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U.S. Tech Funding – What’s Going On?

464 points by randomname2 11y ago

sgwealti 11y ago
The slide about e-commerce only making up about 6% of total retail sales is only relevant if there are a lot of "unicorns" which are in that market. According to Fortune's Unicorn list there are only 3 unicorns that are retail e-commerce based businesses.
j_baker 11y ago
Robert Shiller had an interesting analysis of the current stock market's "frothiness": http://www.businessinsider.com/robert-shiller-stock-market-bubble-2015-5 http://www.businessinsider.com/robert-shiller-stock-market-b... Basically, the stock market is a bit overvalued, and people expect that trend to continue. However, peoples' level of confidence in the stock market pricing is very low. To me, if there's a coming crash, it's going to be because investors are overly anxious rather than because valuations are so stratospheric.
- TTPrograms 11y ago
  Hopefully gradual increase in interest rates will result in stabilization of stock value as people pull out for safer low-rate returns (which are basically non-existent now). Then again the fed sure is taking their time...
  - fsk 11y ago
    The problem is that banks are leveraged to the hilt. If you have 30x leverage in 5 year duration bonds, and interest rates go up 1%, you lose 150%! ZIRP (0% interest rates) is a wealth transfer to big banks, a backdoor bailout.
    - hipcactus 11y ago
      Can you elaborate on this last statement?
      - eru 11y ago
        Banks get the money at 0%, lend it out at above 0%. Profit. (And if they don't find anything, they only pay 0% while they wait.)
      - fsk 11y ago
        A bank borrows at the Fed Funds Rate (say 0.1%) and buys one year Treasuries (currently 0.26%). On Treasury trades, banks can do leverage of 100x or more. So the bank's profit is 0.16 times 100 or 16%. If the Federal Reserve raised the Fed Funds Rate to 1%, then the bank would be borrowing at 1% and lending at .26%, and they'd be .74% in the hole per bond, 74% accounting for 100x leverage. Big banks are comfortable doing this trade right now, because they know the Federal Reserve isn't going to raise interest rates. (It is more accurate to say that the Federal Reserve is owned by the big banks, rather than acting independently.) Instead of buying Treasuries, they could invest in stocks, futures, corporate bonds, mortgages, houses, whatever. The bank borrows at zero and buys stuff that yields (on average) greater than zero. The bank can lend money to hedge funds who in turn invest in VC funds or startups. (ZIRP indirectly causes a startup valuation bubble.) Most of the time, the banks make huge profits (borrowing low and lending high). Every 20 years, there's a severe recession, and the big banks get a bailout. When interest rates are lowered, that's an indirect bank bailout. Suppose the bank owns a 5 year duration bond, uses 10x leverage, and interest rates go down 1%. The bond prices go up 5*1 = 5%. With 10x leverage, that's 50% profit.
        vasilipupkin 11y ago
        the problem with this theory is the bank doesn't borrow at zero. Goldman Sachs has 380 Bln of outstanding debt, and is paying roughly AA corporate rates on that debt. Overnight bank rate is 0.13 right now, which is the Fed Funds rate
        fsk 11y ago
        That's only corporate bonds. Federal Reserve transactions are not publicly disclosed, which is one of the issues.
  - marincounty 11y ago
    The average retail investor is still licking their wounds from 2008. Many, like myself, put our tiny blood soaked wads in CD's, at .01 percent. There are millions of Americans who can't gamble on a rigged stock market, and relied on a healthy 5% interest rate. This free money being doled out by the Fed to a select few entities will have consequences. My biggest fear is market will finally win over retail investors from 2008. Then, and only then will the big boys pull out leaving us holding the empty bag. Big boys who should gave bleed out if Bush Administration didn't throw them a coagulant? (I know a cheezy metaphor.) Oh yes, My America--you are the picture boy of Capitalism?
    - vasilipupkin 11y ago
      well, public markets have gone up dramatically since the trough in 2008/2009
    - saryant 11y ago
      The average retail investor is doing just fine. Anyone who did something as basic as hold an S&P 500 ETF is up quite a bit from the crash.
      - brc 11y ago
        Well, yes. But that dies to fit the narrative of markets bad! Capitalism bad!
- sumedh 11y ago
  Robert Shiller is an academician not an investor. During 2009 when the market was at an all time low he told Steven Schwarzman that the market would remain low for many years, Steven said no, it would bounce back in less than a year. Steven was right.
thorfish 11y ago
"And the tech IPO is basically dead. The tech IPO market is at early 1980's volumes. For most of the 90's the majority of tech funding was public. This has reversed. It used to be routine to hit $20 million in revenues and go public. Not anymore." It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley. Before an engineer might vest after four or five years, just as the company is going public at a modest valuation. But if the company stays private, the employees are forced to go double or nothing. Either the company continues to grow, and there is a Google or Facebook like outcome with hundreds of employees getting rich. Or the company goes sideways and the stock ends up diluted to nothing. Furthermore the general public would have shared in the growth in the 1980's, but now most of the value has accrued by the time the company goes public. So for the few that make it, all the wins go to the founders and VC's, rather than having the general public get in early.
- dcurtis 11y ago
  In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached.
  - chollida1 11y ago
    > In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached. Can you elaborate a bit here. Specifically this is so vague its almost a useless statement "at roughly the same benchmarks that an IPO"
- npkarnik 11y ago
