Dizzying Ride May Be Ending for Startups | Hacker News Reader

Dizzying Ride May Be Ending for Startups

nytimes.com

107 pointsthatcherclay122 comments

For those of you too young to remember, there were numerous articles written about the bubble bursting before it finally did in 2000-01. It wasn't a surprise that it did, just that no one knew precisely when it would.

My point is that arguing that people have said this bubble was about to burst and that it hasn't yet isn't an argument that it won't.

And some of those articles were from 1998. It can take a long time for a bubble to burst. I remember hearing about the housing bubble in 2001. It even made the front cover of the Economist in 2005.

As Keanes said "The market can stay irrational for longer than you can stay solvent".

As a rule, bubbles only burst after everybody gives up on claiming they will.

Because that's when even the bears have been stopped into longs.

And it's when the press has already moved full power into bringing more people to the market, and when people with doubts (and thus some spare money) have already invested, and people that didn't invest are feeling foolish, so they won't convince other people.

And, probably, more reasons. That's one contrary indicator that seems to be very reliable.

The housing bubble was a special case. It was more or less impossible to short until fairly late in the game (i.e. approximately the time when Burry actually did) - the market for CDS was not very liquid until synthetic CDOs came into the picture.

I'm pretty sure that it's also quite difficult to go short on non publicly traded equity.

Are there any swaps or other tools that provide a reasonable mechanism?

Exactly. When I say things that seem outrageous, and get downvoted or called out, like claiming Google is past it's peak, I'm aware it may take a couple years for public opinion or actual monetary figures to catch up. I called the antitrust investigations around Android which have been opening up this year, a couple years ago.

People are quick to downvote and say you're crazy, but often, you're just early. And it can definitely take time for public opinion (which drives things like stock) to catch up.

I have a watch in my drawer that's exactly right twice every day.

Your watch is wrong for 1438 out of 1440 minutes each day, or 99.86% of the time, assuming minute precision. I haven't made a very high percentage of bad calls yet, AFAIK. Clever one-liners that are barely relevant to the topic really don't add anything to the conversation.

If you use milliseconds you can even make that 99.99% or higher!

The point is, that watch is verifiable accurate twice daily, you can look at it and will tell you exactly the right time. It will do so 365 days per year, which is 730 times. This is a very large number of accurate predictions without being useful at all.

The only kind of useful predictions are the ones that you are prepared to back with either money or deeds. Words alone really don't cut it, in fact, with words alone your accuracy decreases.

A good way to find out where people stand on a prediction is to ask them to back that prediction with money. If you're willing to stake $500 on each of your predictions then you may still be wrong but you'll be a lot more careful with what it is exactly that you predict than if there is no downside to you for your prediction being wrong.

It's nice to see you only value opinions of people as wealthy as you are. ;)

https://en.wikipedia.org/wiki/Arthur_Schopenhauer

Spelling - it's John Maynard Keynes, not Keanes :)

The problem with this type of reasoning is that there are always analysts predicting a bear market. Articles arguing as such come out every day. So it's easy to find an article from the late 90s that said a crash is coming and feel vindicated that that person was right among so many fools. Perhaps that analyst was brilliant and his argument was flawlessly researched, but anyone can build a bubble story over rising P/E ratios. I can predict a bubble burst right now and I'll be correct at some point in the future. Saying "we're in a bubble" is pointless without an accurate prediction of the turning point.

You're misunderstanding the essential point of @hvs's comment: it's not that some people predicted the bust (though that was certainly true), it's that the articles that indicated a bust was coming helped instill a collective sense the boom couldn't last forever. This is very important because it preconditions everyone for the bust -- and when the bust comes, it accelerates stunningly quickly. Having lived through two of these (the dot-com bust and the housing bust) that is my overwhelming conclusion: that the boom goes on much longer than you could think possible, but once it turns into bust, it turns with a vengeance that you cannot imagine. And I'm not alone in this conclusion; Marc Andreessen (famously) phrased this as startups that will "vaporize"[1] -- because we are the generation that saw it first hand.

Until then (and as was said to me at the height of the dot-com bubble by someone who was then three times my age[2]): enjoy the party -- but dance close to the door!

[1] https://twitter.com/pmarca/status/515216965183754242

[2] https://twitter.com/bcantrill/status/572952707788505088

This is exactly right, bubbles are a sort of "mass hysteria" where everyone in the herd is trying to get the most for themselves. Generally to be successful you need otherwise rational people to put aside reason and to invest in the belief that things are going up. And they do, and you get these things. And when that belief is dispelled, they go elsewhere.

What isn't well spelled out is how people step out of the bubble without losing their shirts. And that is something that is going to make this one interesting. A privately held company is illiquid. So you can't really get out, you just have to sit there and watch your value deflate.

But as Sam pointed out, a lot of these investments are more like debt than equity, they have their liquidation preferences built in, to the really interesting thing will be to see if someone comes up with a creative way to switch all the people and IP from one company to a different company without triggering a "sale".

