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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 i

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.
  - delecti 12y ago
    The student loan situation is bubble-y, but one big difference is that the loans can't be discharged in bankruptcy. That makes the situation fundamentally different from most bubbles. I'm not saying you're wrong per se, because I think the way student loans are heading is almost bound to be problematic, I just can't picture that bubble "bursting" like we usually think of it. A couple outcomes I could think of would be a law making student loans dischargeable in bankruptcy again, a government bailout type program, or a law greatly reducing the availability of student loan debt. Any of those would have drastic consequences, but I'm still not sure it'd be right to call any of them a bursting bubble (except maybe the first).
- malchow 12y ago
  Ads are the one thing that folks focus too much on in quest of bubble quarry. I run a large boutique display ad platform, and I'm reasonably confident that advertisements change form, function, and price -- but advertising never goes away. Even the display ad markets in post-Great Recession 2008 were not too bad.
gruntled 12y ago
Worse, Facebook makes a lot of mobile advertising money from app install ads. If startup investors cut back the flow of money, that advertising revenue dries up. There will be a glut of unemployed developers just as Facebook starts reporting declining revenues. Facebook will need to start reducing costs, not hiring, and definitely no acquihires (startups with viable business models might be a different story). Google might clean up with their pick of the best surviving startups and the best devs going cheap, because they have more diverse sources of advertising revenue, but they might also be under pressure to control costs if investors panic and flee tech.
- georgeecollins 12y ago
  That Facebook makes money from mobile advertising is a good point: In the dot com era, many dot coms made money very briefly selling ads or services to other dot coms, who were willing to pay way too much. Now many companies are valuable because other companies will pay too much for user acquisition. If they stopped, their would be repercussions for a lot of companies in the middle (not Facebook) who see their business model go away. If the base of the value chain isn't making money (and I think honestly in the current case even the middle isn't) the whole ecosystem will probably contract.
themagician 12y ago
Right now there is a scandal going on somewhere, we just don't know where. Maybe Facebook, maybe LinkedIn, maybe Yahoo, maybe even Google. Maybe someone else, who knows. It always starts with a scandal. WorldCom, Enron, Lehmans, AIG, etc.. When a company can no longer meet growth targets to stay competitive they start lying to keep the capital flowing. They build a bigger house around the main house, but it's built out of cards and eventually it crumbles. This is what no one wants to believe, but it always happens. "It's different this time.™" It's never different. There's always going to be that incentive to cheat, and multiple people will take that bet. Someone eventually gets caught. Once one of the titans fall, investors get scared and pull back. Companies like Google and Apple, with huge cash positions, are okay. Everyone else runs out of capital in a few months. The fallen firm lets 10,000 people go. Everyone else either does layoffs or initiates a hiring freeze. Now you've got 10,000+ locals out of work who can't get jobs. Now you've got 10,000+ people who are a few months away from defaulting on a mortgage they could barely afford in the first place because it was so expensive to live in an area propped up by cheap money and heavy leverage. People start defaulting, and things get even worse. You've got a bunch of people in San Francisco who got $200,000 no interest downpayment loans from the city. They can't pay them back and the city gets stuck with the debt. Now there's public crisis. Everyone and everything attached to the real estate market starts to freak out that home prices might decline. More panic, more layoffs, more defaults. The dust settles and we start over.
- saryant 12y ago
  The added difficulty over the (for instance) Enron scandal is that this time, we don't have a nice set of publicly available SEC documents to look through (obviously not talking about GOOG/FB/TWTR). But with so many firms growing huge on private capital, we don't have the same opportunities for investigation that were available with many of the previous scandals. Most of Enron's malfeasances were documented, everyone was just so exuberant they didn't bother to look that closely. Once people did (a key short seller and a few journalists), Enron collapsed in about six weeks. Finding the scandal will be much harder this time, but I agree it's out there. Cash prize to the one who finds it.
  - 12y ago