  Many highly valued tech companies do secondary offerings to allow average employees to get some liquidity. Sure, the general public may not "get in early" but M&A is far less risky for both VCs and general investors. If mostly "sure things" make it to IPO, it's far less likely for the general public to be exposed to the meltdowns that made the headlines circa 2000-2001. The flipside is that until the startups IPO, the VCs and founders are exposed to most of the risk.
michaelvkpdx 11y ago
My takeaway- the VC's have leveraged the money from their successes to create a vortex that sucks in money from consumers, into privately owned companies, back into VC pockets, and back into more companies that get more people to spend more money. The tech vortex that is sucking away quality of life from the middle class and padding the billionaires (and large company) bank accounts. Throwing out a few bones on occasion (fewer and fewer) to entrepreneurs to keep the vortex going. Vortex is the opposite of bubble, but it does the same thing to the life of the average person.
- nathantotten 11y ago
  When you read "public returns" that doesn't mean the middle class. The "public market" the deck is referring just means that the trading happens on the open market (NASDAQ, S&P, etc.) rather than in private deals. Regardless, it is always the big players who make the big returns. The average investor wasn't the one making all the returns on Microsoft either. So you are right that the rich use these tools to get richer, but it is hardly a new thing.
  - Spooky23 11y ago
    So, those 30% annual returns my dad made in the 90s were some sort of dream? The early players made more, but plenty of people rode Microsoft and Intel up through the 80s and 90s. We all missed the first decade of Dropbox. Billionaires make wacky amounts of money in stock because we stopped taxing them.
- nostrademons 11y ago
  That's the way capitalism has always worked - it is up to you to make deals that increase your overall level of happiness, and it's up to your counterparties to ensure that those deals also increase their happiness. In past years, instead of "VCs" the villains have been hedge funds, private equity, corporate raiders, giant conglerates, corporations in general, investment trusts, robber barons, and colonial empires. In return, the average person has gotten information at their fingertips, sheep-throwing, Farmville, Candy Crush, easy travel bookings, a place to stay in every city, a computer on every desk, the ability to fly through the air, a car of their own and a house in the suburbs, and many other things. The reason money gets drawn away from "the average person" and collects in "billionaires and large companies" is because the average person values money for what it can do for them, while billionaires and large companies value money as a scorecard. Naturally, it makes sense that money will flow away from people who want it so they can spend it, and toward people who want it so they can hoard it. If you're unhappy with this arrangement, decide which side you would rather be on and then act accordingly.
TTPrograms 11y ago
This doesn't really directly address the issue of valuations for the unicorns. P/E valuations are probably insane by most metrics - the type of user base growth required to get them in line (P/E wise) with other companies is on the order of double-digit percentages of the global population IIRC. This doesn't really mean there's a "tech bubble", though. It's possible we'll see a massive correction to those companies, but it will likely be isolated, and thanks to the weird structuring of these private equity deals I can't imagine that the VCs will be much worse off.
- encoderer 11y ago
  Facebook revenue grew 8000% from 2007 to 2014. Clearly not all "unicorns" will perform this well. And maybe none will. But possibly they avoided discussion of these companies' P/E because the data is both unavailable and unreliable given their size? It's not just a canard that these companies are "not focusing on revenue".
- nemo44x 11y ago
  We've already seen many isolated corrections in the public market over the last few years. 3D printing has corrected in a massive way. Biotech had a big correction a bit over a year ago, however it has recovered and continues to rally. Solar suffered a correction recently and many small to mid-cap technology companies had a correction about 1.5 years ago too. Apple even saw an isolated correction a couple years ago. That is one reason I believe the public markets are in fact healthy. Sectors have been allowed to correct on their own instead of everything just failing in a systemic way.
codemac 11y ago
If anyone had trouble seeing the embedded flash of slideshare, here's the direct link to the slideshare: http://www.slideshare.net/a16z/state-of-49390473 http://www.slideshare.net/a16z/state-of-49390473
sharkweek 11y ago
I thought Dan Primack had a solid response: http://fortune.com/2015/06/15/andreessen-horowitz-why-were-not-in-the-next-tech-bubble/ http://fortune.com/2015/06/15/andreessen-horowitz-why-were-n... "Andreessen Horowitz’s presentation treats the relative lack of tech IPOs as a sign of market health. As I wrote last week, there is a much less charitable way to view it. Moreover, the lack of IPOs also means that the public markets have yet to validate many of these unicorn valuations."
- beambot 11y ago
  Except that the valuations are meaningless without understanding all the other undisclosed terms granted to the VCs in the latter rounds (eg. liquidation preference, participating preferred, etc).
  - ThomPete 11y ago
    Which makes the original point made even stronger.
  - nugget 11y ago
    How important is a liquidation preference on a $500m round which values Uber at $40b? Not very. Moreover, most of the institutions doing these late stage rounds and secondaries are the same banks and asset management firms that float the IPOs. One of the unintended consequences from SOX is the creation of this public-private funding environment where huge private firms and high net worth individuals can invest, but small retail investors are shut out until the venture firms believe the company's value has plateaued (Slide 30). We saw this happen with Facebook, for which there is a ton of second market valuation data from 2007 through the IPO to the present. If you believe that small retail investors should be protected from themselves when it comes to early stage investing, this is a good thing.
    - dylanjermiah 11y ago
      Just for an accurate number Uber has ~4bn of liq prefs currently.
