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One major difference is that large parts of the internet are economically viable, and not just driven by money pumped in by VCs and IPOs. Back in 2000, there was little real consumer money going into the web's money cycle. Google didn't even have Adwords back then!

Of course there's still a large chunk of revenue today that is just recycling VC money - e.g. apps advertising in other apps, or AWS which is a huge sink of VC money from other startups. But there is a lot more "end user" money coming in from real people and companies that purchase products and services online. Even if that flow stops, the internet today is less of a ponzi scheme as a whole.

You're right that there's more legitimate internet revenue than in 2000. But most of that is going to a few established players that are decidedly post-unicorn in nature. I don't think Google is going anywhere (though Twitter might just get its fatal wound; that would be a particularly symmetrical ending, wouldn't it? Company born of the ashes of dot-com 1.0 dies in the explosion of dot-com 2.0. But, I digress.)

From what I know, most of the "unicorns" are neither profitable nor particularly modest with their spending. They are vulnerable to any sort of turn in investor sentiment, even if their revenue streams are real.

Yeah, of course, there's a real valuation bubble going on. I don't think we'll see twitter going anywhere, too - it's a good product after all. But maybe returning to its real size in terms of worth, number of employees and spending.

I find this article thoughtful: http://www.economist.com/news/briefing/21659722-tech-boom-ma...

The key is that allegedly "overvalued" companies (like Uber say)are still under private investment which has a larger appetite for risk. Whereas in the last boom, most of the speculation were fueled by publicly traded tech stocks.

Edit: Grammar.

But privately owned companies are now funded largely by private equity who are massively leveraged. They will be first to the exits. IPOs meant the pain was more spread around among stock holders. Now the pain will be more concentrated among highly indebted leveraged investors. It won't end prettily.

Yes we have funded high beta investments with high beta capital. This works great in the boom, but the unwind is a killer.

In the barren wilderness of near 0% interest, wealth shelters under leafless trees, risking lightning strikes.

Have you considered writing haikus to accompany Matt Levine's articles? I see a bright future for you.

I'm a bit new to the whole lingo of The Valley. Could you explain a little more verbosely what you meant by that sentence? What is beta capital and beta investments? What is considered high? What denotes a boom and what is an unwind? How bad is a killer unwind, what does that mean really? Again, sorry, trying to learn the fast lingo here.

Beta is a coefficient that attempts to measure an investment's likelihood to move 'with the market.' The total market has a Beta == 1 by definition, with beta ratings above 1 indicating higher volatility/sensitivity to market movements, and vice-versa. See Wikipedia for how the calculations are made.

https://en.wikipedia.org/wiki/Beta_%28finance%29

In this context, I a 'high beta investment' is likely to move with the market, ie) is dependent on some aspect of market performance. 'Beta capital' I think refers to using sources of capital that are likely to become more or less available depending on the market. I've never heard of capital sources being given beta values though, so I think this may be a finance/VC colloquialism rather than an actual calculated value.

Disclaimer: I am not a VC and may be totally wrong.

http://www.investopedia.com/terms/b/beta.asp

Sorry I was trying to be pithy :)

jkimmel explained what beta is. The Tech industry as a whole has a high beta, and the smaller loss making component (i.e unicorns) an even higher beta. I am using the term beta loosely here as most of the unicorns are not public so they don’t really have a true beta, but they do have a pseudo-beta. They are being funded by private equity funds in what are effectively private IPOs.

The problem is that private equity funds are a high beta asset class. In times of risk aversion investors pull their money out of high risk asset classes and put them into lower risk asset classes like large public companies and bonds. Relatively small changes in investor preferences can get amplified up the investment chain resulting in large swings in demand at the far end.