Let's imagine that DropBox creates a wholly owned subsidiary "DroppedBox" and of course gives it a non-exclusive right to use all of DropBox's IP in perpetuity for no fee (its a subsidiary right?) and then people start transferring into that new organization to work on projects there. And then after nearly everyone is working there, it has its own equipment, staff, etc. DropBox divests itself of its subsidiary and leases back access to the servers and services to support its legacy clients. And then DropBox goes chapter 7, but DroppedBox lives on with all the customers and technology and people of the original and none of the onerous liquidation clauses that made it impossible for them to so public or move freely in the financial markets.

When the bubble has started deflating rapidly, that is the kind of behavior you can expect. Smart people skirting the edge of prudence to avoid being the ones who take the loss.

I'm pretty sure the chapter 7 won't fly because of illegitimate removal of resources from the company knowing you're headed for chapter 7.

Eh? What're you talking about?

Months ago, we started a re-org to streamline our management and to help focus on our core competencies. We wanted to put more wood behind fewer arrows, and so divested ourselves of our legacy customers and technology so we could focus on our growth strengths.

Now, today, surely, the growth numbers haven't been there, but we wish all the best to our former coworkers and business assets at DroppedBox. ;)

As long as you still own DroppedBox, no problem. But if you divest DroppedBox you'd better hope there isn't any dispute once that chapter 7 hits about the price you made for it and/or any ties of investors and or principals from 'DropBox' with those of 'DroppedBox'.

Really, bankruptcy fraud is nothing to joke about, it is a very common trick to try to remove assets from a company that is on the skids but it usually does not end well.

If you divest the whole then that's perfectly possible but you're going to be under a microscope if you declare bankruptcy a very short time later.

See also 'clawback'.

I completely agree with you that using bankruptcy to defraud your investors, but as @angersock points out quite humourously, there are people who make their money just on the inside of "perfectly legal". Look at some of the more creative use of the bankruptcy code at Onlive.

And since there are millions, perhaps billions of dollars worth of company at play here, the top people in this game get involved. And that is what makes it interesting. Sadly much of it won't happen in public because they are private companies.

There are even tons of people that make money just outside of perfectly legal and lots of them well into illegal! That doesn't make any of that ok though and you're definitely inviting scrutiny with such actions.

It is definitely interesting but as someone who helped someone else deal with the fall-out from a bankruptcy where the management made use of these 'technicalities' to defraud creditors I can tell you that in some cases it can end very bad for the people pulling those tricks.

In that case the sale of assets happened months before the bankruptcy but the fact that they could have reasonably known it was coming was all it took to get a judge to nail them to a tree. I'm pretty sure that if there are billions at stake that the 'smartest boys in the room' will have a trick or two up their sleeve that they can defend is entirely legal (even if at least morally bankrupt) but even being that smart doesn't always work out well and people end in jail.

We can only hope. I'm a big fan of punishing people who abuse the system in that way, but I prefer taking their gains and redistributing it to the people they took from rather than putting them in jail. I'd much rather have them scraping by trying to make ends meet at a transient hotel than living in jail cell at tax payer expense.

You basically just described what Tribune Company did over the last few years. 8 years ago they owned the Chicago Cubs, a bunch of profitable TV stations, and a bunch of newspapers that were in big trouble.

They sold the Cubs and created two new companies, Tribune Media and Tribune Publishing. Tribune Media got all the TV stations and holdings in internet companies. Tribune Publishing consists of all the newspapers.

The best part is that Tribune Media kept Tribune Tower in Chicago, home of the newspaper, and makes Tribune Publishing lease it from them.

A good strategy as an analyst is to predict a downturn coming. You can be wrong for six or seven years, and then if/when there is a downturn you say, "I told you so!"

The thing is though, there are just as many people saying "it's different this time". The person predicting a downturn will inevitably be right. The other person... not so much :).

There will inevitably be a downturn. When people say "it's different this time" they don't mean that there can never be a downturn, they mean that when it happens can't be predicted by looking at past events. And they mean that when it happens it will be different--perhaps not as bad.

There is a huge difference between this time and last time. The internet is much more mature for one. People depend on web apps now in a way that's not going to change just because the market swings.

Another thing that's different is that people spend more time on software distractions when the economy tanks, not less, so a global downturn is likely to drive consumer spending away from the real world into the virtual.

There is a huge difference between this time and last time.

Is it, though?

Instead of overvalued companies based on the theory of "put it on the internet", we have overvalued companies based on the theory of "put it on the internet and get a billion users". Companies that, by and large, struggle to break even without telling a compelling story for how they'll monetize (let alone achieve or retain) that huge projected subscriber base.