foobarqux 11y ago
Lot's of points to dispute: Slides talk about S&P IT but no one is concerned with IT public market valuations (at least relative to the rest of the public market). The concern is with private tech market. Slides talk a lot about how the amount of funding is justifiable but the question is whether the valuations are. Lower amounts of funding do suggest there is less at risk, however. How do you reconcile slide 37, which suggests that fund raising is as difficult as ever, with the widely held view that money is flowing freely today. You can't own an index of unicorns (slide 32) etc.
- vasilipupkin 11y ago
  you can own an index of unicorns if you are an LP in a16z :)
  - foobarqux 11y ago
    No, you can own some unicorns but not all of them or something that represents all of them. I suppose you could invest in the top 5-10 VCs but in either case you would also own a bunch of non-unicorns. It would be like saying you can buy an index of CPG companies by buying the S&P500.
- deleted 11y ago
  [deleted]
ripberge 11y ago
When Andreesen talks about "tech funding", what do they mean by this? A lot of VC funding that used to go to "tech" companies is now going into much less profitable types of businesses that should not be considered "tech". Businesses that most VC's don't really have a lot of experience with. For example, their investments in Soylent, Walker and Co, Dollar Shave Club. It is REALLY hard to make money in these types of businesses when compared to software. They could be in for a rude awakening...
- spitfire 11y ago
  If your business has a website, it is now a "tech" company. It's a brave new world.
  - abakker 11y ago
    Us consultants call this the "Digital Business Transformation"
  - aswanson 11y ago
    Not new at all. I remember reading articles in the media in 98-99 about "tech" stocks like pets.com and etoys. Anything back then that had a website was a tech stock just like anything with an app is a tech stock these days. Nothing new to see here...
- chetanahuja 11y ago
  Bingo. A very large part of recent "tech" startup scene is just the good old "doing X but now with a smartphone" pattern. Or even worse "Sending a person with a smartphone to do X for you when you call them using your smartphone". I simply don't know how these businesses are supposed to be profitable at the scale they're supposed to grow to. Will Uber still be cool when it has a million quasi-employees? Will the governments around the world still allow the "quasi" part to stay intact at that scale - highly unlikely.
  - mkagenius 11y ago
    > Will the governments around the world still allow the "quasi" part to stay intact at that scale - highly unlikely. By the time that happens, Uber will be as big as google. They will find a way - when lot of smart people work together, they generally do.
iblaine 11y ago
IPO's are dead and so are options.
foobarqux 11y ago
Is a16z focused on the seed stage now? That seems to be what they are selling in these slides.
timr 11y ago
Note that they use the valuations of public companies to argue that the market isn't overvalued, then spend 90% of the presentation arguing that all of the value is being "created" in the private markets, and that IPOs are dead. Moreover, they're basically arguing that it's logical for investors to pile into these late-stage deals, because waiting around for IPO is a losing strategy. If you believe this data, it doesn't tell you that there isn't a bubble. It says that if there is a bubble here, it's mostly happening off the books, and depends on the huge public exits of a handful of mythical creatures. Also, slide 38 is an argument for the "No Exit" way of looking at startups: we've got a boom in low-cost, early-stage deals (2x growth since 2009), coupled with an ever-more-ruthless culling of the herd, where most of the aggregate funding goes into fewer (<20) hot deals than ever. Investors are taking a cheap call option on your youth.
- jeffreyrogers 11y ago
  Yeah, I thought the same thing when reading through the slides. It's pretty disingenuous of them to do that, since I think when most people say "tech bubble" they're referring to the inability of most of the VC funded companies to go public. A couple of months ago there was a blog post by Mark Cuban that made a similar argument. It wasn't well received on HN largely because most commenters just looked at the words tech bubble and instantly disagreed, rather than seeing that his argument was really about liquidity. Anyways, I don't have a strong opinion either way as to whether we're in a tech bubble or not and it doesn't strongly affect me since I'm not heavily invested in tech companies. But I certainly am skeptical of the high valuations that currently exist. One last thing HN readers should be aware of. VC firms are like hedge funds. The people running them make money whether the fund does well or poorly and typically the amount invested by the general partners is quite small relative to the size of the fund (often around 1%), so when you look to VC guidance for how the VC market is doing keep in mind what their incentivizes are. Edited to add on VC firms: Typically the investors in such funds aren't rich people either. They're often (probably in most cases) institutional investors such as pension funds and university endowments.
  - cmullen 11y ago
    GP commit is always at least 2%. Also, I think its pretty disingenuous to say that partners at VC / PE make money whether the fund does well or not. The management fee (2%) almost all goes into operating expenses - mostly salaries for mid-level / junior folks, professional / legal fees, research, consultants, etc. Partners make almost no money off of the management fee (LPs make sure that the management fee is just sufficient to cover the operating expenses of the fund) The way that partners make real money is through carried interest. Most funds have a hurdle rate of return (around 8%) below which, no carry gets paid. Furthermore, the vast majority of LP agreements have clawbacks associated with early carry paid in the event that later investments prove unsuccessful. So, unless the fund returns 8% per year to its investors, the partners make only their salaries.
ThomPete 11y ago
