4 ms·

"For one, if everything goes sour, the folks taking a hit can very much afford it." Really. Where do people think this private capital is coming from? I guess

by timr 12y ago

"For one, if everything goes sour, the folks taking a hit can very much afford it." Really. Where do people think this private capital is coming from? I guess the investment banks and fund managers who are dumping hundreds of millions into late-stage companies are doing that exclusively with the investments of wealthy people? The fact that people aren't investing in Uber via E-Trade accounts doesn't mean that it won't hurt regular folks when the bubble pops. When this all goes south, we're going to find out that grandma's pension was tied up in it, just like last time. It's just a bit better hidden in 2015.

klenwell 12y ago
We both zeroed in on this same point in this article. You could be right. Have we identified a new class of suckers (which I see as a necessary condition)? Anyone have any data to support or refute this hypothesis?
seregine 12y ago
Generally, limited partners like pension funds diversify their asset allocation. I found this interesting presentation that shows 57% of US pension funds is in the "equities" asset class, but I would expect most of that to be public blue-chip stocks, with a small fraction dedicated to higher-risk growth capital. http://conferences.pionline.com/assets/2014_GPAS_Study_Final.pdf http://conferences.pionline.com/assets/2014_GPAS_Study_Final... In another interesting note, this shows that pension funds in the US grew at over 6% annually between 2003-2013. The recent horror stories you're thinking of are less about pension funds, and more about grandma's savings being tied up in her own house.
- bradleyjg 12y ago
  Pension funds, especially public pension funds, have been given unrealistic growth targets by employers that want to cheap out on contributions. The only way to even have a chance to hit those growth targets is by taking on risk. So pension manager can't just stick to AAA rated bonds and blue chip stocks. For example, CALPERS targets an overall 7.5% annualized rate of return in its investment portfolio.
  - fredfoobar42 12y ago
    Also worth noting CalPERS has been slashing its VC allocations.
    - timr 12y ago
      Fortunately (</sarcasm>) for CalPERS, this late-stage capital isn't considered VC! Many of these late-stage, insane-valuation rounds are euphemistically called "growth capital", and it's being driven by big banks and hedge funds, not VC firms. The Money always finds a way.
  - dragonwriter 12y ago
    I'm not sure there is a good case to be made that the CalPERS target is an unrealistic long-term annualized rate of return target. IIRC, they have been making that much over most long and short term windows (they had a horrible -- -27% or something like it -- year in 2008 and so their performance over a 10-year window is still under 7.5%, in the neighborhood of 6.5% I think, but over both shorter and longer windows they are at or significantly above the 7.5% target.)
brintoul 12y ago
I've wondered this myself. We've already seen how easy it is to privatize the gains here - it's just a matter of how the losses will be socialized this time that's got me stumped.
michaelochurch 12y ago
If there are major losers in this game, it'll be young people who moved to the Bay Area, threw 90 hours per week into an overfunded startup for a 0.05% slice, got "fired for performance" by a company trying to dodge the press of an honest layoff, realized that they learned no useful skills munching on Scrum tickets and fixing someone else's ball of shitty deadline code, and lost their prime savings years due to Bay Area rent and job instability. If the bubble pops in a way that reduces their earning potential permanently, it's a catastrophe. More likely, it's a blip. Valuations are inflated but salaries aren't. This period, in the VC-funded Valley, will be remembered bitterly but I think the damage will be minimal. Still, I find it jarring that no one wants to speak for the real risk-takers: the engineers actually building the products, who (unlike investors) don't get to diversify and are the first to get hit when things go bad, but get such a small percentage of the upside.
- Kalium 12y ago
  A lot of Silicon Valley culture and counter-culture alike are built on having no empathy for engineers. The investors see them as useful workers, and the counter-culturalists see them as inhuman invaders. Nobody gives a flip, and when confronted the universal response is a dismissive "Oh, they'll be fine".
  - michaelochurch 12y ago
    First Estate: investors and well-connected serial founders who can raise money on a drop and get injected at VP levels in tech giants on a phone call. They dominate SV culture. Second Estate: true technologists. Programmers and designers and makers. Third Estate: everyday people. Often pissed off (justifiably) about the arrogance of the Valley's tech barons. Tend to protest Google buses, making it hard for Second Estaters to get to work (while being slightly amusing to First Estate assholes). They're the "counter-culture" you describe, along with the regular people who are getting annoyed by tech's arrogance. A few of them are the anti-vax NIMBY assholes who are even more execrable than the tech barons, but most of them are just normal people. Silicon Valley is dominated by the First Estate. The Second Estate is misled to think it's in charge by workplaces with ball pits, but has no real power or hope of advancement or financial upside except in extreme long-tail cases. So much of the narrative has been II vs. III. That's because the First Estate doesn't want the Second and Third Estate to get together and realize that they don't need the First. See, the Second Estate has weak organizational and social skills, and has been systematically infantilized ("Agile"/Scrum) to keep it that way. We could learn a lot from Third Estaters (who are often just as smart as we are) in politics, government, law, labor activism, etc. But we've been told by the VC elite to reject such people as parasitic future-averse peons, and they've been told that we're a bunch of socially inept, prematurely affluent assholes. This artificial II/III cleavage works to their benefit, and it hurts us, by making us dependent on the First Estate for funding and approval.