For those that have a semi-believable revenue model (e.g., Uber), they make their money as rentiers, trying to scrape money off the top by matchmaking between actual service providers and customers... and in a lot of cases, they do so while violating labour laws vis a vis contractors (and in a lot of cases, regulations in the industry they're attempting to disrupt).

I know the Pollyanna's around here want to insist that this time is different. That these companies have fundamentals now! Except, I don't see it. It looks like the same billion dollar gimmicks to me, just a decade and a half further down the road.

> Companies that, by and large, struggle to break even without telling a compelling story for how they'll monetize (let alone achieve or retain) that huge projected subscriber base.

The companies we're talking about in this discussion, late-stage (Series D and on) startups, already have a large and quickly growing user base. And, yes, most of them have real revenue.

There are, of course, some that don't. Take Snapchat for example. Is it really that difficult to see how Snapchat will monetize?

Everyone worried about whether or not Facebook would ever be able to monetize, but it brought in $4 Billion in revenue last quarter. Last quarter! Twitter isn't growing as quickly as some would like (only 4 million new users per quarter) and has its own share of problems, but it's still on track to bring in ~$2 Billion in revenue this year. It lowered revenue projections for the last quarter of 2015... to $650-710 million.

You mention Uber: Uber's gross revenue is expected to hit a run rate of about $10 billion by the end of next year. Even with Uber only taking 20% (=$2B of that), that's $2 billion in revenue. And they're still growing 300% year over year. That is a holy shit number.

So, yes, there is objectively a big difference between this time and last time.

Could those companies be overvalued? Certainly. Do they need to start bringing in more profit? Yes, but even the most bearish investors admit that takes a lot of time. There may even be a downturn in the market, but it is not going to be 2000 all over again, when every tech company with the exception of a couple vanishes overnight into thin air.

Everyone worried about whether or not Facebook would ever be able to monetize, but it brought in $4 Billion in revenue last quarter. Last quarter!

So let's do a little math. From this:

http://www.forbes.com/sites/kathleenchaykowski/2015/04/22/fa...

We see 1.44 billion monthly active users. That translates to about $12 a year per user.

Think about that.

Now think about the potential growth curve.

And you're telling me I should be impressed?

Now, if they can find a way to continue to push that per-user revenue number up, great, let's see how that goes. But their numbers today only show great promise.

Meanwhile, using Facebook as your benchmark is incredibly disingenuous. Of all the internet companies today, they have the largest subscriber base, the greatest retention, and the greatest daily active engagement.

Snapchat doesn't come close.

Twitter isn't growing as quickly as some would like (only 4 million new users per quarter) and has its own share of problems, but it's still on track to bring in ~$2 Billion in revenue this year.

Twitter can't break even. They report 320MM monthly active users which means they're pulling in about $7 per user per year in revenues, less than Facebook, and with a growth curve that's even more alarming.

Again, you're not seeing the forest for the trees, here.

Uber's gross revenue is expected to hit a run rate of about $10 billion by the end of next year.

And, mark my words, in 5 years they will be shut down by regulators and class action lawsuits as folks realize they're making $10B a year on the backs of illegal contract workers.

> We see 1.44 billion monthly active users. That translates to about $12 a year per user.

No, the $4 Billion in revenue was last quarter. In other words $48/user annually, not to mention the huge growth of even that number. That's why its market cap is ~$300 Billion.

> Twitter can't break even. They report 320MM monthly active users which means they're pulling in about $7 per user per year in revenues, less than Facebook, and with a growth curve that's even more alarming.

Twitter could fire 90% of its staff today and keep bringing in that same amount of revenue, being wildly profitable. But it doesn't because it's still trying to grow quickly. It also just barely started turning on revenue.

You're actually the one thinking about this the wrong way. Profit alone is just a bad way to value quickly growing companies, as it never carries all of the nuance (see Amazon - http://a16z.com/2014/09/05/why-amazon-has-no-profits-and-why...).

You're also not appreciating the growth. There's a reason PG says "startups = growth"; because growing 25% month over month compounds and gets really big really fast.

> And, mark my words, in 5 years [uber] will be shut down by regulators and class action lawsuits as folks realize they're making $10B a year on the backs of illegal contract workers.

In most cities they're not "illegal contract workers" even today. I'd bet good money that in 5 years few, if any cities, would call Uber drivers "illegal contract workers."

No, the $4 Billion in revenue was last quarter. In other words $48/user annually, not to mention the huge growth of even that number. That's why its market cap is ~$300 Billion.

Yup, that's my bad, sorry.

That said, unless they can continue to grow that number, their trajectory is based on subscriber growth, and that must necessarily flatten out.

Profit alone is just a bad way to value quickly growing companies

Agreed.

But a company that can't not lose money is not well positioned.

And the fact that Twitter's growth trajectory has flattened out only makes me more nervous.

In most cities they're not "illegal contract workers" even today

You're right.

They're illegal across the country according to federal labor regulations.