As I have mentioned in another thread. We don't have a tech bubble we have a Silicon Valley valuation bubble, one a16z is part of themselves. The discussion isn't whether tech companies are under or overvalued, they are most likely in general undervalued. The discussion is whether the kind of investments that companies like a16z and other VC companies make are over valued or even valuable. In other words, they are setting up a straw man about tech funding in general but the very issue is that it's not the tech sector in general that is having insane valuations tied to it but a small but important subset.
- vasilipupkin 11y ago
  they made a number of specific points about why they don't think it's a bubble. Now, they could be wrong, but at least they are coherent
  - jseliger 11y ago
    they made a number of specific points about why they don't think it's a bubble. Now, they could be wrong, but at least they are coherent This is a great comment. The grandparent is being pointlessly dismissive with zero evidence presented. That makes it an incredibly low-value comment.
  - freyr 11y ago
    It's a red herring. They present data about public markets to conclude there's no bubble. But the bubble, whether real or not, is generally considered a funding bubble taking place in private markets.
    - ThomPete 11y ago
      Exactly! They are showing that there is in fact no tech bubble which I agree with. But that doesn't mean there isn't a bubble far more problematic inside the tech sector. There are a bunch of companies that get a lot of attention for their valuation but without any real proven path to ever honor it.
cdnsteve 11y ago
Why are IPOs no longer viable? Too much red tape? It seems that investors and their money have a better chance underground (private) where public stocks are either too slow to get a return or the return amount would be much less. Why does it seem all the money is in the US and not in Canada? More investors? More money? Taxes?
- foobarqux 11y ago
  If you want to raise money and can't do so without going through the regulations of being a public company you would do so. The only reason to IPO these days is to provide liquidity to existing shareholders (i.e. cash them out).
deleted 11y ago
[deleted]
graycat 11y ago
Didn't see where the OP explained why the tech IPO market is dead.
narrator 11y ago
Here's my current map of where the money is coming from and going to. Fed buying trash MBSs with QE -> Investment Banks -> Stock Market -> Big Tech Companies -> Acquisitions -> Venture Capitalists -> Tech Companies -> Startup Employees -> San Francisco Landlords and Fancy Toast Restaurants.
- mahyarm 11y ago
  And the landlord step is further accelerated by the overseas wealthy using sf real estate as a secure bank account compared to their home country and hedge funds buying up stock as an investment step. NIMBYs then leverage it further by constraining supply.
  - narrator 11y ago
    The "overseas wealthy" is the trade deficits we've been running for the past 30 years slowly trickling back into the U.S asset markets. We were able to export our inflation for 30 years and it was all piling up in foreign central banks as treasury bills. Now, with very low interest rates, it is going into any asset that's not a bond. If the dollar index starts to go the wrong way, watch out, that little stream of overseas dollars buying into U.S assets is going to become a flood.
- notNow 11y ago
  Let me add to this amazing chain two important points 1) The FED is basically printing money out of thin air. 2) To close this open loop: SF Landlords and Fancy Toast Restaurants -> IRS -> THE FED
kamilszybalski 11y ago
"It’s Carlota Perez’s argument that technology is adopted on an S curve: the installation phase, the crash—because the technology isn’t ready yet—and then the deployment phase, when technology gets adopted by everyone and the real money gets made" - http://www.newyorker.com/magazine/2015/05/18/tomorrows-advance-man http://www.newyorker.com/magazine/2015/05/18/tomorrows-advan...
mkagenius 11y ago
Who were those companies which had funding > 1bn within a year in the year 1999?
- GBond 11y ago
  http://wayback.archive.org/web/*/fuckedcompany.com http://wayback.archive.org/web/*/fuckedcompany.com
BinaryIdiot 11y ago
Is there a video of someone giving this presentation? It's interesting.
pbreit 11y ago
1999-2000 was insane. Regulators killed the IPO market such that all the gains are being made by venture investors and the public is totally missing out.
- dylanjermiah 11y ago
  >Regulators killed the IPO market such that all the gains are being made by venture investors and the public is totally missing out. A point which seems to be lost in this discussion.
MichaelCrawford 11y ago
I've been adamantly opposed to the public trading of tech companies for fifteen years now: The Valley is a Harsh Mistress http://www.warplife.com/tips/business/stock/venture/capital/misery.html http://www.warplife.com/tips/business/stock/venture/capital/... Investment yes, Wall Street no. The reason to seek investment is to grow one's company so that one can grow one's business in ways that would not be possible to fund out of one's current revenue. One of the very wealthiest people I have ever met founded "The Nation's Largest Sperm Bank" in the early 1970s with $2,500.00 of his own money, along with just one other partner, mostly for liquid nitrogen dewars, medical lab equipment as well as pr0n.
kosigz 11y ago
The takeaway for me is that investing in tech companies during the growth stage has gone from being mostly for rich people to being pretty much exclusively for very very rich people.
jgalt212 11y ago
Maybe the tech IPO is dead because Andressen Horowitz (et al) invest in Series B, C, and D at geometrically increasing valuations and have pushed valuation levels to where the public markets are skeptical.
jackgavigan 11y ago
I think a lot of people don't grasp the extent to which the cost of founding a tech company has fallen since the dot-com boom. I remember forking out tens of thousands of pounds for physical hardware (which then had to be hosted somewhere) and software licences for things like Oracle and Checkpoint firewall, which I then had to install, set up, admin and maintain. These days, with Google, AWS, Rackspace, Heroku, there's none of that. You can spin up a new server in minutes and scale up as required. All the technical infrastructure is already there, so you can focus on the product and market.

