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The CEO of a $1 billion 'unicorn' startup admits we're in a bubble

67 points by lladnar 11y ago

jasondc 11y ago
Wait until we have the first 1 person startup valued at $1 billion (it is only a matter of time). I don't think this is from a bubble, but how new technology can let companies grow very quickly (AWS for hosting, social networks for word of mouth, etc.)
- brianbreslin 11y ago
  what is the smallest billion $ startup at time of sale? Instagram?
  - stevewilhelm 11y ago
    Instagram 12 employees, WhatsApp had 55, Tumblr 178 [1] http://www.dailymail.co.uk/news/article-2127343/Facebook-buys-Instagram-13-employees-share-100m-CEO-Kevin-Systrom-set-make-400m.html http://www.dailymail.co.uk/news/article-2127343/Facebook-buy... [2] http://pando.com/2014/02/24/whatsapp-bought-for-19-billion-what-do-its-employees-get/ http://pando.com/2014/02/24/whatsapp-bought-for-19-billion-w... [3] http://www.bloomberg.com/bw/articles/2013-05-22/what-tumblrs-millionaires-tell-us-about-the-tech-industry http://www.bloomberg.com/bw/articles/2013-05-22/what-tumblrs...
  - deleted 11y ago
    [deleted]
  - beat 11y ago
    WhatsApp, probably.
    - basch 11y ago
      $22 billion / 55 employees SO $.35 billion / employee
- dopamean 11y ago
  I don't know much about it but I'm sure Minecraft was worth a shitload for a while when Notch was the only one developing it.
  - k-mcgrady 11y ago
    But unlike most companies in SV they were worth a lot because they were making a lot of money! They were selling a product, not giving it away and praying they got bought or found an innovative new advertising model.
    - dopamean 11y ago
      Even more impressive. An actual business.
cylinder 11y ago
Why do people keep making the point that in this boom, tech startups actually have revenue? It doesn't mean anything if the company grosses $1 million or $0. What matters is the valuations. Even taking into account their revenues (in some rare cases, profits), the companies are wildly valued and investors are making extremely ambitious and optimistic growth assumptions.
- taki1 11y ago
  If interest rates are at 7% (savings account returns you 7% annualy) who will invest in risky start-ups? If you can just go to a bank branch deposit cash and get back 7% -- are you going to go and invest in Uber instead? Really? Because it has "great valuation" ?
  - austenallred 11y ago
    > If interest rates are at 7% (savings account returns you 7% annually) who will invest in risky start-ups? Well, they're not. Interest rates are so extremely low right now that they don't even keep up with inflation. In several banks and several countries, the interest rate is actually less than zero. Or, in other words, banks charge you to store your money for you. Given that, is investing in technology really that bad of an idea? You have to put your money somewhere. VCs are mostly funded by large stashes of money - some of it among the oldest and most secure money in the world - called limited partners (LPs). Think endowment funds, that type of thing. Those funds will diversify their investments across multiple aspects of the economy. For simplicity sake, we'll say 50% real estate, 40% stock/bonds, and 10% into VC funds. VCs take a small chunk, and invest the rest in tech companies. In that way, some of the most institutionalized money in the world will, yes, be invested in Uber. Really.
    - taki1 11y ago
      You get it backwards. austenallred 1 day ago | parent >> If interest rates are at 7% (savings account returns you 7% annually) who will invest in risky start-ups? > Well, they're not. Well, in 2000-2006 house prices weren't going down. Wait a sec! In 1800-2006 house prices in the US weren't going down. Sure thing, do nothing but invest in housing in the US in 2006! I love that type of logic. Interest rates can change very soon. The interest rates will go up. Sooner than many think. >Interest rates are so extremely low right now that they don't even keep up with inflation. If you use the same formula to calculate inflation that was used in Reagan times we have had inflation in 5-10% year-to-year basis for the past few years now. > In several banks and several countries, the interest rate is actually less than zero. Or, in other words, banks charge you to store your money for you. Real interest rates are in negative territory: i.e. you can borrow at lower rate than the rate of inflation. That's the only logical reason behind investors buying into treasuries or swiss debt with negative return: because investors understand that we currently have real interest rates that are negative vs. cnbc and government propaganda of low inflation. The only reason they invest in these is because they know we live in high inflation times. In times of high inflation (like nowadays) it is extremely hard to find investment that beats inflation, so investors tend to invest in "anything", they just don't want cash. Cash is toxic. Investors are afraid of cash. They want anything but cash. Even taxi start-up with valuation higher than all taxi companies in the world - Uber - is better than Cash. Everything is better than cash in high inflation times. People invest in Uber because cash is worthless. Not because Uber is a good value stock. Are you trying to tell me people invest in $32B "worth" "business" like Uber because there is no inflation? Good joke. > Given that, is investing in technology really that bad of an idea? You have to put your money somewhere. "You have to put your money somewhere." you said it brother. Why I have to? If inflation is low as you claim? Why? Because even Uber is less risky than inflated USD. That's why. You have to put your money somewhere -- catch phrase heard often in high inflation times. Really. Not deflation times or even close to deflation. In deflation times you "dont have to put your money somewhere". Because your money gives you nice return without actually doing anything with it. If I can get the same amount of food, gas, housing, healthcare and vacation for the same amount as I did in 2010, why the hell I need to invest in risky taxi drivers start-up with $32B valuation? You don't make any sense brother! Apply some common sense here! >VCs are mostly funded by large stashes of money - some of it among the oldest and most secure money in the world - called limited partners (LPs). I'm tired of hearing about "the most secure money in the world". Heard enough of it when working for Capital Group back in 2007/08. They finally shut up when their "assets" (very secure, very) went from $2T to $500B. > Think endowment funds, that type of thing. Those funds will diversify their investments across multiple aspects of the economy. For simplicity sake, we'll say 50% real estate, 40% stock/bonds, and 10% into VC funds. VCs take a small chunk, and invest the rest in tech companies. Why? If inflation is so low? What for? Just keep it in the bank. With low inflation there is 0% logic in doing what you propose - investing in real estate, stock, bonds. Not to mention things that are start-ups with $32B valuation in taxi "niche". You'll see - we'll lough from this soon enough. You invest in Uber, because you recognize there is no return on cash (high inflation). > In that way, some of the most inssttitutionalized money in the world will, yes, be invested in Uber. Really. Till the day even idiots at Fed who believe in their own cooked inflation numbers open their eyes and see they need to stop the madness. Raises the interest rates. Then the bubble pops. Like it did every time before. Really.
cheriot 11y ago
So everyone agrees that the tech market is overvalued, but there's a pointless semantic argument over calling it a "bubble"? There's always going to be a downturn coming and it will always take some companies down with it. That's why it's called a business cycle.
ChuckMcM 11y ago
In my opinion the bubbleness will be reflected when the music stops. Back when the dot com bubble burst, the thing I found amazing was that people who had been customers just a month before, vanished. Not into chapter 11 (reorginizational) bankruptcy, but chapter 7 (liquidation). I vividly recall showing up for a meeting with a customer's VP of sales at their fancy downtown San Francisco office and getting off at the elevator to an empty floor with a broker taking pictures to put it on the market. From the previous wednesday, "Oh sure, lets talk monday." to Monday's "The previous tenant isn't here anymore." was really startling to me. Almost like the movie trope where the shadowy agency removes its front company over night. For those companies, it was the fact that they were "pre-revenue" and so the only way to keep the lights on was to raise money. And right up until every investor said "No" and they couldn't make payroll with the money left in the bank, they operated like a company, and then they weren't, For companies these days that do have revenue, they basically have to try to shrink into a profitable place, which is keep as much of the revenue as possible with the fewest possible people / computers / real estate etc. Then they have a shot of surviving. But contracts like leases you can't get out of, can bite you and force you to go into Chapter 11 briefly to renegotiate those contracts. What is unique I think to tech bubbles though is that the developers are often fine when the bubble bursts, they just go to companies that are built on better financials, its the executives that pay the price and have a harder time finding a new job.
- ericabiz 11y ago
  +1 to all of this. I lived through the dot-com boom and bust in the Valley, much like Chuck did. I'd like to add: There is a metric ton of opportunity at the bottom for those who hoarded cash at the top. I used credit card advances, equipment financing, and a SBA loan to buy servers at 10 cents on the dollar when Exodus Santa Clara went bust (I also bought fancy equipment from many other companies.) I started my company in 2001, when I was 20 years old, and in 2007, sold my company ("built on eBay", teased the guy who ran the acquiring company) for over $1 million. This was a completely bootstrapped web hosting company. This time, if indeed we are in a bubble, I would cash hoard like a mofo, and scout for the new "10 cents on the dollar" opportunities that may well pop up in the next few years. You can build a cash flow-based business relatively cheaply at the bottom. You just have to endure everyone telling you you're crazy (I can't count how many times I heard "What do you think you know better than Exodus/AboveNet/all the big hosting companies who declared bankruptcy?" Well, I know I don't have to sell servers for too much money to clients in order to make a buck, when I'm buying them at 10 cents on the dollar...)
dataker 11y ago
Related link http://www.businessinsider.com/sam-altman-y-combinator-talks-mega-bubble-nuclear-power-and-more-2015-6 http://www.businessinsider.com/sam-altman-y-combinator-talks...
misterbwong 11y ago
The one thing that's telling me it isn't a bubble is the sheer number of people calling it a bubble. It seems the majority of people, inside and out of tech, see it as a bubble. This is what makes me think that it won't "pop" but instead deflate slowly and painfully.
- sputknick 11y ago
  I agree with you. Or you will know it's a bubble when people start to say "this isn't a bubble, it's different this time." It's never different this time.
- RaSoJo 11y ago
  Unfortunately I am hearing a lot of people say the same - the fact that people ARE talking about a bubble and hence it is NOT a bubble. This justification is calming to hear - but could this be the cause of complacency this time around?
- zzalpha 11y ago
  Funny, people said the same thing leading into 2000/2001... past is indeed prologue when it comes to irrational exuberance. Which is one of the main points of the article... many in the tech industry (and many here on HN) are too young to remember what a tech bubble looks like, or how painful it is when it pops...
clarky07 11y ago
My question isn't is it a bubble or not, the question is what would the effects be this time around? Most people seem to agree the bubble (if it exists) is in privately held venture backed startup companies. Does the popping of that bubble have significant ramifications across the economy as a whole? 1. Last time they were all public companies, including the big ones like intel,msft, being wildly overvalued. Everyone lost money, not just VC's 2. It will certainly be harder to do a startup, but I suspect all these engineers won't be unemployed. They will go and work for AppGoogBook. AppGoogBook will welcome them with open arms. To recap, at least I think/hope, VC's and founders are the only one's losing money compared to everyone who might be invested in S&P 500 (read everyone) and there shouldn't be any kind of major unemployment causing extra problems Is this a reasonable view?
- ebbv 11y ago
  Unfortunately when the bubble pops while the VCs who hold equity in the overvalued companies will be hit the hardest, the entire economy will suffer. The public stock markets will crash, the housing market will crash, etc. The irresponsible valuations and investing will hurt everyone.
