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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. Wh

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.
- mateo411 11y ago
  If the interest rate is at 7 percent, then inflation will probably be between 5 and 10 percent. There would be other opportunities in an economy that will yield more than 7 percent, if the bank is offering 7 percent. Additionally, the inflation rate would be higher, so not investing your money, is losing it to inflation.
  - taki1 11y ago
    Inflation is at 5-10% if we measure it the same way we have always measured it till Reagan times. Then the Government started cooking books, but if we agree to use the same formula to calculate inflation as the one we used before 1990s, we are at 10% right now my friend. We have been for a few years. So in real terms we have had negative interest rates. By definition this makes investors to put money in anything but cash. When you think about it, this is why investors are so keen to keep money in things like Swiss Government debt that has negative return. Why would you ever do that if real interest rates werent in fact negative?
- refurb 11y ago
  Because inflation will be 5% and your real return will be 2%? Interest rates will rise in response to inflation.
austenallred 11y ago
Because they're comparing to 1999. In 1999 you could get a billion dollar valuation with not much more than a domain name and an idea. Most of those never ended up making any money at all. Now, OK, valuations may be high, but at least there is cold hard cash involved. There are hundreds of success stories involving cold hard cash, where in 1999 everything evaporated because the whole damn thing was based on smoke and mirrors. In other words, even if a company earning $10m/year in profit isn't worth $500M, at least they're worth something. Last time they weren't worth anything.
- ericabiz 11y ago
  "In 1999 you could get a billion dollar valuation with not much more than a domain name and an idea. Most of those never ended up making any money at all." Well, kind of. Having been there, the biggest problem I remember is not that these companies didn't have any revenue, it's that they didn't have any profit. Webvan, Kozmo, Pets.com, etc. had customers. They just lost money on every sale. The problem came when investors stopped funding them to do so, and many of them went out of business literally overnight (like Chuck's comment elsewhere in this thread mentioned.) I would be more worried if Uber, Airbnb, etc. lost money on every sale. It is relatively easier to turn the marketing knob down to $0 spent, if your customers will still continue using your service at that point. I think the fundamentals are better this time around, though I still strongly feel Valley VC's overweight "getting 100% of the available market" and underweight "making money on each sale."
  - austenallred 11y ago
    Fair, so swap "they never made any money" to "they never even had a potentially profitable business model"
aetherson 11y ago
If you have let's say enough revenue to support yourself, or at least to make your bank account stretch for years and years, but your valuation is $RIDICULOUS, and then your valuation drops to $NOTRIDICULOUS, well... that sucks for your owners (including your employees, presumably), but your company stays alive and your employees stay employed. If you have no revenue and a high burn rate, then when your valuation drops you get no investors and can't pay your employees and the company folds. That said, I'm not sure I buy the idea that this boom is marked by a massive increase in companies with (significant) revenues. I mean, yes, Uber has revenues. Instagram didn't, Snapchat doesn't, Whatsapp had laughable revenues, etc. Uber is the most massive outlier of this particular boom. It is definitionally not typical.
- clarky07 11y ago
  instagram and whatsapp are already bought, and facebook does have plenty of revenue. Snapchat has started their business model, and they do at least have some revenue. (Certainly not profit, but revenue). Any way you look at it, there are still more "real" companies than in 1999. And the rest, well it's not that surprising when startups fail. It's a thing that happens all the time. It's much different than tons and tons of public companies going out of business.
clarky07 11y ago
because there is a difference between 100% of value collapsing all at once, and 25-50% going away. Yes, Uber is likely to be overvalued. But it is a real business, with real customers, with real money being exchanged. It won't go to 0 overnight like everything did in 1999. If Uber suddenly goes from 40 bil to 30 bil, who really cares? It just doesn't effect very many people. Also, these are private companies. If the S&P loses 25-50% overnight it literally effects everyone in the world. If privately held tech companies lose 25-50% it definitely sucks, but it doesn't effect everyone. It just effects rich people in SV, who are all incredibly employable at other companies not in said bubble.
saosebastiao 11y ago
I'm not making that point, but I can at least defend it partially. With revenue comes sustainability, even if only partial. That means that if valuations are out of control, it is the investors that lose. Without any revenue, everybody loses, as it was all just a fantasy to begin with. Of course, if you have revenue but with negative gross margins, as I suspect a lot of current startups(especially delivery oriented) have, then your revenue is an illusion as well.