464 points by randomname2 11y ago

The slide about e-commerce only making up about 6% of total retail sales is only relevant if there are a lot of "unicorns" which are in that market. According to Fortune's Unicorn list there are only 3 unicorns that are retail e-commerce based businesses.

j_baker 11y ago

Robert Shiller had an interesting analysis of the current stock market's "frothiness": http://www.businessinsider.com/robert-shiller-stock-market-bubble-2015-5 http://www.businessinsider.com/robert-shiller-stock-market-b... Basically, the stock market is a bit overvalued, and people expect that trend to continue. However, peoples' level of confidence in the stock market pricing is very low. To me, if there's a coming crash, it's going to be because investors are overly anxious rather than because valuations are so stratospheric.

TTPrograms 11y ago
Hopefully gradual increase in interest rates will result in stabilization of stock value as people pull out for safer low-rate returns (which are basically non-existent now). Then again the fed sure is taking their time...
- fsk 11y ago
  The problem is that banks are leveraged to the hilt. If you have 30x leverage in 5 year duration bonds, and interest rates go up 1%, you lose 150%! ZIRP (0% interest rates) is a wealth transfer to big banks, a backdoor bailout.
  - hipcactus 11y ago
    Can you elaborate on this last statement?
    - eru 11y ago
      Banks get the money at 0%, lend it out at above 0%. Profit. (And if they don't find anything, they only pay 0% while they wait.)
    - fsk 11y ago
      A bank borrows at the Fed Funds Rate (say 0.1%) and buys one year Treasuries (currently 0.26%). On Treasury trades, banks can do leverage of 100x or more. So the bank's profit is 0.16 times 100 or 16%. If the Federal Reserve raised the Fed Funds Rate to 1%, then the bank would be borrowing at 1% and lending at .26%, and they'd be .74% in the hole per bond, 74% accounting for 100x leverage. Big banks are comfortable doing this trade right now, because they know the Federal Reserve isn't going to raise interest rates. (It is more accurate to say that the Federal Reserve is owned by the big banks, rather than acting independently.) Instead of buying Treasuries, they could invest in stocks, futures, corporate bonds, mortgages, houses, whatever. The bank borrows at zero and buys stuff that yields (on average) greater than zero. The bank can lend money to hedge funds who in turn invest in VC funds or startups. (ZIRP indirectly causes a startup valuation bubble.) Most of the time, the banks make huge profits (borrowing low and lending high). Every 20 years, there's a severe recession, and the big banks get a bailout. When interest rates are lowered, that's an indirect bank bailout. Suppose the bank owns a 5 year duration bond, uses 10x leverage, and interest rates go down 1%. The bond prices go up 5*1 = 5%. With 10x leverage, that's 50% profit.
      - vasilipupkin 11y ago
        the problem with this theory is the bank doesn't borrow at zero. Goldman Sachs has 380 Bln of outstanding debt, and is paying roughly AA corporate rates on that debt. Overnight bank rate is 0.13 right now, which is the Fed Funds rate
        fsk 11y ago
        That's only corporate bonds. Federal Reserve transactions are not publicly disclosed, which is one of the issues.
- marincounty 11y ago
  The average retail investor is still licking their wounds from 2008. Many, like myself, put our tiny blood soaked wads in CD's, at .01 percent. There are millions of Americans who can't gamble on a rigged stock market, and relied on a healthy 5% interest rate. This free money being doled out by the Fed to a select few entities will have consequences. My biggest fear is market will finally win over retail investors from 2008. Then, and only then will the big boys pull out leaving us holding the empty bag. Big boys who should gave bleed out if Bush Administration didn't throw them a coagulant? (I know a cheezy metaphor.) Oh yes, My America--you are the picture boy of Capitalism?
  - vasilipupkin 11y ago
    well, public markets have gone up dramatically since the trough in 2008/2009
  - saryant 11y ago
    The average retail investor is doing just fine. Anyone who did something as basic as hold an S&P 500 ETF is up quite a bit from the crash.
    - brc 11y ago
      Well, yes. But that dies to fit the narrative of markets bad! Capitalism bad!
sumedh 11y ago
Robert Shiller is an academician not an investor. During 2009 when the market was at an all time low he told Steven Schwarzman that the market would remain low for many years, Steven said no, it would bounce back in less than a year. Steven was right.

thorfish 11y ago

"And the tech IPO is basically dead. The tech IPO market is at early 1980's volumes. For most of the 90's the majority of tech funding was public. This has reversed. It used to be routine to hit $20 million in revenues and go public. Not anymore." It's interesting how it seems that inequality is an unintended consequence of Sarbanes-Oxley. Before an engineer might vest after four or five years, just as the company is going public at a modest valuation. But if the company stays private, the employees are forced to go double or nothing. Either the company continues to grow, and there is a Google or Facebook like outcome with hundreds of employees getting rich. Or the company goes sideways and the stock ends up diluted to nothing. Furthermore the general public would have shared in the growth in the 1980's, but now most of the value has accrued by the time the company goes public. So for the few that make it, all the wins go to the founders and VC's, rather than having the general public get in early.