  - clarky07 11y ago
    why would the public markets crash, and why would the housing market outside of SF crash? I feel like I made reasonable assumptions as to why those things wouldn't happen. If you think that's not the case, at least provide an argument as to why they would, as opposed to stating it as fact.
    - zzalpha 11y ago
      Clearly you didn't live through the recession of the 2000s... Recessions are never isolated. The entire point of a bubble is that investment capital chases gains. In the 90s it was tech. In the 2000s it was housing. Now we're back to tech again. When the bubble pops, all those invested in the space are hurt. That means hedge funds, pension funds, etc, and the effects will absolutely ripple through the economy. I doubt it'll be anything like 2008 (which was greatly exacerbated by derivatives trading and so forth), but it will be felt well beyond the valley.
kittenfluff 11y ago
> I had drinks with one of the $1 billion "unicorn" CEOs last night, in a trendy Noho bar in London. Where the hell is "Noho"? Is this some ridiculous attempt to Americanize London by trying to rename parts of it after bits of New York? If the author means the area north of Soho, I am happy to point him in the direction of any map of London, where he will see that area labeled "Fitzrovia". Also, who points out that they were in a 'trendy' bar without covering the word 'trendy' in a fetid, glistening layer of sarcasm? Business Insider journalists, I guess?
- dragonwriter 11y ago
  > Is this some ridiculous attempt to Americanize London by trying to rename parts of it after bits of New York and San Francisco? AFAICT, SF doesn't have any role at all in the source of names, but otherwise, yes [0]. Of course, lots of the place name in the continental US (and a number of other places) are a result of the same kind of thing in reverse centering around renaming every piece of the continent after parts of Britain, and particularly England, so turn about is fair play. [0] http://www.bbc.com/news/uk-england-london-11305340 http://www.bbc.com/news/uk-england-london-11305340
  - kittenfluff 11y ago
    Well, I'm glad that Londoners have collectively decided to tell the rebranders where to stick it. I've lived in London for ten years and have never heard someone refer to "Midtown" or "Noho". Urgh.
austenallred 11y ago
So many of these articles (and CEOs) fail to take portfolio theory into account. Your chances of success are still very small. Almost infinitesimally so, and your valuation doesn't change that.A lot of companies will fail. VCs hope that the ones that are successful are successful in a big enough way to make up for all of the losses. But the fact that a bunch of "billion dollar" companies are going to go belly up doesn't mean that everyone's acting irrationally. They're just going to subsidize the failure of the many with the success of the few. A bubble bursting happens if on average the investors lose so badly that their LPs start to put money into something other than startups. Not if some "unicorns" fail. And by the way, there are a lot more variables than even the success of the startups. Interest rates, success of other types of investments, etc. probably play more of a role in startup valuations than the success of most startups. Right now interest rates are essentially zero, and as a result people are throwing money at almost anything that has a vague promise of a return. That being said, the entire VC slice of the economy is laughably small compared to other aspects. It's basically rounding error.
swang 11y ago
2010: Sorry, But This "Tech Bubble 2.0" Talk Is Ridiculous http://www.businessinsider.com/one-big-reason-were-not-in-tech-bubble-20-2010-12 http://www.businessinsider.com/one-big-reason-were-not-in-te... 2011: 11 Crazy Signs This Really Is A Tech "Bubble" http://www.businessinsider.com/signs-of-tech-bubble-2011-8 http://www.businessinsider.com/signs-of-tech-bubble-2011-8 2012: A Non-Tech Person's Guide To The Tech Bubble—And Why There ISN'T A Tech Bubble http://www.businessinsider.com/why-there-is-no-tech-bubble-2012-5 http://www.businessinsider.com/why-there-is-no-tech-bubble-2... 2013: Here's The Evidence That The Tech Sector Is In A Massive Bubble http://www.businessinsider.com/evidence-that-tech-sector-is-in-a-bubble-2013-11 http://www.businessinsider.com/evidence-that-tech-sector-is-... 2014: Here's The Evidence That The Tech Bubble Is About To Burst http://www.businessinsider.com/evidence-that-tech-bubble-is-at-a-peak-2014-10 http://www.businessinsider.com/evidence-that-tech-bubble-is-... Have we reached peak, "Tech Bubble" talk yet? PS. those last 2 articles were written by the same person basically regurgitating the same talking points, but just 1 year later.
- akshatpradhan 11y ago
  All the URLs come from Business Insider. That's kind of like John Stewart's point how the News Media says year after year that this is the worst Allergy Season ever. Its the worst allergy season every year no matter what because pollen count increases every year no matter what.
  - TheBeardKing 11y ago
    Why do pollen counts increase every year? Global temperatures don't rise every year.
    - dragonwriter 11y ago
      If the rising pollen counts are part of a process that is driven by the overall global temperature trend but which is relatively insensitive to annual variation around that trend, such that the output is smoothed compared to the input, that would produce the pollen counts rising every year with a rising global temperature trend, even if global temperatures don't rise every year. One particular reason this might be the case is if the process driving the increased pollen count is a reaction to global temperature (or some other more direct product of global temperature) that moves to slowly compared to the average rate of global temperature change to ever reach an equilibrium point with the current global temperature, so that its always trailing well below what it would be at the current global temperature if that temperature were a long-term sustained average.
mseebach 11y ago
> Sure, he says, Uber is a great business and a great company. But $41 billion? Now? Maybe in a few years time. If that's the best evidence you can come up with, it's not a bubble, it's an overvalued market at best. Uber's valuation collapsing even to, say, 15B, is not a bubble popping in any meaningful sense, and nobody can deny that there's a business there. In 2000, that we according to this mysterious CEO can't remember, companies with barely any customers, next to no revenue, massive deficits and not even a coherent business plan achieved billion-dollar valuations.