Uber and its ilk are almost certainly illegally classifying their workforce as contractors when they should be employees. It's actually a really easy line to cross, and if you ever work as an independent contractor, it's worth familiarizing yourself with the regulations as it obviously has significant tax implications, among other things.

This is the basis for this class action: http://uberlawsuit.com/

When that hammer comes down, Uber's profits will evaporate. They're also very likely to face similar legal action in other countries with similar labor protections (e.g. Canada).

And that's ignoring their violating taxi regulations all over the place (though I admit I have more sympathy for them in that regard, as I generally view those regulations as anti-competitive).

Sure ... but ... what about the fact that consumers fucking LOVE to use Uber & Lyft? It's like marijuana or potato chips made of heroin. People can't get enough of that shit.

How popular will the politicians (e.g. state attorney generals) who push to destroy those businesses be with consumers/voters?

We don't have to look around very hard to see laws/regulations that go unenforced because politicians/regulators fear voter backlash.

Sure ... but ... what about the fact that consumers fucking LOVE to use Uber & Lyft?

People also LOVE cheap clothes and electronics.

And yet, we all seem to generally agree that sweatshops and child labour are maybe not worth it just to get a novelty t-shirt or an iPhone at low low prices.

How popular will the politicians (e.g. state attorney generals) who push to destroy those businesses be with consumers/voters?

I don't think you understand.

These laws already exist.

If Uber loses, and odds are pretty damn good they will, they'll lose in the courts. This doesn't require an attorney general or a politician. All this requires is a willing lawyer to launch a class action, which has already happened, and a court system willing to enforce the law even if it's unpopular. Boy, I can't imagine when that last happened...

The only option, if they want to preserve their existing business model, is for Uber would then be to lobby the government to turn back the very labor laws that protect everyone from exploitation by their employers, while very fundamentally changing a key part of the tax code.

All to ensure folks can get a cheap car ride.

Good luck with that.

In reality, the solution will almost certainly be for Uber to allow drivers to set their own rates, which might clear them (maybe... see https://www.irs.gov/Businesses/Small-Businesses-&-Self-Emplo...). That'll almost certainly cause rate inflation and destroy one of Uber's key competitive advantages. It could also lead to uncontrolled surge pricing as drivers would naturally inflate their rates during rush periods.

Could they survive that? Maybe. Assuming the taxi regulations don't kill them, as we're seeing overseas.

But sweatshops are often where our cheap clothes and electronics actually come from right now despite everyone's agreement that they're bad.

Also, I'm not sure what would make you think that I do not understand that these laws already exist. I mentioned a state attorney general precisely because an attorney general enforces/ignores existing laws.

But, sure, you make an excellent point about the very real lawsuits which have already been filed.

Reading the rest of your response, your assessment seems to be that maybe Uber can survive. That's what I think too.

It's also not an argument that it will. I'm not saying it won't, but I find flaw with the argument that because it happened before, it will necessarily happen again, in a substantially similar way. Generals are always preparing to fight the last war.

Something will probably happen, but I don't think it's reasonable to expect that looking at 2000 will teach us much about that something. Silicon Valley is a substantially different place today from what it was during the dot-com years. While not all (few, if any) unicorns are financially healthy in any traditional sense, they all have plausible business plans, ie. ones that involves booking actual revenue from delivering actual services to actual customers for actual money. The dot-com victims almost comically did not. The investors in the valley today are sophisticated and institutional, all weathered through the dot-com bust, not mom-and-pops -- much less sensitive to small bumps and panics, again a very different environment from 2000.

> arguing that people have said this bubble was about to burst and that it hasn't yet isn't an argument that it won't.

The reverse isn't an argument, either.

There's essentially zero information content in a claim that "the bubble" will burst sometime between now and the heat death of the universe.

"Unicorns Dropping Like Flies: First Dropbox; Then Square; Now Fidelity Cuts Snapchat Valuation By 25%" - Zero Hedge

https://news.ycombinator.com/item?id=10546947

* Dropbox was warned by its investment bankers that it would be unable to go public at a valuation anywhere near close to what its last private round (which had most recently risen to $10 billion from $4 billion a year ago) valued it at.

* Square, last private valuation of $6bn, $3.9bn at IPO

* Snapchat, written down 25% by Fidelity ($31 -> $23)

* Combined "valuation" of all US unicorns is $486 billion. Their combined profit? $0.

The cresting wave of immense private valuations is crashing onto the rocky shore of public markets. Funding is going to shrivel.

There's a difference between a correction in the market (or more specifically a correction with regard to a few companies) and a bursting of a bubble.

Tech investment volume today is much, much smaller than it was in the 2000s, despite the fact that the number of people on the Internet has grown by two orders of magnitude. Actually the funding per person online has remained almost on a flat line from 2002 to today.