dcurtis 11y ago
In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached.
- chollida1 11y ago
  > In practice, there are almost always offerings for employees to liquidate at roughly the same benchmarks that an IPO would have reached. Can you elaborate a bit here. Specifically this is so vague its almost a useless statement "at roughly the same benchmarks that an IPO"
npkarnik 11y ago
Many highly valued tech companies do secondary offerings to allow average employees to get some liquidity. Sure, the general public may not "get in early" but M&A is far less risky for both VCs and general investors. If mostly "sure things" make it to IPO, it's far less likely for the general public to be exposed to the meltdowns that made the headlines circa 2000-2001. The flipside is that until the startups IPO, the VCs and founders are exposed to most of the risk.

michaelvkpdx 11y ago

My takeaway- the VC's have leveraged the money from their successes to create a vortex that sucks in money from consumers, into privately owned companies, back into VC pockets, and back into more companies that get more people to spend more money. The tech vortex that is sucking away quality of life from the middle class and padding the billionaires (and large company) bank accounts. Throwing out a few bones on occasion (fewer and fewer) to entrepreneurs to keep the vortex going. Vortex is the opposite of bubble, but it does the same thing to the life of the average person.

nathantotten 11y ago
When you read "public returns" that doesn't mean the middle class. The "public market" the deck is referring just means that the trading happens on the open market (NASDAQ, S&P, etc.) rather than in private deals. Regardless, it is always the big players who make the big returns. The average investor wasn't the one making all the returns on Microsoft either. So you are right that the rich use these tools to get richer, but it is hardly a new thing.
- Spooky23 11y ago
  So, those 30% annual returns my dad made in the 90s were some sort of dream? The early players made more, but plenty of people rode Microsoft and Intel up through the 80s and 90s. We all missed the first decade of Dropbox. Billionaires make wacky amounts of money in stock because we stopped taxing them.
nostrademons 11y ago
That's the way capitalism has always worked - it is up to you to make deals that increase your overall level of happiness, and it's up to your counterparties to ensure that those deals also increase their happiness. In past years, instead of "VCs" the villains have been hedge funds, private equity, corporate raiders, giant conglerates, corporations in general, investment trusts, robber barons, and colonial empires. In return, the average person has gotten information at their fingertips, sheep-throwing, Farmville, Candy Crush, easy travel bookings, a place to stay in every city, a computer on every desk, the ability to fly through the air, a car of their own and a house in the suburbs, and many other things. The reason money gets drawn away from "the average person" and collects in "billionaires and large companies" is because the average person values money for what it can do for them, while billionaires and large companies value money as a scorecard. Naturally, it makes sense that money will flow away from people who want it so they can spend it, and toward people who want it so they can hoard it. If you're unhappy with this arrangement, decide which side you would rather be on and then act accordingly.

TTPrograms 11y ago

This doesn't really directly address the issue of valuations for the unicorns. P/E valuations are probably insane by most metrics - the type of user base growth required to get them in line (P/E wise) with other companies is on the order of double-digit percentages of the global population IIRC. This doesn't really mean there's a "tech bubble", though. It's possible we'll see a massive correction to those companies, but it will likely be isolated, and thanks to the weird structuring of these private equity deals I can't imagine that the VCs will be much worse off.

encoderer 11y ago
Facebook revenue grew 8000% from 2007 to 2014. Clearly not all "unicorns" will perform this well. And maybe none will. But possibly they avoided discussion of these companies' P/E because the data is both unavailable and unreliable given their size? It's not just a canard that these companies are "not focusing on revenue".
nemo44x 11y ago
We've already seen many isolated corrections in the public market over the last few years. 3D printing has corrected in a massive way. Biotech had a big correction a bit over a year ago, however it has recovered and continues to rally. Solar suffered a correction recently and many small to mid-cap technology companies had a correction about 1.5 years ago too. Apple even saw an isolated correction a couple years ago. That is one reason I believe the public markets are in fact healthy. Sectors have been allowed to correct on their own instead of everything just failing in a systemic way.

codemac 11y ago

If anyone had trouble seeing the embedded flash of slideshare, here's the direct link to the slideshare: http://www.slideshare.net/a16z/state-of-49390473 http://www.slideshare.net/a16z/state-of-49390473

sharkweek 11y ago

I thought Dan Primack had a solid response: http://fortune.com/2015/06/15/andreessen-horowitz-why-were-not-in-the-next-tech-bubble/ http://fortune.com/2015/06/15/andreessen-horowitz-why-were-n... "Andreessen Horowitz’s presentation treats the relative lack of tech IPOs as a sign of market health. As I wrote last week, there is a much less charitable way to view it. Moreover, the lack of IPOs also means that the public markets have yet to validate many of these unicorn valuations."

beambot 11y ago
Except that the valuations are meaningless without understanding all the other undisclosed terms granted to the VCs in the latter rounds (eg. liquidation preference, participating preferred, etc).
- ThomPete 11y ago
  Which makes the original point made even stronger.
- nugget 11y ago
  How important is a liquidation preference on a $500m round which values Uber at $40b? Not very. Moreover, most of the institutions doing these late stage rounds and secondaries are the same banks and asset management firms that float the IPOs. One of the unintended consequences from SOX is the creation of this public-private funding environment where huge private firms and high net worth individuals can invest, but small retail investors are shut out until the venture firms believe the company's value has plateaued (Slide 30). We saw this happen with Facebook, for which there is a ton of second market valuation data from 2007 through the IPO to the present. If you believe that small retail investors should be protected from themselves when it comes to early stage investing, this is a good thing.
  - dylanjermiah 11y ago
    Just for an accurate number Uber has ~4bn of liq prefs currently.