- mcguire 11y ago
  I was actually kind of surprised by that Uber comment. Sure, it's a completely worthless number, but then the market cap of Ford isn't much more real and it's $61B. So someone thinks Uber is worth a significant chunk of the total value of the industry on which it is built. [Side note: F is paying ~4% dividends. Hm.] Anyway, did you see the other evidence presented? Cherry picking: * Interest rates * Private valuations not matching public ones * Tech startups offering stock at a discount (If that's more than a one-off idiocy, well, ew.)
- mason55 11y ago
  > But $41 billion? Now? Maybe in a few years time. Here's the other thing. If you're investing in a startup you're not putting your money in based on some current metric like 3x booked ARR and saying you expect it to throw off enough to cover your investment. The whole idea is that you think it can grow into the valuation you're putting your money in at, that's where the risk is. If the market believes that Uber is going to grow into a $41B company then that's what it's going to get priced at right now, even if they're not currently "worth" that much based on some present value formula. It's the same way that product announcements don't generally move stock values - those products were already priced in.
deleted 11y ago
[deleted]
jurymatic 11y ago
Who cares if we're in a bubble or not? A sound business strategy is sound regardless.
- phdp 11y ago
  Everything has risk. During bursting of bubbles, there is a "flight to quality." If you run out of cash to fund your business and you cannot secure financing because the rate of return vs the risk is not attractive to investors, you will go out of business. Those businesses who can survive without outside investments will fare better, but even consumers can be affected by a bursting bubble via layoffs, media talking heads, etc. They may be less willing to spend on unnecessary expenses. This means less revenue and likely profit for the businesses.
  - jurymatic 11y ago
    I agree, but I think the problem you're highlighting is intrinsic to business models that emphasize growth over money making more than it's intrinsic to bubbles.
solve 11y ago
You cannot "admit" a prediction of the future as if the prediction of the future were a fact. It can only be predicted.
3pt14159 11y ago
The only point that I agree with is this one: "Margin compression": A lot of tech businesses sell things, and because the market is good there isn't much price competition. My unicorn sees a lot of companies that appear to be dependent on customers paying what they're told to pay. These companies have yet to experience, or survive, a price war with their rivals. All the other ones are BS. > Entire generation of entrepreneurs under age 30 have no memory of 2000 or 2008. Lol wut? I'm 29. I remember both in vivid detail. I worked in tech in 1999. Sure I was young, but I had been seriously programming for already 4 years. Let alone 2008, that was the year I graduated university. I remember barely landing a job just as things went sideways. Gen Y knows things can go wrong. Maybe some current 17 or 18 year olds don't. > Interest rates: Central banks currently have interest rates [...] Find me a bank that will lend me money so that I can invest in startups. It's impossible. Interest rates going up will depress assets prices that are frequently purchased with debt: Housing and Education. > Valuations. [Specifically Uber] If Uber wins it wins logistics as a whole. This is like talking about Amazon. Back then Amazon realized that books were the only thing that made sense to sell online because of the markups and the fact that customers don't need to touch a book to want to buy it. Then once customers got used to buying stuff online and Amazon worked out their distribution model they expanded to more and more things. Read "ecommerce is a bear". For other companies, sure there are some winners and some losers. But Facebook, for example, has data on every person on earth that has real spending power. Super, super valuable. In the 90s only us nerds were online. Today tweens sext. Completely different markets. > Private valuations not matching public ones 1. Sarbanes Oxley. 2. Investors dump stocks that have no real growth left in them onto the public. The only exception was Tesla, and that was out of desperation, and look how well they are doing. > Tech startups offering stock at a discount This doesn't usually materially effect the valuations of a stock. 20% discount, 50% tops. > Burn rates If you aren't burning money then it is a huge red flag to investors. There is a very real risk that your money machine doesn't scale or that you can't recruit talent in the same numbers as before. > Too many business models are dependent on "one thing not happening" This would be a factor if there actually were a bubble about to pop. There isn't, so this will naturally work its way out. Also, it isn't like 1999 where all money flowed through Yahoo or Microsoft. The world has more real world businesses like arms contractors, that don't overlap business cycles. I've been saying that there isn't a bubble for over 7 years. There still isn't a bubble. There will be one that starts to form soon when crowd investing starts to get underway world wide, but until retail investors invest in startups in a large and meaningful way, there isn't a bubble.
bla2 11y ago
> tech stocks are at an all-time high The stock market has a positive return on average. Which means that on average stocks (not just tech stocks) are at an all-time high all the time, no?
paulhodge 11y ago
In order for it to be a "bubble", the collapse needs to be severe enough that it has a downward momentum. Enough so that even companies with good business models are affected & become undervalued. I don't see that happening. There are lots of companies with strong business models (Google/Apple/Amazon/Etc) which will be fine if all the revenueless startups suddenly go away. They'll probably be happy they get to hire up all the newly unemployed talent. Remember.. just because a downward correction is coming, doesn't mean it's a bubble.
- pyre 11y ago
  People are more likely to refer to it as a bubble because of the 2000 "Dot Com Bubble." While 2008 was a "housing bubble" most people just refer to it as the 2008 recession. People are just most apt to draw comparisons between the tech industry now and the tech industry in 1998-2000, so referring to it as a bubble happens.