A hypothetical example might be 10% of investors pull their money out of private equity funds, the funds find that most of their money is locked up in illiquid assets like loss making high growth tech companies (i.e. unicorns). In order to return the 10% of capital requested they have to cut new investments by 50%. The unicorns find that they are not able to raise the money they need to expand at the pace they have been and so go on a crash program to achieving profitability. They lay off developers, cut back on outside services, and stop buying small start-ups. VCs and angel investors seeing this cut back on investing stop putting money into new firms further decreasing demand. All of this is not good if you are running (or wanting to start) a business based on rapid growth that needs lots of capital.

It is a bit misleading to label all private equity as "massively leveraged." None of the major investors in "unicorns" of VC use leverage (e.g. Uber https://www.crunchbase.com/organization/uber/investors). In fact, the typical VC fund is legally barred from using leverage in their investments.

The buyout side of the PE market is leveraged, however, the investments in those investors' portfolios typically have big balance sheets to support the debt loads (and the interest payments).

What are you considering Unicorn?

Small, early stage companies (say <100 employees, <250m valuation) that high profile investors are competing to get in on? If so, most of them are supposed to fail. The money is still small by systemic standards and so are the number of people affected. Volatility here is not dangerous, it's expected.

Or, are you talking about the Unicorns expected to go public any day now? The Ubers and AirBnBs? Thee are also kind of retrospectively Unicorns at this stage. If these guys go under, that's a problem. But, these guys aren't rely reliant on investor sentiment.

> What are you considering Unicorn?

A start-up that's worth over $1B

https://en.wikipedia.org/wiki/Unicorn_(finance)

You're right. Startups are overvalued. But they're still making money. The Indian 'unicorns' - Flipkart, Snapdeal, Ola, etc. have real revenues and customers.

Do they deserve their $1Bn valuations? Probably not. But do they have enough customers to give them $100M-$1B revenues? Yes.

If these startups were public companies, they'd still be valued at at least half of what their last Crunchbase entry says

The ones who are in much more risk are those "selling shovels in a gold rush" - i.e. companies with a revenue stream based on services and products to other start-up companies.

They have serious competition from Amazon and Uber. These are low/no margin, cash flow businesses, surviving on economies of scale. Can they survive a funding crunch? Who knows...

This is what I wonder as well. Uber has grown massively here, but it has managed to do so by essentially bribing drives with incentives and riders with steep discounts.

Once the discounts go and they have to start charging market rates, I wonder how it will affect their prices. At market rates, I don't think most customers here will choose them.

But then again, while a cab company operates at, say, 20% profit margin to break even, Uber can probably operate at 5% margin thanks to its scale.

I agree that they have real customer and service. But i think they will still go away. It is definitely a convinience that these service provides but see where Meru or Cell cab and so on... Once the volumes drops it is very difficult to continue these business. I think flipkart still does not make any money and customers are now aware that they exploit or cheat when it comes lot of home appliances and cloth. Most of the items you find on flipkart/snapdeal is priced higher just to show how much discount they give.i had purchased many items they have (non branded (which is about 75%) ) that are shown Rs 1000,50% off Rs 500 and in local market it is priced at Rs 500 and sold at Rs 475 with 5% off. But most people will chose 50% off :(. But slowly flipkart will become a price chcecking website than actual price. Don't get started on appliances and service....

An additional problem is that in a downturn, people reassess what they are willing to spend money on. Overvalued companies with revenues today may see those revenues evaporate. This also happened in the first dotcom crash.

> Google didn't even have Adwords back then!

Google didn't, but banner ads were around back then, and they were one of the main ways of making money off the Internet until the market bottomed out. DoubleClick was a pretty major player for years before Google bought them.

I remember lots of websites saying they suddenly had problems affording their hosting around 2000 because their banner ads suddenly started paying them pennies when they used to provide at least enough cash to cover the server bills.

And that started the trend of websites accepting more and more intrusive ads, because they made more money than banner ads. Pop-ups became popular because pop-ups made money and banner ads didn't.

Something of a tangent to what you said, but I see other parallels between current events and 1999 - this is what happens when unsophisticated investors gain sharemarket access for the first time.