There's some frothiness in the late-stage market still, and but those are the companies that are being corrected. That's largely happening because none of them are IPOing, and with interest rates being practically 0 investors have to put their money somewhere. So they build some losses into a late-stage portfolio theory instead of distributing it in the S&P 500.

Some of those companies will end up with lower valuations, but that's always happened, and that's built into the IPO model. In other words, even if several late-stage "unicorns" completely failed (and some undoubtedly will), that doesn't mean that the entirety of tech will be viewed as worthless. The only way it is worthless is if the companies won't eventually generate profits. Last time that was largely the case because the unit economics were bad. This time we see real revenue coming through and the unit economics are there for most companies.

I remember all of HN being positive that Instagram selling for $1B to Facebook was the height of the bubble. But now Instagram is returning >$500m in revenue to Facebook per year. Turns out it was a very, very savvy purchase.

All of the current tech "unicorns" combined are worth 2/3 of Microsoft. You can make the argument that owning all of Twitter, Amazon, Square, Snapchat, Dropbox, Uber, Zenefits, etc. would be worse than owning 2/3 of Microsoft, but I could definitely see the other side of that argument, as well.

Much investment is in private equity anyway, so the market should be fine and dandy

profit != success of a company. some of the best companies in the world run a deficit and its a smart thing to do. https://medium.com/@girlziplocked/why-amazon-isn-t-a-fucking.... so the fact that they have no profit means nothing.

Isn't there a growing murmur that these "private valuations" are in some ways imaginary as when you look at the terms of many rounds of funding you find deals which are less like equity and more like debt?

  Snapchat, written down 25% by Fidelity ($31 -> $23)

Unfortunately that's probably not the correct way to estimate Snapchat's value based on Fidelity's assessment. Since Fidelity probably has a liquidation preference—and a recent one, at that—the implied new valuation of the company is much lower.

Depending, of course, on a whole bunch of details about the investment and Fidelity's assessment that I personally don't know.

Sure, but I bet you there weren't any articles in 1993 about a bubble that ultimately burst in 2000. The insanity with the current argument for a bubble is that we have people who have been screaming "bubble!" since 2006, starting with the myspace and youtube acquisitions. At some point predicting that there is a bubble loses meaning if the prediction doesn't have a time constraint(ultimately, all companies and people die.)

Strongly, strongly, strongly disagree with this description. This is a completely unfalsifiable definition of a bubble.

On December 5, 1996 Alan Greenspan first uttered the phrase "irrational exuberance". Some people amazingly credit him with "calling the bubble" for this statement. The Nasdaq 100 closed at 835.80 that day, the lowest price the Nasdaq 100 has closed once the bubble "crashed" was at 804.64 on October 7, 2002.

This is the problem with "bubble watchers". Yes, it's possible for prices to get too high and for companies to trade at too high of valuations (or so it seems) and late 1990s had plenty of that. However, many people are constantly calling bubbles, people were calling the S&P 500 a bubble in this current rally back at 1200 and 1300. Could it go back down? Certainly, but that doesn't make the people calling it a bubble at 1200 correct if it drops from 2100 to 1800.

One of my favorite jokes about the subject: Bubble watchers have correctly predicted 9 of the last 2 bubbles.

Btw, for those interested in a sane economist talking about bubbles I highly highly recommend Scott Sumner. Here's a good old post of his on the subject:

http://www.themoneyillusion.com/?p=8063

Sam Altman has already explained why late-stage private valuations -- but not earlier-stage or public valuations -- are bubble-like right now:

>To summarize: there does not appear to be a tech bubble in the public markets. There does not appear to be a bubble in early or mid stages of the private markets. There does appear to be a bubble in the late-stage private companies, but that’s because people are misunderstanding these financial instruments as equity. If you reclassify those rounds as debt, then it gets hard to say where exactly the bubble is.

>At some point, I expect LPs to realize that buying debt in late-stage tech companies is not what they signed up for, and then prices in late-stage private companies will appear to correct. And I think that the entire public market is likely to go down—perhaps substantially—when interest rates materially move up, though that may be a long time away. But I expect public tech companies are likely to trade with the rest of the market and not underperform.

http://blog.samaltman.com/the-tech-bust-of-2015

There is a bubble at the seed stage. There are tons of people (accredited investors) investing that stage and tons of incubators/accelerators to help introduce those startups to those investors.

Platforms like Angel list are helping fund allot more companies at the seed stage by having syndicates.

Now even non-accredited investors will be able to invest in startups[1]. So the seed stage is bubbling up.

http://www.usnews.com/news/business/articles/2015/10/30/sec-...

It's not really possible for there to be a bubble at the seed stage -- valuations at that stage are "paper" values because there's zero liquidity. Companies also tend not to stay in the seed stage for long enough to cause an asset bubble; they are either able to acquire follow-on funding (at which point they're no longer a "seed" company) or they aren't and they disappear.

The seed stage is increasingly crowded, but IMO that's a good thing.