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.
- delecti 12y ago
  The student loan situation is bubble-y, but one big difference is that the loans can't be discharged in bankruptcy. That makes the situation fundamentally different from most bubbles. I'm not saying you're wrong per se, because I think the way student loans are heading is almost bound to be problematic, I just can't picture that bubble "bursting" like we usually think of it. A couple outcomes I could think of would be a law making student loans dischargeable in bankruptcy again, a government bailout type program, or a law greatly reducing the availability of student loan debt. Any of those would have drastic consequences, but I'm still not sure it'd be right to call any of them a bursting bubble (except maybe the first).
malchow 12y ago
Ads are the one thing that folks focus too much on in quest of bubble quarry. I run a large boutique display ad platform, and I'm reasonably confident that advertisements change form, function, and price -- but advertising never goes away. Even the display ad markets in post-Great Recession 2008 were not too bad.

gruntled 12y ago

Worse, Facebook makes a lot of mobile advertising money from app install ads. If startup investors cut back the flow of money, that advertising revenue dries up. There will be a glut of unemployed developers just as Facebook starts reporting declining revenues. Facebook will need to start reducing costs, not hiring, and definitely no acquihires (startups with viable business models might be a different story). Google might clean up with their pick of the best surviving startups and the best devs going cheap, because they have more diverse sources of advertising revenue, but they might also be under pressure to control costs if investors panic and flee tech.

georgeecollins 12y ago
That Facebook makes money from mobile advertising is a good point: In the dot com era, many dot coms made money very briefly selling ads or services to other dot coms, who were willing to pay way too much. Now many companies are valuable because other companies will pay too much for user acquisition. If they stopped, their would be repercussions for a lot of companies in the middle (not Facebook) who see their business model go away. If the base of the value chain isn't making money (and I think honestly in the current case even the middle isn't) the whole ecosystem will probably contract.

themagician 12y ago

Right now there is a scandal going on somewhere, we just don't know where. Maybe Facebook, maybe LinkedIn, maybe Yahoo, maybe even Google. Maybe someone else, who knows. It always starts with a scandal. WorldCom, Enron, Lehmans, AIG, etc.. When a company can no longer meet growth targets to stay competitive they start lying to keep the capital flowing. They build a bigger house around the main house, but it's built out of cards and eventually it crumbles. This is what no one wants to believe, but it always happens. "It's different this time.™" It's never different. There's always going to be that incentive to cheat, and multiple people will take that bet. Someone eventually gets caught. Once one of the titans fall, investors get scared and pull back. Companies like Google and Apple, with huge cash positions, are okay. Everyone else runs out of capital in a few months. The fallen firm lets 10,000 people go. Everyone else either does layoffs or initiates a hiring freeze. Now you've got 10,000+ locals out of work who can't get jobs. Now you've got 10,000+ people who are a few months away from defaulting on a mortgage they could barely afford in the first place because it was so expensive to live in an area propped up by cheap money and heavy leverage. People start defaulting, and things get even worse. You've got a bunch of people in San Francisco who got $200,000 no interest downpayment loans from the city. They can't pay them back and the city gets stuck with the debt. Now there's public crisis. Everyone and everything attached to the real estate market starts to freak out that home prices might decline. More panic, more layoffs, more defaults. The dust settles and we start over.

saryant 12y ago
The added difficulty over the (for instance) Enron scandal is that this time, we don't have a nice set of publicly available SEC documents to look through (obviously not talking about GOOG/FB/TWTR). But with so many firms growing huge on private capital, we don't have the same opportunities for investigation that were available with many of the previous scandals. Most of Enron's malfeasances were documented, everyone was just so exuberant they didn't bother to look that closely. Once people did (a key short seller and a few journalists), Enron collapsed in about six weeks. Finding the scandal will be much harder this time, but I agree it's out there. Cash prize to the one who finds it.
- 12y ago