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Ask HN: If we are in a VC bubble, how would the bust play out?

• hrshtr 11y ago
  I think bubble will not burst but it will start to deflate, when bunch of companies with 1B+ evaluation fail to give the investors huge promised returns. This will dry up seed funding and Series funding for startups. Investors will loose their money and series of layoffs at startups. This may impact the growth of big giants but nit sharply. Lastly, Silicon valley crazy rental could be see decline too.
• flipmonk 11y ago
  Over-valued companies will have to take down rounds - employees who joined late will get their options roasted. A large number of small and new VC funds will get wiped out. This time, the difference is, its the professional players that get hit (VC's, institutional investors, hedge funds etc). Last time, tourist investors (newbies and the lay man) invested in stocks that crashed. Private huge rounds are protecting the tourist investors by virtue of lack of access.
  • fivedogit 11y ago
    > A large number of small and new VC funds will get wiped out. This time, the difference is, its the professional players that get hit (VC's, institutional investors, hedge funds etc). This is what I'm getting at. Is that extent of it? Before the housing crash, most institutional investors thought it would be confined to the subprime market... but that wasn't true at all. Where are the VCs getting all their money? Are mainstream banks exposed? Hedge funds? Corporations? Retirement funds?
    • pdq 11y ago
      > Where are the VCs getting all their money? Are mainstream banks exposed? Hedge funds? Corporations? Retirement funds? It all eventually comes back to the Federal Reserve. Interest rates are at record lows (much below a "market" rate), and funds are taking advantage of this to flood money into stocks, housing, tech companies, etc.
    • alenlpeacock 11y ago
      > Where are the VCs getting all their money? Are mainstream banks exposed? Hedge funds? Corporations? Retirement funds? VCs raise money from Limited Partners (LPs). Who are they? The regulars of course (fund of funds, foundations, endowments, large family trusts, pension funds, etc), but it seems pretty common for VC firms to also take on money from other wealthy individuals who made a lot of money from the machine, i.e., founders who got big exits and even other VCs or ex-VCs who likewise previously made bank. In other words, there's a surprising amount of circulation or recycling of funds in the bay area tech scene. And that's awesome, win or lose.
    • nostrademons 11y ago
      The numbers (in startups, at least) are much, much smaller than 2008. Total VC funding was about $48B in 2014 [1]. By contrast, the subprime mortgage in 2007 was $1.3T [2]. The current student debt loan burden is about $1.2T [3]. I predict that the coming tech crunch will be a sideshow in much bigger chaos caused by the effects of rising interest rates on newly-minted college grads. We live in a bubble in Silicon Valley; across most of the country, youth employment never really ticked upwards. If interest rates go up, I think we'd start to see widespread non-payment of student loans and possible political unrest. That's much scarier than a few startups going belly-up. [1] http://nvca.org/pressreleases/annual-venture-capital-investment-tops-48-billion-2014-reaching-highest-level-decade-according-moneytree-report/ http://nvca.org/pressreleases/annual-venture-capital-investm... [2] https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Subprime_mortgage_market https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Subpr... [3] http://www.forbes.com/sites/specialfeatures/2013/08/07/how-the-college-debt-is-crippling-students-parents-and-the-economy/ http://www.forbes.com/sites/specialfeatures/2013/08/07/how-t...
      • fivedogit 11y ago
        Upvote for the term "tech crunch"
  • jgautsch 11y ago
    > A large number of small and new VC funds will get wiped out. I'm not an expert, but I think most VC funds have a 10 year lifetime. Once a fund raises money and closes, it can't really be dissolved during those 10 years. Maybe the post-bubble lack of unicorns would mean the new/existing funds don't return anything, but most small VC funds don't end up having attractive returns today (especially taking into account their illiquidity).
• tmuir 11y ago
  I think the inherit nature of bubbles means that it's almost impossible to accurately predict the fallout. Sure, there were investors that bet against credit default swaps, but it was still a bet, or calculated risk. If such predictions were easy to make, bubbles wouldn't occur, at least at the scale of the dot com and housing bubbles.