Interesting point re: not staying at the seed stage long enough for a bubble. What we're seeing instead is multiple preferences layered on in subsequent rounds.

So seed/A investors think they're doing well when the company raises B,C,D,E rounds at higher valuations, when in fact many will be washed out when the company eventually IPOs or is acquired at a lower valuation than their last venture round.

That's what I would expect -- the more crowded the market, the less leverage you have, and the lower your eventual payoff.

There are lots of people willing to provide companies with small amounts of money in exchange for a gigantic potential payoff. As payoffs decrease, lenders will exit the market.

It's also worth noting that obtaining Series A Funding[1] is more difficult than ever. The bubble is not with growth stage companies, it's with massive Unicorns that earn 0 dollars.

1. http://firstround.com/review/what-the-seed-funding-boom-mean...

I think "argued" is more correct than "explained." Not everything sama says is guaranteed to be correct.

What I found interesting about this article is that these are mutual funds - i.e. public markets. I had not realized that "unicorns" were being invested in by funds available to the small investor.

It's time for a new term: a "Pegasus" (a different kind of mythical horse than a unicorn):

https://twitter.com/jgrahamc/status/658702918200250368

    Pegasus (n)
    1. Mythical winged horse;
    2. Silicon Valley 'unicorn' with high gross margin.
       i.e. one that might actually take off.

A pegasus doesn't have a horn. A flying unicorn is usually called an "alicorn" but also pegacorn, unisus, or unipeg. /pedantic

Maybe jgrahamc already edited his comment, but I don't see that he ever said a pegasus had a horn.

On a separate matter, I would prefer to not use either term, but people love these convenient categories.

I was inferring from "unicorn... that might actually take off."

I didn't edit it.

To be far more pedantic, Pegasus is the name of a single flying horse, it's not the name for horses with wings.

Obligatory Futurama reference:

  You are technically correct, the best kind
  of correct

:-)

And heaping on, Pegasus was not part of a breed or species. He was a one-off, the offspring of Poseidon and Medusa. He had a brother, Chrysaor, a man.

God, "unicorn" is already stupid enough.

Fight fire with fire.

On the bright side, if you found that annoying, I've heard rhinos as being unicorns that became hopelessly obese and are dying out, with the fairly obvious business analogies. They're not dead unicorns because they're not dead. They're on the way though! And until the seemingly inevitable bankruptcy or shutdown, they're living rhinos. They'll be dead unicorns unless something turns around, sure. Or I guess you could call them dead rhinos?

A quick internet search of rhino and bubble and stuff like that has found nothing, I've only heard this verbally a couple times.

"Do you have a contingency plan for rolling your your (whatever) off (whatever)? They're a rhino, you know about that, right?"

That analogy would make sense, except for the fact that rhinos are real and very intimidating. Shouldn't a rhino be a unicorn that has survived an IPO or something?

I'd suggest Icarus.

Flying high on wings of wax - until the sun gets too hot.

No, the new term is "Cockroach" - https://medium.com/@caterina/the-age-of-the-cockroach-5a720d...

Fidelity has just marked its shares down from $30.72 at the end of June to $22.91 for the end of September.

To be fair, I think these markdowns have more to do with who is investing than the companies themselves.

VC's do portfolio valuations much less frequently than mutual funds, PE firms or hedge funds do and they give less negative scrutiny to the valuation than the aforementioned firms do, the reason for this....

... is VC firm's typically don't allow redemptions on monthly intervals which means they can keep an unrealistic valuation for longer where as Hedge funds, PE firms and mutual funds, who typically allow monthly redemption, need to properly value each holding at the end of each month.

I mean if you are a VC, do you care if you don't write down Snap-chat at the end of the month, you really have no incentive to do so?

You get paid on a quarterly basis on the size of your portfolio, why mark it down until you are absolutely certain that it needs to be marked down, this point is usually not until you actually go to sell, be it IPO or private equity deal.

However, if you are a hedge fund and someone wants to redeem their assets, you want to make sure you value Snap-chat for what you can realistically sell if for as that's essentially what you are doing when you allow someone to redeem their funds from your firm.

With people pulling money out of hedge funds, and PE firms on a monthly basis, this makes you have to pay attention to valuations on a much more granular time frame than historically VC firms would have.

Thanks for the explanation of the different incentive structures for VCs vs. mutual/hedge funds.

Can you explain where large mutual funds get the money that they invest in the late rounds of these private companies? Is it mostly institutional/pension/retirement funds?

Who is losing when Fidelity writes down a late stage investment in a private company? I'm assuming the fund manager, but do the investors lose as well, or will they only lose if it causes a panic/bank rush with all investors clamoring to withdraw from the fund asap?

No PE firms allow quarterly redemptions in traditional fund vehicles. PE firms and VC firms use precisely the same legal structure and are both generally required to value assets and report to partners on a quarterly basis. Some PE larger PE firms will have quarterly/semi-annual audits, but most PE and VC firms audit their financial statements (and thus valuations) annually.