foobarqux 11y ago

Lot's of points to dispute: Slides talk about S&P IT but no one is concerned with IT public market valuations (at least relative to the rest of the public market). The concern is with private tech market. Slides talk a lot about how the amount of funding is justifiable but the question is whether the valuations are. Lower amounts of funding do suggest there is less at risk, however. How do you reconcile slide 37, which suggests that fund raising is as difficult as ever, with the widely held view that money is flowing freely today. You can't own an index of unicorns (slide 32) etc.

vasilipupkin 11y ago
you can own an index of unicorns if you are an LP in a16z :)
- foobarqux 11y ago
  No, you can own some unicorns but not all of them or something that represents all of them. I suppose you could invest in the top 5-10 VCs but in either case you would also own a bunch of non-unicorns. It would be like saying you can buy an index of CPG companies by buying the S&P500.
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ripberge 11y ago

When Andreesen talks about "tech funding", what do they mean by this? A lot of VC funding that used to go to "tech" companies is now going into much less profitable types of businesses that should not be considered "tech". Businesses that most VC's don't really have a lot of experience with. For example, their investments in Soylent, Walker and Co, Dollar Shave Club. It is REALLY hard to make money in these types of businesses when compared to software. They could be in for a rude awakening...

spitfire 11y ago
If your business has a website, it is now a "tech" company. It's a brave new world.
- abakker 11y ago
  Us consultants call this the "Digital Business Transformation"
- aswanson 11y ago
  Not new at all. I remember reading articles in the media in 98-99 about "tech" stocks like pets.com and etoys. Anything back then that had a website was a tech stock just like anything with an app is a tech stock these days. Nothing new to see here...
chetanahuja 11y ago
Bingo. A very large part of recent "tech" startup scene is just the good old "doing X but now with a smartphone" pattern. Or even worse "Sending a person with a smartphone to do X for you when you call them using your smartphone". I simply don't know how these businesses are supposed to be profitable at the scale they're supposed to grow to. Will Uber still be cool when it has a million quasi-employees? Will the governments around the world still allow the "quasi" part to stay intact at that scale - highly unlikely.
- mkagenius 11y ago
  > Will the governments around the world still allow the "quasi" part to stay intact at that scale - highly unlikely. By the time that happens, Uber will be as big as google. They will find a way - when lot of smart people work together, they generally do.

iblaine 11y ago

IPO's are dead and so are options.

foobarqux 11y ago

Is a16z focused on the seed stage now? That seems to be what they are selling in these slides.

timr 11y ago

Note that they use the valuations of public companies to argue that the market isn't overvalued, then spend 90% of the presentation arguing that all of the value is being "created" in the private markets, and that IPOs are dead. Moreover, they're basically arguing that it's logical for investors to pile into these late-stage deals, because waiting around for IPO is a losing strategy. If you believe this data, it doesn't tell you that there isn't a bubble. It says that if there is a bubble here, it's mostly happening off the books, and depends on the huge public exits of a handful of mythical creatures. Also, slide 38 is an argument for the "No Exit" way of looking at startups: we've got a boom in low-cost, early-stage deals (2x growth since 2009), coupled with an ever-more-ruthless culling of the herd, where most of the aggregate funding goes into fewer (<20) hot deals than ever. Investors are taking a cheap call option on your youth.

jeffreyrogers 11y ago
Yeah, I thought the same thing when reading through the slides. It's pretty disingenuous of them to do that, since I think when most people say "tech bubble" they're referring to the inability of most of the VC funded companies to go public. A couple of months ago there was a blog post by Mark Cuban that made a similar argument. It wasn't well received on HN largely because most commenters just looked at the words tech bubble and instantly disagreed, rather than seeing that his argument was really about liquidity. Anyways, I don't have a strong opinion either way as to whether we're in a tech bubble or not and it doesn't strongly affect me since I'm not heavily invested in tech companies. But I certainly am skeptical of the high valuations that currently exist. One last thing HN readers should be aware of. VC firms are like hedge funds. The people running them make money whether the fund does well or poorly and typically the amount invested by the general partners is quite small relative to the size of the fund (often around 1%), so when you look to VC guidance for how the VC market is doing keep in mind what their incentivizes are. Edited to add on VC firms: Typically the investors in such funds aren't rich people either. They're often (probably in most cases) institutional investors such as pension funds and university endowments.
- cmullen 11y ago
  GP commit is always at least 2%. Also, I think its pretty disingenuous to say that partners at VC / PE make money whether the fund does well or not. The management fee (2%) almost all goes into operating expenses - mostly salaries for mid-level / junior folks, professional / legal fees, research, consultants, etc. Partners make almost no money off of the management fee (LPs make sure that the management fee is just sufficient to cover the operating expenses of the fund) The way that partners make real money is through carried interest. Most funds have a hurdle rate of return (around 8%) below which, no carry gets paid. Furthermore, the vast majority of LP agreements have clawbacks associated with early carry paid in the event that later investments prove unsuccessful. So, unless the fund returns 8% per year to its investors, the partners make only their salaries.