It happened in the late 90s in the states (remember those "trading poolside" etrade ads?); it's happening now in China. Only recently you've been able to actively trade and view your portfolio on smartphone apps; it became a kind of game and more and more people piled in. I know people there who were up tens of thousands in paper gains even a month ago and could not be convinced they were basically gambling. Well, they're convinced now :-P

I suppose this is the way people learn...

Are you really blaming financial instability on "unsophisticated investors"? Not on automated, high speed traders able to liquidate stocks and topple markets in seconds? Not on reckless, fear-mongering media outlets competing for the most sensationalist headline? Not on government action/inaction affecting trillions in assets?

I think taking 1999 as a general example is a bad idea. The mechanics of how the bubble popped is not really interesting. It could have popped any number of ways.

What happened in the 90s was this. People realized the internet was a huge deal. World changing, re-writing the rules of the economy, among other major human institutions (learning, governance, etc.) They were right. 20 years later a lot has changed because of the internet. Revolutions have been driven by it. Economic titans have been created by it.

A large chunk of the blue chip economy is now made up of internet and internet compliment companies, even Apple & MSFT are in that category. Google, Alibaba. The new blue chips being generated today are internet companies and I'll wager the blue chips generated in 2030 will also be driven by this.

The investors of 1997 were not wrong about the scale of the revolution. What they were wrong about was the importance of early mover advantages. It's as if they expected the internet economy to be built behind walls constructed in their entirety by 2000. They thought they were buying shares in Google, Facebook, Alibaba & Uber, that these companies were all being founded between 95 and 98. Seems silly now. But, hindsight.

The really large scale irrational exuberance lasted a short while, just 2-3 years maybe less. That's hard to justify but it's the end of a bubble when bubble thinking is totally disconnected with the rules outside the bubble.

In that environment, it doesn't matter what bursts the bubble, it's going to burst.

Without that kind of bubble, you don't get that kind of burst. With that kind of bubble, you inevitably get that kind of burst. Investor sentiment may be fickle, but U-haul traffic jams are caused by real economics, not panicky investors.

So, who are these unicorns? Can they survive a month or twenty of panicky investors? Can they do away with investors all together? Are they reliant on investor money for revenues like all the ad selling startups of 1999?

Here they are: http://graphics.wsj.com/billion-dollar-club/

I think no matter what investors do tomorrow morning, Uber, Xiomi, AirBnB and Palantir will still pay salaries, bonuses and such. The IPO might be put off by a couple of years. If the market goes extremely nasty a lot of people who expect to buy houses with stock options will be disappointed. That might cause trouble.

U-Hauls? I don't see it.

Uber is burning through cash, without fresh investment they cannot keep going on their current course.

Perhaps, but the comparison to 1999 giants is completely nonsensical, IMO.

Uber are breaking records in building a business segment from scratch over an incredibly short span of time. They have been taking investment in order to grow fast. That's reasonable because (1) they have been able to use it to grow fast and (2) this is a business that probably tends to the winner-takes-all end of the spectrum.

Is it riskier than ExomMobile? Yes. Is it a nonsensical investment no? Will they be harmed if all finance markets dry up completely. Yes. Would it kill them? Probably not, but who knows. But, the only reason for a tootle dry-up is if the fundamentals are totally broken, and there is no reason to think they are.

Uber generates revenue. It's business model is pretty solid. Customer like it. This is nothing like the 99 companies.

   What they were wrong about was the importance of early mover advantages.

There is also a tendency to underestimate the "early mover disadvantage", if you will - if you move too early you risk ending up being little more than a detailed market study for a company that will succeed with your idea a few years later. The current wave of delivery and mobile services includes lots of ideas people were chuckling about in 2000, but now they are functioning pretty well.

I actually have a hard time coming up with an idea from the previous bubble that is not at least being tried again now with more success, or already successful.