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.
mateo411 11y ago
If the interest rate is at 7 percent, then inflation will probably be between 5 and 10 percent. There would be other opportunities in an economy that will yield more than 7 percent, if the bank is offering 7 percent. Additionally, the inflation rate would be higher, so not investing your money, is losing it to inflation.
- taki1 11y ago
  Inflation is at 5-10% if we measure it the same way we have always measured it till Reagan times. Then the Government started cooking books, but if we agree to use the same formula to calculate inflation as the one we used before 1990s, we are at 10% right now my friend. We have been for a few years. So in real terms we have had negative interest rates. By definition this makes investors to put money in anything but cash. When you think about it, this is why investors are so keen to keep money in things like Swiss Government debt that has negative return. Why would you ever do that if real interest rates werent in fact negative?
refurb 11y ago
Because inflation will be 5% and your real return will be 2%? Interest rates will rise in response to inflation.

austenallred 11y ago

Because they're comparing to 1999. In 1999 you could get a billion dollar valuation with not much more than a domain name and an idea. Most of those never ended up making any money at all. Now, OK, valuations may be high, but at least there is cold hard cash involved. There are hundreds of success stories involving cold hard cash, where in 1999 everything evaporated because the whole damn thing was based on smoke and mirrors. In other words, even if a company earning $10m/year in profit isn't worth $500M, at least they're worth something. Last time they weren't worth anything.

ericabiz 11y ago
"In 1999 you could get a billion dollar valuation with not much more than a domain name and an idea. Most of those never ended up making any money at all." Well, kind of. Having been there, the biggest problem I remember is not that these companies didn't have any revenue, it's that they didn't have any profit. Webvan, Kozmo, Pets.com, etc. had customers. They just lost money on every sale. The problem came when investors stopped funding them to do so, and many of them went out of business literally overnight (like Chuck's comment elsewhere in this thread mentioned.) I would be more worried if Uber, Airbnb, etc. lost money on every sale. It is relatively easier to turn the marketing knob down to $0 spent, if your customers will still continue using your service at that point. I think the fundamentals are better this time around, though I still strongly feel Valley VC's overweight "getting 100% of the available market" and underweight "making money on each sale."
- austenallred 11y ago
  Fair, so swap "they never made any money" to "they never even had a potentially profitable business model"

aetherson 11y ago

If you have let's say enough revenue to support yourself, or at least to make your bank account stretch for years and years, but your valuation is $RIDICULOUS, and then your valuation drops to $NOTRIDICULOUS, well... that sucks for your owners (including your employees, presumably), but your company stays alive and your employees stay employed. If you have no revenue and a high burn rate, then when your valuation drops you get no investors and can't pay your employees and the company folds. That said, I'm not sure I buy the idea that this boom is marked by a massive increase in companies with (significant) revenues. I mean, yes, Uber has revenues. Instagram didn't, Snapchat doesn't, Whatsapp had laughable revenues, etc. Uber is the most massive outlier of this particular boom. It is definitionally not typical.

clarky07 11y ago
instagram and whatsapp are already bought, and facebook does have plenty of revenue. Snapchat has started their business model, and they do at least have some revenue. (Certainly not profit, but revenue). Any way you look at it, there are still more "real" companies than in 1999. And the rest, well it's not that surprising when startups fail. It's a thing that happens all the time. It's much different than tons and tons of public companies going out of business.

clarky07 11y ago

because there is a difference between 100% of value collapsing all at once, and 25-50% going away. Yes, Uber is likely to be overvalued. But it is a real business, with real customers, with real money being exchanged. It won't go to 0 overnight like everything did in 1999. If Uber suddenly goes from 40 bil to 30 bil, who really cares? It just doesn't effect very many people. Also, these are private companies. If the S&P loses 25-50% overnight it literally effects everyone in the world. If privately held tech companies lose 25-50% it definitely sucks, but it doesn't effect everyone. It just effects rich people in SV, who are all incredibly employable at other companies not in said bubble.

saosebastiao 11y ago

I'm not making that point, but I can at least defend it partially. With revenue comes sustainability, even if only partial. That means that if valuations are out of control, it is the investors that lose. Without any revenue, everybody loses, as it was all just a fantasy to begin with. Of course, if you have revenue but with negative gross margins, as I suspect a lot of current startups(especially delivery oriented) have, then your revenue is an illusion as well.