ThomPete 11y ago

As I have mentioned in another thread. We don't have a tech bubble we have a Silicon Valley valuation bubble, one a16z is part of themselves. The discussion isn't whether tech companies are under or overvalued, they are most likely in general undervalued. The discussion is whether the kind of investments that companies like a16z and other VC companies make are over valued or even valuable. In other words, they are setting up a straw man about tech funding in general but the very issue is that it's not the tech sector in general that is having insane valuations tied to it but a small but important subset.

vasilipupkin 11y ago
they made a number of specific points about why they don't think it's a bubble. Now, they could be wrong, but at least they are coherent
- jseliger 11y ago
  they made a number of specific points about why they don't think it's a bubble. Now, they could be wrong, but at least they are coherent This is a great comment. The grandparent is being pointlessly dismissive with zero evidence presented. That makes it an incredibly low-value comment.
- freyr 11y ago
  It's a red herring. They present data about public markets to conclude there's no bubble. But the bubble, whether real or not, is generally considered a funding bubble taking place in private markets.
  - ThomPete 11y ago
    Exactly! They are showing that there is in fact no tech bubble which I agree with. But that doesn't mean there isn't a bubble far more problematic inside the tech sector. There are a bunch of companies that get a lot of attention for their valuation but without any real proven path to ever honor it.

cdnsteve 11y ago

Why are IPOs no longer viable? Too much red tape? It seems that investors and their money have a better chance underground (private) where public stocks are either too slow to get a return or the return amount would be much less. Why does it seem all the money is in the US and not in Canada? More investors? More money? Taxes?

foobarqux 11y ago
If you want to raise money and can't do so without going through the regulations of being a public company you would do so. The only reason to IPO these days is to provide liquidity to existing shareholders (i.e. cash them out).

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graycat 11y ago

Didn't see where the OP explained why the tech IPO market is dead.

narrator 11y ago

Here's my current map of where the money is coming from and going to. Fed buying trash MBSs with QE -> Investment Banks -> Stock Market -> Big Tech Companies -> Acquisitions -> Venture Capitalists -> Tech Companies -> Startup Employees -> San Francisco Landlords and Fancy Toast Restaurants.

mahyarm 11y ago
And the landlord step is further accelerated by the overseas wealthy using sf real estate as a secure bank account compared to their home country and hedge funds buying up stock as an investment step. NIMBYs then leverage it further by constraining supply.
- narrator 11y ago
  The "overseas wealthy" is the trade deficits we've been running for the past 30 years slowly trickling back into the U.S asset markets. We were able to export our inflation for 30 years and it was all piling up in foreign central banks as treasury bills. Now, with very low interest rates, it is going into any asset that's not a bond. If the dollar index starts to go the wrong way, watch out, that little stream of overseas dollars buying into U.S assets is going to become a flood.
notNow 11y ago
Let me add to this amazing chain two important points 1) The FED is basically printing money out of thin air. 2) To close this open loop: SF Landlords and Fancy Toast Restaurants -> IRS -> THE FED

kamilszybalski 11y ago

"It’s Carlota Perez’s argument that technology is adopted on an S curve: the installation phase, the crash—because the technology isn’t ready yet—and then the deployment phase, when technology gets adopted by everyone and the real money gets made" - http://www.newyorker.com/magazine/2015/05/18/tomorrows-advance-man http://www.newyorker.com/magazine/2015/05/18/tomorrows-advan...

mkagenius 11y ago

Who were those companies which had funding > 1bn within a year in the year 1999?

GBond 11y ago
http://wayback.archive.org/web/*/fuckedcompany.com http://wayback.archive.org/web/*/fuckedcompany.com

BinaryIdiot 11y ago

Is there a video of someone giving this presentation? It's interesting.

pbreit 11y ago

1999-2000 was insane. Regulators killed the IPO market such that all the gains are being made by venture investors and the public is totally missing out.

dylanjermiah 11y ago
>Regulators killed the IPO market such that all the gains are being made by venture investors and the public is totally missing out. A point which seems to be lost in this discussion.

MichaelCrawford 11y ago

I've been adamantly opposed to the public trading of tech companies for fifteen years now: The Valley is a Harsh Mistress http://www.warplife.com/tips/business/stock/venture/capital/misery.html http://www.warplife.com/tips/business/stock/venture/capital/... Investment yes, Wall Street no. The reason to seek investment is to grow one's company so that one can grow one's business in ways that would not be possible to fund out of one's current revenue. One of the very wealthiest people I have ever met founded "The Nation's Largest Sperm Bank" in the early 1970s with $2,500.00 of his own money, along with just one other partner, mostly for liquid nitrogen dewars, medical lab equipment as well as pr0n.

kosigz 11y ago

The takeaway for me is that investing in tech companies during the growth stage has gone from being mostly for rich people to being pretty much exclusively for very very rich people.

jgalt212 11y ago

Maybe the tech IPO is dead because Andressen Horowitz (et al) invest in Series B, C, and D at geometrically increasing valuations and have pushed valuation levels to where the public markets are skeptical.

jackgavigan 11y ago

I think a lot of people don't grasp the extent to which the cost of founding a tech company has fallen since the dot-com boom. I remember forking out tens of thousands of pounds for physical hardware (which then had to be hosted somewhere) and software licences for things like Oracle and Checkpoint firewall, which I then had to install, set up, admin and maintain. These days, with Google, AWS, Rackspace, Heroku, there's none of that. You can spin up a new server in minutes and scale up as required. All the technical infrastructure is already there, so you can focus on the product and market.