I'm not saying someone couldn't do it, but it's not easy.

One classic mockery target is the company that was going to deliver dog food to people. (I want to say Pets.com but it seems like they were more diversified than that.) The only wrong thing about that idea was that it isn't its own company. Amazon will happily deliver you dog food, as well as all kinds of other basic staples. (They even started a new program for that lately.)

Fresh grocery delivery from local stores is probably the best example I have... it exists, we can't quite call it dead, but only in very limited areas, and is still struggling to grow. (Bear in mind that there is a strong correlation between reading HN and being in an area that has grocery delivery. :) It isn't very common.)

I'm interesting in anybody who can come up with something from 1999 that still doesn't exist at all, or has failed so utterly that nobody is trying it today.

pets.com?

I buy cat food from chewy.com. I doubt the site is worth $1B, but it does seem to be staying in business.

I think we are in for a tech market correction at some point but I hope it isn't as drastic as the one you paint! Everyone seems so starry eyed in the Bay Area but few seem to remember 2008-2009 when even Google was laying people off. I remember going from being unhappy in my job to being thankful for having one in the span of a few months when pretty much all job postings dried up.

Likewise. I moved to SF right before Lehman, to work at a startup. I had next to no money in the bank when I moved here, and an outrageous rent to pay. It was (financially) terrifying -- but at least it cut back on the douchebaggery in the city!

That said, 2009 wasn't a tech-specific downturn. New York had it far worse than us, and there were still tech companies doing their thing in SF, albeit on a much tighter budget, since the money wasn't flowing. The dot-com crash (which is essentially what I am describing) had its epicenter in SOMA, and we're a lot closer to that scenario than we are to Lehman -- outside of exports (oops, spoke too soon!) and shale oil/gas (oops, spoke too soon!), tech is the primary bright spot in our economy right now. The dumb money is flooding into tech instead of real estate this time, which means that when it does go away, the hangover is going to be pretty wicked.

"It was (financially) terrifying -- but at least it cut back on the douchebaggery in the city!"

Don't get it? Personally, I can't find anything positive about spending so much of one's income on rent? If it's crime, my car is still broken into like its 1999?

I got a new job in SV in 2008 as well. People were congratulating me that I managed to get "an" offer. Lots of places had hiring freezes back then. When did things change in the valley? Was it Q4 2010? Q1 2011? I'm genuinely curious and trying to refresh my memory. I feel like I was in a funk and then woke up one day with all this Unicorn talk. Today, housing prices in MV "seem to be" 100% more than what they were in 2010. What the heck happened? Does "Unicorns" explain all of that? Forign investors? Ultra low interest rates??

Q4 2010 feels about right to me -- that's when companies started to hire more aggressively, anyway.

In retrospect, my first "this might be insane" moment happened when techcrunch wrote the "airbnb has arrived" article, announcing that they'd grown a horn and become a unicorn. That was June 2011.

> New York had it far worse than us

Yeah, some of the banks were paying people to defer their offers to a later date.

Many unicorn valuations have already taken a hit: https://www.theinformation.com/articles/mutual-funds-show-ma...

MongoDB and Gilt Groupe (both of which happen to have been cofounded by ex-DoubleClick CEO Kevin Ryan: https://en.wikipedia.org/wiki/Kevin_P._Ryan) are specifically called out.

It isn't all bad, of course. Hastening the removal of MongoDB from our lives is my kind of silver lining.

Given that it's AGPLed, it unfortunately doesn't look like MongoDB (the joke of a DB) will be going away any time soon, even if MongoDB Inc. (the joke of a company) does.

What I'm not looking forward to is a culling of all the on-demand apps available in the Bay Area (https://www.theinformation.com/investors-asking-tough-questi...) - I've really enjoyed subsidizing convenience with VC/PE cash.

> MongoDB Inc. (the joke of a company)

I don't know; selling support contracts for a product that requires a lot of support is a pretty solid business model. SAP comes to mind.