  • gbog 11y ago
    What's easy to predict, though, is who will benefit from the burst: Chinese big four will likely be the winners. (Protected on their back by the gov, they also have the lucrative commerce in their hands, and they'll harvest all the engineers from the failed start-ups.)
• capkutay 11y ago
  My question is what would be the inflection point for the bubble burst? Would it be one quick event like a failed Uber or Dropbox IPO? Or would it be something like higher interest rates drying out VC funds leading to startups going out of business left and right?
  • netcan 11y ago
    Interesting question. The second one sounds more severe, competition for money from different asset classes.
• deleted 11y ago
  [deleted]
• aburan28 11y ago
  When interest rates start going up later this year this bubble will pop
  • slater 11y ago
    [Citation needed]
    • toomuchtodo 11y ago
      I don't have a citation to backup GP/OP, but the school of thought is that because interest rates are so low, capital is chasing increasingly risky investments to get an "acceptable" return (which is $expected_return after any taxes or inflation). With interest rates rising, other asset classes will see returns rise, reducing the attractiveness of startup/VC investing.
      • testrun 11y ago
        Not only that, but the US, Europe and Japan printed a lot of money that is floating in the system (quantitative easing). If interest rates rise, it will mop up a lot of that.
        • toomuchtodo 11y ago
          Strangely enough, even with trillions of dollars in QE in both the US and Europe, GDP is stagnant (or retreating) and the EU still has negative interest rates. Welcome to the new normal.
    • Havoc 11y ago
      >[Citation needed] A citation for a future event? Its clearly a prediction...
  • testrun 11y ago
    It could be the trigger. Other things to look at is Greece, China's economy, Europe's quantitative easing.
• bwy 11y ago
  The real question is, "if we're in a bubble, how do we take advantage of knowing it will pop?" (genuine question)
  • frostmatthew 11y ago
    Markets can remain irrational longer than you can remain solvent - John Maynard Keynes
  • shogun21 11y ago
    Can you short sell a company that doesn't have a public offering?
    • uhwhat 11y ago
      Yes but you would have to make that deal with the private investor(s).
  • ddw 11y ago
    If you work for a big tech company, try to partner with the startups doing interesting work in your domain. When they run out of money you can scoop up their IP (and maybe team?) for cheap.
• fsk 11y ago
  1. Lots of unicorn corpses. They either get down rounds, fold completely, or get bought for much less than their last round's valuation. 2. It would be harder for new startups to raise money. The big losses in the unicorns would then lead to smaller B/A/angel rounds. 3. Lots of unemployed people who formerly worked at startups, scrambling to get jobs and the handful of large survivors. 4. With money drying up, it would be a good time for bootstrappers or people who don't need much financing.
• graycat 11y ago
  Likely the evidence for a bubble that would be risky for our economy is the surprisingly large number of recent unicorns, that is, private companies who have a recent funding with a post money evaluation of $1 billion or more. One reason for so many unicorns, that is, such valuable private companies, is the reluctance of significant private companies to do an IPO. Reasons include (A) having to try to please Wall Street that has a very limited view of real progress for a company and a very short term focus and (B) the overhead of Sarbanes-Oxley. But I believe that you will find that a surprisingly large fraction of the unicorn fundings are more like traditional private equity instead of venture capital. So, for the unicorns, the high post money evaluation may be at high risk (bubble bursting), but, due to the deal terms, the last investor is relatively well protected and at only low risk. That high post money evaluation was just something out in the ozone anyway, a long way from that much in actual cash, so that, if such high evaluations suddenly disappeared, that is, the bubble burst, then the effect on the economy would be minimal. So, why do these goofy late stage fundings and unicorns even exist? The companies may want the cash from the equity funding and not want to attempt an IPO, and the private equity investors see maybe an upside, if the bubble doesn't burst first.