by timr 12y ago

klenwell 12y ago

We both zeroed in on this same point in this article. You could be right. Have we identified a new class of suckers (which I see as a necessary condition)? Anyone have any data to support or refute this hypothesis?

seregine 12y ago

Generally, limited partners like pension funds diversify their asset allocation. I found this interesting presentation that shows 57% of US pension funds is in the "equities" asset class, but I would expect most of that to be public blue-chip stocks, with a small fraction dedicated to higher-risk growth capital. http://conferences.pionline.com/assets/2014_GPAS_Study_Final.pdf http://conferences.pionline.com/assets/2014_GPAS_Study_Final... In another interesting note, this shows that pension funds in the US grew at over 6% annually between 2003-2013. The recent horror stories you're thinking of are less about pension funds, and more about grandma's savings being tied up in her own house.

bradleyjg 12y ago
Pension funds, especially public pension funds, have been given unrealistic growth targets by employers that want to cheap out on contributions. The only way to even have a chance to hit those growth targets is by taking on risk. So pension manager can't just stick to AAA rated bonds and blue chip stocks. For example, CALPERS targets an overall 7.5% annualized rate of return in its investment portfolio.
- fredfoobar42 12y ago
  Also worth noting CalPERS has been slashing its VC allocations.
  - timr 12y ago
    Fortunately (</sarcasm>) for CalPERS, this late-stage capital isn't considered VC! Many of these late-stage, insane-valuation rounds are euphemistically called "growth capital", and it's being driven by big banks and hedge funds, not VC firms. The Money always finds a way.
- dragonwriter 12y ago
  I'm not sure there is a good case to be made that the CalPERS target is an unrealistic long-term annualized rate of return target. IIRC, they have been making that much over most long and short term windows (they had a horrible -- -27% or something like it -- year in 2008 and so their performance over a 10-year window is still under 7.5%, in the neighborhood of 6.5% I think, but over both shorter and longer windows they are at or significantly above the 7.5% target.)

brintoul 12y ago

I've wondered this myself. We've already seen how easy it is to privatize the gains here - it's just a matter of how the losses will be socialized this time that's got me stumped.

michaelochurch 12y ago

If there are major losers in this game, it'll be young people who moved to the Bay Area, threw 90 hours per week into an overfunded startup for a 0.05% slice, got "fired for performance" by a company trying to dodge the press of an honest layoff, realized that they learned no useful skills munching on Scrum tickets and fixing someone else's ball of shitty deadline code, and lost their prime savings years due to Bay Area rent and job instability. If the bubble pops in a way that reduces their earning potential permanently, it's a catastrophe. More likely, it's a blip. Valuations are inflated but salaries aren't. This period, in the VC-funded Valley, will be remembered bitterly but I think the damage will be minimal. Still, I find it jarring that no one wants to speak for the real risk-takers: the engineers actually building the products, who (unlike investors) don't get to diversify and are the first to get hit when things go bad, but get such a small percentage of the upside.

Kalium 12y ago
A lot of Silicon Valley culture and counter-culture alike are built on having no empathy for engineers. The investors see them as useful workers, and the counter-culturalists see them as inhuman invaders. Nobody gives a flip, and when confronted the universal response is a dismissive "Oh, they'll be fine".
- michaelochurch 12y ago
  First Estate: investors and well-connected serial founders who can raise money on a drop and get injected at VP levels in tech giants on a phone call. They dominate SV culture. Second Estate: true technologists. Programmers and designers and makers. Third Estate: everyday people. Often pissed off (justifiably) about the arrogance of the Valley's tech barons. Tend to protest Google buses, making it hard for Second Estaters to get to work (while being slightly amusing to First Estate assholes). They're the "counter-culture" you describe, along with the regular people who are getting annoyed by tech's arrogance. A few of them are the anti-vax NIMBY assholes who are even more execrable than the tech barons, but most of them are just normal people. Silicon Valley is dominated by the First Estate. The Second Estate is misled to think it's in charge by workplaces with ball pits, but has no real power or hope of advancement or financial upside except in extreme long-tail cases. So much of the narrative has been II vs. III. That's because the First Estate doesn't want the Second and Third Estate to get together and realize that they don't need the First. See, the Second Estate has weak organizational and social skills, and has been systematically infantilized ("Agile"/Scrum) to keep it that way. We could learn a lot from Third Estaters (who are often just as smart as we are) in politics, government, law, labor activism, etc. But we've been told by the VC elite to reject such people as parasitic future-averse peons, and they've been told that we're a bunch of socially inept, prematurely affluent assholes. This artificial II/III cleavage works to their benefit, and it hurts us, by making us dependent on the First Estate for funding and approval.