67 points by lladnar 11y ago

Wait until we have the first 1 person startup valued at $1 billion (it is only a matter of time). I don't think this is from a bubble, but how new technology can let companies grow very quickly (AWS for hosting, social networks for word of mouth, etc.)

brianbreslin 11y ago
what is the smallest billion $ startup at time of sale? Instagram?
- stevewilhelm 11y ago
  Instagram 12 employees, WhatsApp had 55, Tumblr 178 [1] http://www.dailymail.co.uk/news/article-2127343/Facebook-buys-Instagram-13-employees-share-100m-CEO-Kevin-Systrom-set-make-400m.html http://www.dailymail.co.uk/news/article-2127343/Facebook-buy... [2] http://pando.com/2014/02/24/whatsapp-bought-for-19-billion-what-do-its-employees-get/ http://pando.com/2014/02/24/whatsapp-bought-for-19-billion-w... [3] http://www.bloomberg.com/bw/articles/2013-05-22/what-tumblrs-millionaires-tell-us-about-the-tech-industry http://www.bloomberg.com/bw/articles/2013-05-22/what-tumblrs...
- deleted 11y ago
  [deleted]
- beat 11y ago
  WhatsApp, probably.
  - basch 11y ago
    $22 billion / 55 employees SO $.35 billion / employee
dopamean 11y ago
I don't know much about it but I'm sure Minecraft was worth a shitload for a while when Notch was the only one developing it.
- k-mcgrady 11y ago
  But unlike most companies in SV they were worth a lot because they were making a lot of money! They were selling a product, not giving it away and praying they got bought or found an innovative new advertising model.
  - dopamean 11y ago
    Even more impressive. An actual business.

cylinder 11y ago

Why do people keep making the point that in this boom, tech startups actually have revenue? It doesn't mean anything if the company grosses $1 million or $0. What matters is the valuations. Even taking into account their revenues (in some rare cases, profits), the companies are wildly valued and investors are making extremely ambitious and optimistic growth assumptions.

taki1 11y ago
If interest rates are at 7% (savings account returns you 7% annualy) who will invest in risky start-ups? If you can just go to a bank branch deposit cash and get back 7% -- are you going to go and invest in Uber instead? Really? Because it has "great valuation" ?
- austenallred 11y ago
  > If interest rates are at 7% (savings account returns you 7% annually) who will invest in risky start-ups? Well, they're not. Interest rates are so extremely low right now that they don't even keep up with inflation. In several banks and several countries, the interest rate is actually less than zero. Or, in other words, banks charge you to store your money for you. Given that, is investing in technology really that bad of an idea? You have to put your money somewhere. VCs are mostly funded by large stashes of money - some of it among the oldest and most secure money in the world - called limited partners (LPs). Think endowment funds, that type of thing. Those funds will diversify their investments across multiple aspects of the economy. For simplicity sake, we'll say 50% real estate, 40% stock/bonds, and 10% into VC funds. VCs take a small chunk, and invest the rest in tech companies. In that way, some of the most institutionalized money in the world will, yes, be invested in Uber. Really.
  - taki1 11y ago
    You get it backwards. austenallred 1 day ago | parent >> If interest rates are at 7% (savings account returns you 7% annually) who will invest in risky start-ups? > Well, they're not. Well, in 2000-2006 house prices weren't going down. Wait a sec! In 1800-2006 house prices in the US weren't going down. Sure thing, do nothing but invest in housing in the US in 2006! I love that type of logic. Interest rates can change very soon. The interest rates will go up. Sooner than many think. >Interest rates are so extremely low right now that they don't even keep up with inflation. If you use the same formula to calculate inflation that was used in Reagan times we have had inflation in 5-10% year-to-year basis for the past few years now. > In several banks and several countries, the interest rate is actually less than zero. Or, in other words, banks charge you to store your money for you. Real interest rates are in negative territory: i.e. you can borrow at lower rate than the rate of inflation. That's the only logical reason behind investors buying into treasuries or swiss debt with negative return: because investors understand that we currently have real interest rates that are negative vs. cnbc and government propaganda of low inflation. The only reason they invest in these is because they know we live in high inflation times. In times of high inflation (like nowadays) it is extremely hard to find investment that beats inflation, so investors tend to invest in "anything", they just don't want cash. Cash is toxic. Investors are afraid of cash. They want anything but cash. Even taxi start-up with valuation higher than all taxi companies in the world - Uber - is better than Cash. Everything is better than cash in high inflation times. People invest in Uber because cash is worthless. Not because Uber is a good value stock. Are you trying to tell me people invest in $32B "worth" "business" like Uber because there is no inflation? Good joke. > Given that, is investing in technology really that bad of an idea? You have to put your money somewhere. "You have to put your money somewhere." you said it brother. Why I have to? If inflation is low as you claim? Why? Because even Uber is less risky than inflated USD. That's why. You have to put your money somewhere -- catch phrase heard often in high inflation times. Really. Not deflation times or even close to deflation. In deflation times you "dont have to put your money somewhere". Because your money gives you nice return without actually doing anything with it. If I can get the same amount of food, gas, housing, healthcare and vacation for the same amount as I did in 2010, why the hell I need to invest in risky taxi drivers start-up with $32B valuation? You don't make any sense brother! Apply some common sense here! >VCs are mostly funded by large stashes of money - some of it among the oldest and most secure money in the world - called limited partners (LPs). I'm tired of hearing about "the most secure money in the world". Heard enough of it when working for Capital Group back in 2007/08. They finally shut up when their "assets" (very secure, very) went from $2T to $500B. > Think endowment funds, that type of thing. Those funds will diversify their investments across multiple aspects of the economy. For simplicity sake, we'll say 50% real estate, 40% stock/bonds, and 10% into VC funds. VCs take a small chunk, and invest the rest in tech companies. Why? If inflation is so low? What for? Just keep it in the bank. With low inflation there is 0% logic in doing what you propose - investing in real estate, stock, bonds. Not to mention things that are start-ups with $32B valuation in taxi "niche". You'll see - we'll lough from this soon enough. You invest in Uber, because you recognize there is no return on cash (high inflation). > In that way, some of the most inssttitutionalized money in the world will, yes, be invested in Uber. Really. Till the day even idiots at Fed who believe in their own cooked inflation numbers open their eyes and see they need to stop the madness. Raises the interest rates. Then the bubble pops. Like it did every time before. Really.