• netcan 11y ago
  I imagine that if the alleged bubble burst, VC funded startups and their immediate environment would be where the most damage was/is. A lot of startups would just fail. Employees would lose their jobs and options/shares would be wiped out. Even otherwise healthy startups could suffer or fail from the mess. If a company is worth $200m one day and $40m the next, all sorts of bad things can happen even if they are profitable. Beyond the immediate vicinity of VC backed startup land I don't think the fallout would be very severe. VC funded startups are not really a very big employers in the scheme of things. VC as an asset class isn't a big one either. Since VC investments are expected to be high risk, most end user investors allocate only a small portion of their portfolio to the class. It is expected to be high risk and on the whole it is considered very irresponsible to depend on its success. Even startup employees do not generally treat their jobs as highly secure, so at least psychologically they are prepared to one day find themselves looking elsewhere. They are also generally employable in the much large technology fields that are not directly related to VC money. For an analogy think of the hypothetical bitcoin bubble bursting. Some bitcoin centric businesses would go bust. Some gamblers would too. But I imagine that most people holding large amounts are aware of the risk, they haven't bet the house on it. I think the "systemic" impact would be minimal. The real dangerous bubbles are asset classes like real estate, bonds, blue chip shares and those esoteric but enormous "instruments" and securities. These are expected to be reliable and safe so money that must not disappear goes into them. They are also much bigger. I guess you never really know unless it happens, but I doubt the kinds of levers that make big bubbles so bad are present here. A lender wouldn't/shouldn't be loaning out money to be invested in VC, so I don't think you would have the kind of domino effects that make crashes spread. If it was severe and scary enough with big name "startups" going under, tech stock prices might dip. That might be a good time to buy. I can't see much of a relevance of a VC crash to Google, FB or MSFT's medium term prospects. EDIT: One more - Since VC is a "professionals only" class of investment, we are not likely to see middle class people directly impacted. This means that macro-demand shouldn't be effected much either, except directly by employees losign their jobs and startups no longer consuming whatever they consume.
• pen2l 11y ago
  A lot of talk has been going on about this, and a lot of comments start with a few set of presumptions. One presumption, usually left unexplained, is that there are a lot of "unicorns" that will collapse. I am most interested in classifying these unicorns, and speculating which will fall and which won't. Here's my list -- I want your thoughts on it. 1) Uber -- will not go down 2) Dropbox -- will go down 3) Airbnb -- will not go down, unless threat from regulation becomes stronger 4) Snapchat -- will go down 5) Twitter -- will go down 6) Facebook -- will suffer significantly 7) Square -- will go down 8) Apple will be entirely unscathed 9) Google will suffer, but be largely fine 10) Microsoft is suffering already. It will continue to suffer, but will not go down.
  • georgeglue1 11y ago
    Dropbox is a pretty inexpensive consumer product. Assuming they're profitable, they probably aren't any more likely to go down than netflix.
  • netcan 11y ago
    I disagree about FB. They got a lot of criticism before and immediately after their IPO for not justifying their value. Today they are genuinely making a lot of money. Their advertising platform it is valuable not unlike Google's. I think the only thing likely to harm facebook is losing users.
    • toomuchtodo 11y ago
      > I think the only thing likely to harm facebook is losing users. Which is supposedly happening.
      • fivedogit 11y ago
        Obviously this is just one vague, anonymous data point, but I deleted (not just deactivated) my FB account and I feel like a weight has been lifted from me. I don't have to look at a falsely curated feed of how great everyone else is doing anymore. The more people flirt with quitting, the more they realize their feeds have been reduced to attention whores and babies (their real friends stopped posting long ago), the mroe they'll quit and it'll just snowball. FB messed up by getting too big. I'm going to post my true thoughts when my grandfather might read them? Nope.
