Hacker News Reader

Comment by dvirsky | Hacker News Reader

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.

View on HN

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)

> 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.

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.

Reply on news.ycombinator.com