cheriot 11y ago

So everyone agrees that the tech market is overvalued, but there's a pointless semantic argument over calling it a "bubble"? There's always going to be a downturn coming and it will always take some companies down with it. That's why it's called a business cycle.

ChuckMcM 11y ago

In my opinion the bubbleness will be reflected when the music stops. Back when the dot com bubble burst, the thing I found amazing was that people who had been customers just a month before, vanished. Not into chapter 11 (reorginizational) bankruptcy, but chapter 7 (liquidation). I vividly recall showing up for a meeting with a customer's VP of sales at their fancy downtown San Francisco office and getting off at the elevator to an empty floor with a broker taking pictures to put it on the market. From the previous wednesday, "Oh sure, lets talk monday." to Monday's "The previous tenant isn't here anymore." was really startling to me. Almost like the movie trope where the shadowy agency removes its front company over night. For those companies, it was the fact that they were "pre-revenue" and so the only way to keep the lights on was to raise money. And right up until every investor said "No" and they couldn't make payroll with the money left in the bank, they operated like a company, and then they weren't, For companies these days that do have revenue, they basically have to try to shrink into a profitable place, which is keep as much of the revenue as possible with the fewest possible people / computers / real estate etc. Then they have a shot of surviving. But contracts like leases you can't get out of, can bite you and force you to go into Chapter 11 briefly to renegotiate those contracts. What is unique I think to tech bubbles though is that the developers are often fine when the bubble bursts, they just go to companies that are built on better financials, its the executives that pay the price and have a harder time finding a new job.

ericabiz 11y ago
+1 to all of this. I lived through the dot-com boom and bust in the Valley, much like Chuck did. I'd like to add: There is a metric ton of opportunity at the bottom for those who hoarded cash at the top. I used credit card advances, equipment financing, and a SBA loan to buy servers at 10 cents on the dollar when Exodus Santa Clara went bust (I also bought fancy equipment from many other companies.) I started my company in 2001, when I was 20 years old, and in 2007, sold my company ("built on eBay", teased the guy who ran the acquiring company) for over $1 million. This was a completely bootstrapped web hosting company. This time, if indeed we are in a bubble, I would cash hoard like a mofo, and scout for the new "10 cents on the dollar" opportunities that may well pop up in the next few years. You can build a cash flow-based business relatively cheaply at the bottom. You just have to endure everyone telling you you're crazy (I can't count how many times I heard "What do you think you know better than Exodus/AboveNet/all the big hosting companies who declared bankruptcy?" Well, I know I don't have to sell servers for too much money to clients in order to make a buck, when I'm buying them at 10 cents on the dollar...)

dataker 11y ago

Related link http://www.businessinsider.com/sam-altman-y-combinator-talks-mega-bubble-nuclear-power-and-more-2015-6 http://www.businessinsider.com/sam-altman-y-combinator-talks...

misterbwong 11y ago

The one thing that's telling me it isn't a bubble is the sheer number of people calling it a bubble. It seems the majority of people, inside and out of tech, see it as a bubble. This is what makes me think that it won't "pop" but instead deflate slowly and painfully.

sputknick 11y ago
I agree with you. Or you will know it's a bubble when people start to say "this isn't a bubble, it's different this time." It's never different this time.
RaSoJo 11y ago
Unfortunately I am hearing a lot of people say the same - the fact that people ARE talking about a bubble and hence it is NOT a bubble. This justification is calming to hear - but could this be the cause of complacency this time around?
zzalpha 11y ago
Funny, people said the same thing leading into 2000/2001... past is indeed prologue when it comes to irrational exuberance. Which is one of the main points of the article... many in the tech industry (and many here on HN) are too young to remember what a tech bubble looks like, or how painful it is when it pops...

clarky07 11y ago

My question isn't is it a bubble or not, the question is what would the effects be this time around? Most people seem to agree the bubble (if it exists) is in privately held venture backed startup companies. Does the popping of that bubble have significant ramifications across the economy as a whole? 1. Last time they were all public companies, including the big ones like intel,msft, being wildly overvalued. Everyone lost money, not just VC's 2. It will certainly be harder to do a startup, but I suspect all these engineers won't be unemployed. They will go and work for AppGoogBook. AppGoogBook will welcome them with open arms. To recap, at least I think/hope, VC's and founders are the only one's losing money compared to everyone who might be invested in S&P 500 (read everyone) and there shouldn't be any kind of major unemployment causing extra problems Is this a reasonable view?