• michaelochurch 11y ago
  I doubt that it's going to be anything like 2008's financial market crash. VC-funded startups just aren't that important. Housing prices and interest rates affect everyone; VC is just a game for rich people playing with other peoples' money by taking bets on young narcissists with big ideas. So far, when VC flips its products on to the public markets, the markets react fairly rationally and the bad companies tank. Look at Zynga. The market may be overvaluing it still, but it's nothing like the 1990s. Public markets seem to be recognizing shitty tech stocks as what they are. So, we're not at the 1999 level of bubble. Furthermore, the 2001 crash didn't have a major effect on the economy (although it was bad for the Bay Area, and for many engineers). It wasn't the crash, or even 9/11, but the sluggish ("jobless") recovery in 2002-4 that made the 2000s (except for people on Wall Street or in the slowly recovering Valley) a shit decade. So, let's assume that the VC bubble ends. Some people will get hurt. The celebrity engineers who make $500,000 and aren't any good will get beefed. Run-of-the-mill engineers, if they're any good, might drop from $140k to $125k; not such a big deal. The ScrumDrone engineers will have a hard time finding work. Unfortunately, this will also hurt self-taught (meaning "no college degree") engineers even if they are good; the ones who are talented are still in a position of low leverage because "everyone knows" (well, employers know) they're more sensitive to a dry-up. The short answer is that some people will take painful hits-- you're going to have a lot of 25-year-olds who thought they were millionaires, find out that they worked overtime for nothing-- but average people of average-or-better talent will mostly be fine. Bay Area salaries for good engineers might go down 10 to 20 percent at worst. The bad news: housing in San Francisco's not going to become more affordable. First, the people who actually have money (not a half-million from options) are already diversified and less exposed to dot-com/VC, and the foreign money-launderers aren't exposed to it at all. Second, people hoard rather than sell (a steep positive volume/price correlation) when the market "should" soften. The stupid competitiveness around getting rentals (e.g. competitive open-houses, people cutting checks for a whole year's rent) will go away, but rents and prices will stay about where they are.
• burger_moon 11y ago
  If the tech/ anything bubble pops, what tech companies would be the best to work for preceding this event? Which industries that employ tech workers would be the best to work in preceding the bubble? This under the assumption that getting a software dev job would become increasingly difficult with a rise in unemployment in this sector. I'm a junior developer, so if there became a huge oversupply of developers I think it would be very hard for me to get a new job. This is actually something that really worries me currently. I'm already having a hard time finding a new job, if there was another economic crisis I feel like I would have to leave the tech industry to get a job.
  • nostrademons 11y ago
    Junior developers do fine as long as they actually have coding skills and can demonstrate their work with a portfolio. Make sure you work somewhere where you can point to stuff you've shipped and you'll be fine. The folks who get tossed out of the tech industry in a recession are those who should never have been in it in the first place, i.e. the folks who heard it was easy money but don't actually enjoy programming or building things.
• sdjr 11y ago
  I propose we change the alleged "startup-SV-VC bubble" term to "cockroach" because it just won't die. People have been predicting bubble for years. Coincidentally, people have been predicting the decline of Tesla stock, and when it drops 30 points they claim, "see!" Please. https://medium.com/@silicondowneyjr/bloat-not-bubble-a90bb9cb461b https://medium.com/@silicondowneyjr/bloat-not-bubble-a90bb9c...
• ChuckMcM 11y ago
  It plays out as companies that cannot reduce their costs enough to be operationally profitable will exit the market or be bought for pennies on the dollar. So something like uber getting bought/absorbed by a cab company. Options/stock will be worthless in the dead company. Several VC companies will report large fund losses and investors in those funds, and possibly a LP or two will get out of investing completely. Some folks who thought they were set for life will discover they have to get high paying jobs to support their personal burn rate. They won't be able to and it will change their life, bankruptcy, divorce, suicide. For most people it will be a non-event, they wondered how people could invest in a company at those valuations and so won't be surprised when they lose their investment. It will be really really hard to raise money for a while. Perhaps as many as 6 or 7 years. Companies that depended on new startups like digital ocean will have large layoffs as they cut costs to stay profitable. Anyway, that is my guess. We get to see how it plays out.
  • arielm 11y ago
    Well put. I think this time the bubble won't burst but slowly collapse. Insane valuations (ex. Slack) won't be possible and the employees who are making more than their ROI and get the hope of get rich quick option plans will have to dust off their resumes and go work for the companies who handled expenses properly and focused on revenue and profit. When will this happen? Soon. If you look at the number of seed vs. A vs. B+ rounds, you'll see that A rounds are on the decline. That's important because that's the stage where companies move from a startup to /real/ companies. Lack of A rounds means investors are willing to throw a little money (seed) on potential, or go big on proven success. That's usually great, but lack of A's means they're not willing to take any risk. That's a sign this bubble is deflating. _FWIW - I'm a technical founder of a non-funded tech company._
    • woah 11y ago
      Wasn't there a "series a crunch" just a couple years ago?