Speaking of on-demand apps, http://ftalphaville.ft.com/2015/08/19/2137749/china-uber-but... (especially the snarky table of comparisons)

Except for Uber and a handful of other services, I really don't think the other 'on-demand' businesses are scaleable.

Open Source projects without massive communities or without backing dry up.

Plus I'm not sure MongoDB users are really able to keep the ball rolling.

MongoDB, the carrot top of data stores.

Legitimately curious: why do you feel that way?

Systemic shock is likely to be lower than you'd expect, as the Chinese stock market is on the other side of capital controls to the west and so therefore less linked.

I do agree that there's a lot of 1999-like companies around, especially people wanting to do Webvan 2.0.

The feared impact is a systemic Asian downturn crashing industrial export towards the area, which in turn would reduce demand for services. Germany in particular is currently being watched, since their industry relies on export towards Asia quite heavily these days (since European demand is overall low). If German giants start feeling the pinch, the startup world in Berlin will inevitably get hit.

From a US perspective I honestly don't know. Chinese investments are mostly one-way anyway (it's hard to take money out of China) so they shouldn't significantly impact any honest balance sheet; however, if Japan and Singapore start going under as well, things might turn ugly all around.

The scenario you paint is far from sure but possible; but why are you using to comment a crash on the Chinese stock? I hardly see a correlation. There could even be a negative correlation, if more investor money flows back from Asia to the West.

It's important to remember that companies and programmers at the top of their games can still thrive in a down economy. There will always be software to write, especially in economic sectors that aren't directly wired to startups. Take ecommerce for example, which depends on income from the whole population. The whole population never recovered from the last market downturm, yet people still need to buy stuff, and increasingly do so using apps and the web.

I just hope urban real estate doesn't go even more berserk with investors looking to park otherwise uninvestable money.

"I just hope urban real estate doesn't go even more berserk with investors looking to park otherwise uninvestable money."

I fear this too, and I have benefitted greatly from this realestate bubble.

My two hopes are: The Fed doesn't chicken out, and starts to raise interest rates. Plus, I would like to see an immediate end to foreigners buying realestate without becoming citizens first! At least residential? Right now they can pick up a phone, and buy any home.

> The economic situation is apparently so grim that some experts fear we may be in for a stretch as bad as the mid seventies.

> When Microsoft and Apple were founded.

http://paulgraham.com/badeconomy.html

So the smart investment is in U-Haul right now?

No, the smart investment is in "cash" right now.

I sat on cash since 2008 and don't feel particularly smart.

What is 8 + 8 + 8 + 8 + 8 + 8 - 48?

I don't think this is a bad time to revisit an old chinese proverb :

https://sivers.org/horses

Exciting new SV market : U-Haul startups

tag-line: "Location based, real-time, mass-aggregator content manipulation"

I know this is supposed to be facetious, but UHAL stock is actually quite attractive at current levels. They own a growing self-storage business but don't break out the profit contribution (although they do disclose the revenue contribution). Pure-play self-storage stocks like EXR/SSS/PSA trade for 18-20x 2016 TEV/EBITDA. If you give UHAL credit for that on the estimated earnings from the self-storage business, you are getting the moving business for a very undemanding valuation despite it growing 5-6% per year and with a dominant market position.

no, the smart thing is to quickly create a startup, uber for uhaul. slick app, shows all available trailer and trucks, you order and they appear in minutes, all transactions done through app.

there, go get rich (or not).

Personally I'd buy oil futures, it's trading low right now and it's almost certainly going to rebound.

It's very very likely to rebound, but there would be some question of when, and whether that happens before or after your futures contract delivery date.

I remember seeing gas at $4-5/gallon (in the northeast USA), and figuring that everyone should be happier to stock up while it's not far more expensive, and that it's bound to just keep climbing forever as we run out of global supply. Gas is selling for $2.50/gallon or so now, which doesn't mean that it won't climb again and retail for $20 or $100 a gallon in the future, but it does mean that if I bought futures in gas ten years ago for delivery now, then I would have lost of lot of money.