Also note that most funds calculate fees on committed capital during the investment period (typically five years) and subsequently on invested cost, not fair value, afterword. Therefore the portfolio valuation has little to do with management fee calculations.

If Fidelity just did a 25% write down on SnapChat on the most senior portion of a $600m investment round, and assuming that Fidelity has at least a 1x liquidity pref/ratchet, then SnapChat is now valued at $462M floor, not $15 billion.

What about other investors who also have liquidity preferences?

The latest investment/liquidity pref is usually satisfied first.

Peter Gregory is definitely, posthumously, very disappointed in SnapChat.

I don't follow. Can you explain in more detail?

If they are guaranteed to at least get their money back AND they did a 25% write down, then they are assuming that if there was a liquidity event tomorrow, that that would only get back $0.75 on the dollar, and others less senior get $0. This means that SnapChats valuation mark-to-market price is only $462M because that is all they feel that could be recouped.

I always get scared when "delivery" based start-ups get hot. Reminds me of Kozmo, UrbanFetch, WebVan, Askville...

Everyone in this thread should check out E-Dreams.

Just like Postmates

If I may speculate, it seems like the end result of this situation will be that in the future, startups will avoid taking money from mutual funds or anyone else who must attempt to accurately value their holdings publicly, whenever possible.

If they have a choice. The situation where startups are spoiled for choice in investors will not continue forever.

Frankly, the fact that public valuations (of any kind - see Square's IPO level) are lower than private ones should be ringing alarm bells all over, not be dismissed.

That preference would reduce the available supply of startup investment money, and thus valuations.

The only people that don't see a bubble at the moment are the people inside the bubbles.

If your business has real revenue and real profit then there isn't much to worry about. If your business is valued on "hype" and theoretical valuations then you have reason to worry.

I'm so glad I work at a company right now that has never taken funding and is legitimately profitable. Hiring and expansion have been hard when you don't have access to far more cash than you could ever generate yourself, but it's hard to put a number on knowing that you won't be affected much by an industry downturn (doubly so since none of our customers are software companies).

In fact everybody else's downturn will be your opportunity.

Yup. The only debt we have is a rotating LOC for physical inventory (we ship hard goods) of which we have 2x in cash on hand, but obviously debt service of inventory is more efficient than cash service of inventory.

I read HN and other sites and I am just in shock of the fact people are creating... basically nothing sustainable and hoping it will somehow magically become sustainable? It boggles the mind.

Even if a business has real revenue and real profit, there is still danger depending on the source of that revenue and profit. If there's a large downturn in the startup world, b2b/SaaS companies which profit from startups will suffer too. What will the effect to github/pagerduty be if 3/4ths of startups vaporize? "Not good", I would wager.

Ultimately, it's about the source of the money. SaaS companies are higher up the "trophic chain" than than the startups that pay for their service, but VC money can still represent a substantial portion of their revenue, just passed through an intermediate company first.

What we're seeing an issue with valuations and investments. TechCrunch just did a really good piece on how a raise of $150M gave a $6B valuation with a preference that guaranteed a 20% return on investment to the Series E investors (at the cost to the early investors).

http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and...

So what we're seeing is that people are starting to re-think valuations in the face of these preferences.

While things might wind up bad for the next round of unicorns, things are likely to be better for startups overall once the trend of "To the moon!" dies down just slightly. Hopefully we can return to a world where an acquisition isn't seen as a failure.

I was doing a paid internship at Intel in 1999 out in Portland, OR. I remember seeing huge numbers of new hires every week. I met people out in Portland that were hired to due VB programming with no programming experience. A few months later, the music stopped and there were too few chairs to go around. I always think of the Austrian business cycle when I see such huge upswings in things

I was also at Intel in Hillsboro on a paid internship at this time. I recall a ton of projects across so many areas, with loose management. There was a guy in a QA group I worked in who just day traded.

I was in the Product Development Group working on the Itanium chipset at the time. I remember an older Engineer in the group that had written his own stock trading book. He only lost a dollar per share when the market went from 72 to 18

I think there are far too many startups that focus solely on growth/reach. Build a sustainable business: revenue and more importantly gross margin are the key metrics that need to be thought about. While vcs want fast growth, it is often not in the best interest of common stockholders to jet ahead at the paces many of these companies go.

It would be a nice change if focus was on companies that produced a product or service with long term revenue prospects, instead of short term wildly high margins.

The current state of highly educated people looking for get rich quick schemes (unicorns) is tiresome.

I actually think the opposite, that we are in a period of history where all the software (and arguably businesses) people use day to day go from being crap to fantastic.

A gold rush for good startups I think.

The returns from sitting the right group of people in a room and getting them to make doing something a few orders of magnitude better than it was before is always going to be fantastic.