ebbv 11y ago
Unfortunately when the bubble pops while the VCs who hold equity in the overvalued companies will be hit the hardest, the entire economy will suffer. The public stock markets will crash, the housing market will crash, etc. The irresponsible valuations and investing will hurt everyone.
- clarky07 11y ago
  why would the public markets crash, and why would the housing market outside of SF crash? I feel like I made reasonable assumptions as to why those things wouldn't happen. If you think that's not the case, at least provide an argument as to why they would, as opposed to stating it as fact.
  - zzalpha 11y ago
    Clearly you didn't live through the recession of the 2000s... Recessions are never isolated. The entire point of a bubble is that investment capital chases gains. In the 90s it was tech. In the 2000s it was housing. Now we're back to tech again. When the bubble pops, all those invested in the space are hurt. That means hedge funds, pension funds, etc, and the effects will absolutely ripple through the economy. I doubt it'll be anything like 2008 (which was greatly exacerbated by derivatives trading and so forth), but it will be felt well beyond the valley.

kittenfluff 11y ago

> I had drinks with one of the $1 billion "unicorn" CEOs last night, in a trendy Noho bar in London. Where the hell is "Noho"? Is this some ridiculous attempt to Americanize London by trying to rename parts of it after bits of New York? If the author means the area north of Soho, I am happy to point him in the direction of any map of London, where he will see that area labeled "Fitzrovia". Also, who points out that they were in a 'trendy' bar without covering the word 'trendy' in a fetid, glistening layer of sarcasm? Business Insider journalists, I guess?

dragonwriter 11y ago
> Is this some ridiculous attempt to Americanize London by trying to rename parts of it after bits of New York and San Francisco? AFAICT, SF doesn't have any role at all in the source of names, but otherwise, yes [0]. Of course, lots of the place name in the continental US (and a number of other places) are a result of the same kind of thing in reverse centering around renaming every piece of the continent after parts of Britain, and particularly England, so turn about is fair play. [0] http://www.bbc.com/news/uk-england-london-11305340 http://www.bbc.com/news/uk-england-london-11305340
- kittenfluff 11y ago
  Well, I'm glad that Londoners have collectively decided to tell the rebranders where to stick it. I've lived in London for ten years and have never heard someone refer to "Midtown" or "Noho". Urgh.

austenallred 11y ago

So many of these articles (and CEOs) fail to take portfolio theory into account. Your chances of success are still very small. Almost infinitesimally so, and your valuation doesn't change that.A lot of companies will fail. VCs hope that the ones that are successful are successful in a big enough way to make up for all of the losses. But the fact that a bunch of "billion dollar" companies are going to go belly up doesn't mean that everyone's acting irrationally. They're just going to subsidize the failure of the many with the success of the few. A bubble bursting happens if on average the investors lose so badly that their LPs start to put money into something other than startups. Not if some "unicorns" fail. And by the way, there are a lot more variables than even the success of the startups. Interest rates, success of other types of investments, etc. probably play more of a role in startup valuations than the success of most startups. Right now interest rates are essentially zero, and as a result people are throwing money at almost anything that has a vague promise of a return. That being said, the entire VC slice of the economy is laughably small compared to other aspects. It's basically rounding error.

swang 11y ago

2010: Sorry, But This "Tech Bubble 2.0" Talk Is Ridiculous http://www.businessinsider.com/one-big-reason-were-not-in-tech-bubble-20-2010-12 http://www.businessinsider.com/one-big-reason-were-not-in-te... 2011: 11 Crazy Signs This Really Is A Tech "Bubble" http://www.businessinsider.com/signs-of-tech-bubble-2011-8 http://www.businessinsider.com/signs-of-tech-bubble-2011-8 2012: A Non-Tech Person's Guide To The Tech Bubble—And Why There ISN'T A Tech Bubble http://www.businessinsider.com/why-there-is-no-tech-bubble-2012-5 http://www.businessinsider.com/why-there-is-no-tech-bubble-2... 2013: Here's The Evidence That The Tech Sector Is In A Massive Bubble http://www.businessinsider.com/evidence-that-tech-sector-is-in-a-bubble-2013-11 http://www.businessinsider.com/evidence-that-tech-sector-is-... 2014: Here's The Evidence That The Tech Bubble Is About To Burst http://www.businessinsider.com/evidence-that-tech-bubble-is-at-a-peak-2014-10 http://www.businessinsider.com/evidence-that-tech-bubble-is-... Have we reached peak, "Tech Bubble" talk yet? PS. those last 2 articles were written by the same person basically regurgitating the same talking points, but just 1 year later.

akshatpradhan 11y ago
All the URLs come from Business Insider. That's kind of like John Stewart's point how the News Media says year after year that this is the worst Allergy Season ever. Its the worst allergy season every year no matter what because pollen count increases every year no matter what.
- TheBeardKing 11y ago
  Why do pollen counts increase every year? Global temperatures don't rise every year.
  - dragonwriter 11y ago
    If the rising pollen counts are part of a process that is driven by the overall global temperature trend but which is relatively insensitive to annual variation around that trend, such that the output is smoothed compared to the input, that would produce the pollen counts rising every year with a rising global temperature trend, even if global temperatures don't rise every year. One particular reason this might be the case is if the process driving the increased pollen count is a reaction to global temperature (or some other more direct product of global temperature) that moves to slowly compared to the average rate of global temperature change to ever reach an equilibrium point with the current global temperature, so that its always trailing well below what it would be at the current global temperature if that temperature were a long-term sustained average.

