the named companies (It would require a bit of financial juggling to make that completely work but it could be done) and liquidate in 2020, with whatever you get back going to charity. But that sidesteps the issue of bubbleness or not. Really the question is whether or not the private valuations of these companies is in excess of their "fair market value" (like Box's was) and so the private investors are over paying for participation. Sadly we can't just convert these privately held companies to publicly held ones to its hard to run the experiment.
• zackchase 12y ago
  This post scares me in the way that most bitcoin journalism does. There is no shortage of press talking about the start ups themselves (as opposed to the state of the capital markets). For many people, the state of the markets really does matter. If if you're looking to raise capital, it helps to know that these are historically favorable times. If you're looking to invest, it's important to consider whether things may be overheated. This article advocates silence (I'm tired of hearing about [insert topic]). This head in the sand talk is alarming in the same way that it's scary to hear people say "I'm tired of people saying that bitcoin is a pump and dump scam". Generally, it's a bad sign when a viewpoint is suppressed. Having lived through the dot-com bust (in which my father's "bubble" talk fell upon deaf ears) and the subsequent housing bubble in which people were similarly dismissive of "negative" voices, I'm wary of this rhetorical style.
• marcusgarvey 12y ago
  Where you stand depends on where you sit, so I understand Sam's annoyance with the question of bubble / no bubble. And I get that the tech media knows that it's a reliable source of pageviews. But it's not a spurious concern. Anyone who's got a 401K should be rightfully concerned, because asset managers of all stripes are now jumping into the pool. Zooming out, anyone who has a passing interest in the U.S., and indeed global economy, has a right to ask because the valuations are definitely being driven in part by low interest rates that our central banks have resorted to -- which are hurting savers, pensioners and anyone else on a fixed income. And if it ends badly I don't believe for one second that the hurt will only be confined to those with skin in the game. The global economy is far too financialized and integrated to hope so.
• michaelpinto 12y ago
  If your ass is sitting in an aeron chair reading this, then yes you should always be worrying about a bubble (unless to make up for that your desk is a 2nd hand card table)
• kra34 12y ago
  'My name is Sam Altman, king of VCs: Look on my works, ye Mighty, and despair!' Nothing beside remains. Round the decay Of that colossal wreck, boundless and bare The lone and level sands stretch far away
• jboy55 12y ago
  The current climate feels a lot different than the 2000 era. For starters, what was 'valued' in 2000 was: * The number of employees you had. I had the opportunity to be at a number of Idealab parties in 2000-2001, the only thing one company bragged to another was their head count. A company that had $500 in daily sales, bragged they at 36 employees. Oh, Goto.com has over 200 people now, they moved out of the Lab! * Your marketing spend. A company I knew 'rebranded' themselves. No one heard of them before, but they nearly bought two full page ads in the WSJ (for $110k a pop), to announce the new 'name'. They did spend around $100k in advertising and probably another $100k on a renaming party. This company had collected no revenue their entire 2 year existence up to this point. * You are measured on how big of a pop your IPO did. That is, how much money you left on the table. So, your company had an IPO price of $30 a share, when at the end of trading of the first day, it went for $300. Thus you collected $70 million, out of a possible $700. There was an ad for the WSJ about how much better your child would be if you subscribed, it mentioned that the child of a subscriber would start a company with a 'Record first day pop'. My god if you only doubled your price on the first day you were a complete failure, even though you might have had more cash to help your company grow. If Über, AirBNB and the rest, have real revenue, and they realistically don't need more funding to stay 'afloat' longer than a few months, then the bubble "isn't as bad" as 2000.
• jgalt212 12y ago
  It's amazing how quickly Sam went from founder of moderately successful start-up to public intellectual. I have nothing against Sam, but just because he took over for Paul doesn't mean I'll read and mull over everything he says with the same intensity I did with PG's writings.
• harro33 12y ago
  "Aggregate value" is an interesting way to measure performance, and makes it easier for him to be right than it looks at face value. On the face of it it looks like he's saying their value will increase by 2x or 3x, but what about capital raisings? Capital raised will still count in aggregate value, but doesn't provide direct value for shareholders. For example, one way for a company to go from a $1bn value to a $2bn value is to raise $3bn and then fall by 50%
• dools 12y ago
  So long as Google, Apple, Facebook and Microsoft are there to acquihire failed startups and return money to VC and seed stage investors, everything's peachy. The whole "valuation" thing is dumb anyway... saying that if you buy 5% of a company for $5, the company is worth $100 is incorrect because value is defined by how much you can SELL a thing for, not how much you paid for it. Given the fact that, if you buy 5% of some company in a seed stage round, you can probably not sell it at all, your share of the company is valueless, so the value of the company is whatever the owners can sell the remaining 95% of the company for. Every time you sell more of the company, it reduces the value of the company unless the remaining percentage is increasing in value quickly enough to offset what you've already sold. It's not that valuations are too high, it's that we're calculating the value of a company inaccurately.
• crdb 12y ago
  Glad he mentions the macro collapse possibility (which is out of his hands, and therefore irrelevant to his career except as a binary "shall I stay in this business" decision). I think any talk of bubble in tech should mention the direction of equities as an asset class, and particularly the very cheap capital available at the moment. So when you are taking a directional bet on "the tech bubble" (including deciding to make a career as a developer or startup founder) you are really taking a position on China's economy, and global interest rates for the duration of the bet. Hypothetical question: how many of today's startups would make it through their first five years if interest rates were in their mid-70s levels? What happened to other asset classes during the high interest rate days and what would a savvy investor have done at the time? It's becoming a very real consideration for many countries; see the fall in AUDUSD since 2013. In 2011, the majority of online e-commerce in Australia was cross-border, because the exchange rate was so good [1] and wholesale prices in Australia could be as high as 50% higher than the rest of the world. If you're a domestic online retailer today, raising capital abroad and competing against foreign retailers (say, you're The Iconic, financed in EUR and selling in AUD, competing against ASOS selling in GBP and shipping in USD), life just got a hell of a lot better. [1] can't find the link now, but the Commonwealth Bank of Australia crunched the numbers on over a million customers' accounts and published a fantastic report showing where the money went. In some sectors, over 90% of revenue came from abroad!
• hisabness 12y ago
  if there is a bubble and it persists then the valuations you propose are more likely and would be provided by the same investors participating in the bubble today. so, not sure of your logic here. maybe if you proposed a metric for actual cash generation you'd be on to something, but there's nothing to suggest that actual cash generation will be the driver of the valuations.
• datashovel 12y ago
  I think this tweet sums it up pretty nicely: https://twitter.com/azizonomics/status/490595027589267456 https://twitter.com/azizonomics/status/490595027589267456
  • JimmyM 12y ago
    That tweet was extremely funny, but the argument that followed it was very much not. I am beyond impressed with that person's patience.
• datashovel 12y ago
  One point I would make is... I've heard it said many times. "Fear and Greed are the 2 things that drive the markets". So I guess I would point out that when you try to suppress one or the other too much this is when the market can swing too wildly. My guess is it's probably healthy to have the conversation because if it's truly a bubble then it will be less of a bubble when it bursts. If it's truly not a bubble, then those who are invested will be fine and have nothing to worry about.
• amelius 12y ago
  > Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX are currently worth just over $100B The reason that most these companies (excluding SpaceX) are "bubbles", is that their value is based on marketing only: anyone could start a next Uber or Airbnb in their basement.