I think the fact that this is the top comment says a lot about the general sentiment of people working in the tech sector.

HN is not really tech worker dominated anymore.

Yes. The real worry is if this is shared by those outside the tech sector. We can all sit around speculating if the sky is going to fall in without it really mattering, but if it shared by those outside then it can become self-fulfilling.

I don't think we are in a bubble overall. I lived through 1999 and this is not that. But it's possible that there is a bubble in certain "unicorn" valuations.

The question is to what extent these unicorns are leveraged against their possibly-fictitious valuations? Can they survive a collapse of those valuations to more 'sane' levels? One way they could be leveraged is options promised to key employees, all of which would now be underwater.

Of course any company that suffers a valuation collapse and has no cash on hand is toast, since they won't be able to raise on anything other than bend-over terms. So part two of my question is how much cash the unicorns have. If they have enough to last, they'll probably be okay.

Edit:

There are some good arguments against an overall bubble here. Slide 10 with "spending per person online" is a very powerful argument against an Internet bubble but not necessarily against all possible bubble scenarios.

http://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/

But as I said above, it's possible that there are "mini-bubbles" and that these could pop destructively.

Of course there are other questions, like to what extent are VC firms exposed to China risk and to what extent will stock market losses destroy angel and VC investment? It's possible that the tech field itself is not in a bubble per se, but that it's part of a larger bubble in the global economy.

Yes watch the unicorns. It is the private equity market that will be the place that breaks first. If this dries up then things will go down hill quickly.

I actually think this will be good for the VC industry. Valuations will come back to something based on a universe that is possible and with long term investor (all those locked up limited partners) they can invest with thoughtfulness. It won’t be pretty for the angel investors though.

Not quite right. Interest rates play a larger role all this, which compared to 2000 are at historical lows. The fed might even cut, now. Negative real rates will spur speculative investments.

Where's Pud when we need him the most? Bring back fucked fuckedcompany.com!

And small, self-funded, nimble startups outside the valley eat the lunch of overstaffed and overfunded startups with high leverage and a gun to their head.

I don't think we're due another cycle yet, but every cycle just decreases the amount of money you actually need to make a go of it. Sometime over the next 5-10 years another bust would probably be an overall good thing.

Glad I paid off the mortgage.

Lucky me, I don't even have a mortgage to pay!

Oh well, I guess my family could always move into my mom's spare room.

Very exciting time for companies with good reserves. Can't wait for more engineers to start looking for jobs and the ability to lower salaries.

Which company do you belong to?

The correct question is : Which company belongs to him?

Yeah, whichever - point being he should let us know where not to send our CVs.

You forgot your signature: Mark Zuckerberg

:-)

I am SO ready for the traffic relief we got in 1999/2000 :-) But in this case it's China's market not the US market, so traffic relief in Chenzen?

Presumably it would be a challenge if your new startup was selling to people in China.

I wonder what jet.com is worth now

Well if you want a prediction for a company that's going to take a huge hit in this downturn: Tesla

They're going to deploy the Model X into a temporarily contracting electric car market, with China upside down, and with the US upper class pulling back spending due to a big drop in asset values. The gigafactory will cost vast sums yet to finish and get functional, and then it'll hit the market with weak demand for several years at least. Meanwhile Tesla's growth on the Model S, which has already stalled out, will get hammered further, pushing their already high quarterly losses even higher - all at time when raising more capital is going to be painful.

Any company that needs a lot of financing to do what they do, is going to get hurt bad through this storm.

If Tesla finds itself in position to need more capital, factories are better collateral than domain name and brand equity.

Andreesen talked about this. His specifically mentions that many many startups and tech companies are going to evaporate overnight if the capital stops and these are run by people who are basically burning cash and not knowing what they are doing. A major market correction.