mseebach 11y ago

> Sure, he says, Uber is a great business and a great company. But $41 billion? Now? Maybe in a few years time. If that's the best evidence you can come up with, it's not a bubble, it's an overvalued market at best. Uber's valuation collapsing even to, say, 15B, is not a bubble popping in any meaningful sense, and nobody can deny that there's a business there. In 2000, that we according to this mysterious CEO can't remember, companies with barely any customers, next to no revenue, massive deficits and not even a coherent business plan achieved billion-dollar valuations.

mcguire 11y ago
I was actually kind of surprised by that Uber comment. Sure, it's a completely worthless number, but then the market cap of Ford isn't much more real and it's $61B. So someone thinks Uber is worth a significant chunk of the total value of the industry on which it is built. [Side note: F is paying ~4% dividends. Hm.] Anyway, did you see the other evidence presented? Cherry picking: * Interest rates * Private valuations not matching public ones * Tech startups offering stock at a discount (If that's more than a one-off idiocy, well, ew.)
mason55 11y ago
> But $41 billion? Now? Maybe in a few years time. Here's the other thing. If you're investing in a startup you're not putting your money in based on some current metric like 3x booked ARR and saying you expect it to throw off enough to cover your investment. The whole idea is that you think it can grow into the valuation you're putting your money in at, that's where the risk is. If the market believes that Uber is going to grow into a $41B company then that's what it's going to get priced at right now, even if they're not currently "worth" that much based on some present value formula. It's the same way that product announcements don't generally move stock values - those products were already priced in.

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jurymatic 11y ago

Who cares if we're in a bubble or not? A sound business strategy is sound regardless.

phdp 11y ago
Everything has risk. During bursting of bubbles, there is a "flight to quality." If you run out of cash to fund your business and you cannot secure financing because the rate of return vs the risk is not attractive to investors, you will go out of business. Those businesses who can survive without outside investments will fare better, but even consumers can be affected by a bursting bubble via layoffs, media talking heads, etc. They may be less willing to spend on unnecessary expenses. This means less revenue and likely profit for the businesses.
- jurymatic 11y ago
  I agree, but I think the problem you're highlighting is intrinsic to business models that emphasize growth over money making more than it's intrinsic to bubbles.

solve 11y ago

You cannot "admit" a prediction of the future as if the prediction of the future were a fact. It can only be predicted.

3pt14159 11y ago

The only point that I agree with is this one: "Margin compression": A lot of tech businesses sell things, and because the market is good there isn't much price competition. My unicorn sees a lot of companies that appear to be dependent on customers paying what they're told to pay. These companies have yet to experience, or survive, a price war with their rivals. All the other ones are BS. > Entire generation of entrepreneurs under age 30 have no memory of 2000 or 2008. Lol wut? I'm 29. I remember both in vivid detail. I worked in tech in 1999. Sure I was young, but I had been seriously programming for already 4 years. Let alone 2008, that was the year I graduated university. I remember barely landing a job just as things went sideways. Gen Y knows things can go wrong. Maybe some current 17 or 18 year olds don't. > Interest rates: Central banks currently have interest rates [...] Find me a bank that will lend me money so that I can invest in startups. It's impossible. Interest rates going up will depress assets prices that are frequently purchased with debt: Housing and Education. > Valuations. [Specifically Uber] If Uber wins it wins logistics as a whole. This is like talking about Amazon. Back then Amazon realized that books were the only thing that made sense to sell online because of the markups and the fact that customers don't need to touch a book to want to buy it. Then once customers got used to buying stuff online and Amazon worked out their distribution model they expanded to more and more things. Read "ecommerce is a bear". For other companies, sure there are some winners and some losers. But Facebook, for example, has data on every person on earth that has real spending power. Super, super valuable. In the 90s only us nerds were online. Today tweens sext. Completely different markets. > Private valuations not matching public ones 1. Sarbanes Oxley. 2. Investors dump stocks that have no real growth left in them onto the public. The only exception was Tesla, and that was out of desperation, and look how well they are doing. > Tech startups offering stock at a discount This doesn't usually materially effect the valuations of a stock. 20% discount, 50% tops. > Burn rates If you aren't burning money then it is a huge red flag to investors. There is a very real risk that your money machine doesn't scale or that you can't recruit talent in the same numbers as before. > Too many business models are dependent on "one thing not happening" This would be a factor if there actually were a bubble about to pop. There isn't, so this will naturally work its way out. Also, it isn't like 1999 where all money flowed through Yahoo or Microsoft. The world has more real world businesses like arms contractors, that don't overlap business cycles. I've been saying that there isn't a bubble for over 7 years. There still isn't a bubble. There will be one that starts to form soon when crowd investing starts to get underway world wide, but until retail investors invest in startups in a large and meaningful way, there isn't a bubble.

bla2 11y ago

> tech stocks are at an all-time high The stock market has a positive return on average. Which means that on average stocks (not just tech stocks) are at an all-time high all the time, no?

paulhodge 11y ago

In order for it to be a "bubble", the collapse needs to be severe enough that it has a downward momentum. Enough so that even companies with good business models are affected & become undervalued. I don't see that happening. There are lots of companies with strong business models (Google/Apple/Amazon/Etc) which will be fine if all the revenueless startups suddenly go away. They'll probably be happy they get to hire up all the newly unemployed talent. Remember.. just because a downward correction is coming, doesn't mean it's a bubble.

pyre 11y ago
People are more likely to refer to it as a bubble because of the 2000 "Dot Com Bubble." While 2008 was a "housing bubble" most people just refer to it as the 2008 recession. People are just most apt to draw comparisons between the tech industry now and the tech industry in 1998-2000, so referring to it as a bubble happens.