      • WalterSear 11y ago
• shogun21 11y ago
  Global collapse. We'll be reduced to different factions struggling to survive in the wastelands.
  • TsukasaUjiie 11y ago
    Two VC's enter. One VC leaves.
  • Ezhik 11y ago
    The person with the strongest laptop will prevail. I better buy more ThinkPads...
    • lambdaelite 11y ago
      That sound you hear is the laughter of Toughbook owners.
• uhwhat 11y ago
  Recent trends in economics leads me to believe the accumulation of wealth and capital from gains in productivity and technology is amassing into huge piles of cash that want & need to invest in something, so now the question is what? There are other more volatile economic "bubbles" out there to be concerned about. If you're assuming starting a business based on delivering over priced telegrams or selling rolls of quarters at a 180% markup will lead you to your "exit" than okay be afraid of "the tech bubble". Start a real business that makes sense, and the bubble is irrelevant.
  • dogweather 11y ago
    Interesting points. Anyone know any counter-examples? Startups delivering real value which were wiped out regardless?
    • flyinglizard 11y ago
      I can't think of any particulars right now, but my feeling is that many of companies the 2000-era bubble would be sound and profitable today, they just got to the market too early. It's very hard to judge an idea in isolation; the key is how that idea is applied to the market under particular circumstances. If a true bubble burst were to happen, it'd kill startups by percents, not by merit. Some investors will keep money for their portfolio companies, others will sit until the market hits bottom and they can get better deals. It'll kill everything and everyone, not just the bad companies.
    • gorbachev 11y ago
      Right after the 2007-2008 financial crisis credit was incredibly tight. Nobody was getting any. The same would happen after a tech bubble pop. Companies that are still in the growth phase, and not profitable yet would find themselves in real trouble. You could argue those startups aren't (yet) delivering real value, and I'm sure in large majority of cases that'd be true. But not in all cases.
    • singold 11y ago
      Well, if you are company that delivers real value to other companies that dont, then you will be in trouble.
• spir 11y ago
  Mark Cuban made some interesting remarks http://blogmaverick.com/2015/03/04/why-this-tech-bubble-is-worse-than-the-tech-bubble-of-2000/ http://blogmaverick.com/2015/03/04/why-this-tech-bubble-is-w... "If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it ?"
  • fivedogit 11y ago
    That sounds like a guy who regrets some investment decisions, wants to sell, but can't.
• kak9 11y ago
  Proliferation of SPVs. Retail will get in on it. Eventually will spread to non AAA deals. Private market bust.
• sloanmba 11y ago
  - Huge bubble where startups valued at almost around $1trillion are not regulated. - They are not required to report anything to public. - Eventually, VC will need liquidity that may force these companies to go public. - Once public, they are required to show significant growth to justify super high premium valuation. - If few of the top unicorns fail to show that growth, market may tank, VCs may loose money. - VCs who lost money may be more cautious in future but may also have hard time raising capital. - Many Unicorns do NOT have higher entry barriers or network effects. For instance, why can't same driver serve users from Uber, Lyft & 10 other apps, cheapest for customers & highest paying for driver - an arbitrage opportunity? Or why can't someone list house on Expedia,Travelocity along with Airbnb?
• dogweather 11y ago
  Has anyone written a good set of articles about the 1999/2000 tech bubble bursting, and which businesses it affected? Lots of smaller companies, like Redhat, were hit in their valuation, but made it through.
• Jayd2014 11y ago
  My Guesses are: 1- Facebook: Will go bust and be bought by a conglomerate (non IT Group or Microsoft). They will be the "Lehmans Brothers" of the next crisis. 2- Dropbox: Likely to go bust. No diversification and a lot of competition. 3- Twitter: Will be hurt but can survive,due to appeal to Marketers/News/..etc. 4- Google: Will likely drop a lot of products and concentrate on search and self driving cars. 5- Apple: Will become the new Microsoft.
  • onedev 11y ago
    Terrible terrible guesses