Modern capitalism has a strong basis on theories of social darwinism; evolution only ever does things well enough to get by.

I think your theory and the one outlined in the original post are not mutually exclusive. There will be a culling of the chaff.

Meta: why on earth is this submission being flagged off the frontpage ?

It's an interesting time to be a year from graduation in CS, that's for sure.

Maybe the folks beating the STEM drum will finally shut up when CS sees employment comparable to underwater basket weaving.

That assumes that CS grads will look for work exclusively in a technology role. The skill set of a CS major is applicable to roles well outside programming. Management consulting and financial services for instance recruit CS and EE grads by the bucket load.

CS employment in startups may decrease in the event of a startup bust, but mature companies like Apple, Amazon, Microsoft, Google, IBM etc. aren't likely to drastically change their hiring patterns unless their own business have been materially impacted.

Oh sure, people will still hire programmers, but I expect conditions to worsen dramatically. The rockstar making a $100k+ salary in a $1000 chair on top-of-the-line hardware with free meals at the office experience is very much an artifact of the startup bubble. Mature tech companies offer that to stay competitive, but I expect we'll see a return to salaries closer to $50k in grey cubicle Pointy Haired Boss environments when the bubble bursts.

Whenever I hear the term "unicorn", I think of the Squatty Potty TV ads (they're funny!)

Oh thank god, finally. Maybe I'll be able to afford an apartment again.

My thoughts right now are: how will this reflect on Atlassian IPO?

> Dizzying Ride May Be Ending for Startups

> may tap the breaks

Next bubble burst is close.

the sky is falling...

... on our heads :o))

Can't help a smile: Our pun is downvoted to be the least helpful on this page.

Now look at the top rated contribution. A few more words but essentially the same meaning.

Its just that the original nytimes article is so ridiculous, that it deserves nothing but making fun of it.

Sarcasm and subtle humor has always been problematic on the internets. It's just that on Hacker News you'd expect that most people are more clued and would appreciate the playful/funny variety, but noooo they tend to take it quite literally.

Looking at India, this can be conflated with a global level ending of the dizzying ride. [0] gives a good overview of this. In short, the free lunch is now over and people are asking for results. I am sure it has a lot to do also at an economic level with the Fed now talking of tightening- that means interest rates are headed higher and there is more aversion to risk. I am not an economist, so others might have different opinions.

[0] https://goo.gl/9MfjBa

I think a lot of companies who raised seed funding prior to 2010 or 2012 did so at excessively low valuations, and then tried to make up for it later by raising at excessively high valuations once they hit. The 'bubble' over the last couple years that's driven up pre-seed valuations should actually make the current crop of startups more stable over the long run.

Also, the decaying state of physical infrastructure in the U.S. is only going to drive more people to spend time on the Internet, where network effects are only getting exponentially more powerful as new networks are getting built on top of existing networks. These days a social startup that's "only growing as fast as Facebook" might not even be able to successfully raise a seed round. There might be a cyclical downturn, but none of the underlying trends in society point to tech being a bad investment over the longterm.

The fact that our roads are crappy is going to turn people into shut-ins?

Basically, yes. I think better examples though would be:

- A rapid increase in states requiring HS students to complete some of their classes online in order to save money.

- Folks being unable to get treatment for all sorts of health conditions and mental illnesses.

- The prison system not providing adequate job training or rehabilitation.

- The costs of college education increasing while the quality of that education decreases.

Are Internet startups the best way to solve all of these problems? Probably not. But in each of these cases startups are going to rake in the bulk of the money, if only because they're going to be the only game in town.

Thanks to complete gridlock at the federal level and general incompetence at the state level, sandhill road has effectively become the new congress. And like it or not, this probably isn't going to change anytime soon.

And as for your example with the roads, to quote @noUpside on Twitter the other day, "SF specializes in creating companies that are essentially 'New York as a Service' bc its infrastructure sucks." (https://twitter.com/noUpside/status/659094021151789056)

This is some wild speculation.

"SF specializes in creating companies that are essentially 'New York as a Service' bc its infrastructure sucks."

I've also heard the "mom" variation. I've never heard "mom" equated with "New York" but it is insightful in its own strange way.

So they've figured out how to mometize new revenue streams, eh...

(I'll show myself out.)

Ok. Yes.

But when will San Francisco/San Jose/Palo Alto go back to being simple, boring cities with high real estate prices that are no longer at the center of the global software hurricane?

it's ending again? Wasn't it supposed to end the year before, and the year before that, and the year before that? When is google going to just drop news.google.com and have an algorithm write the same stories over every year?

Next up: The next [pick top product] killer! you won't believe how [pick new or underdog product] is going to completely replace [pick top product] due to it's [pick random feature in [pick new or underdog product]]

Funny, folks used the same line of reasoning prior to the real estate bubble popping in 2007-2008.

But, that doesn't stop the Pollyanna's...

If news like this had any predictive value then journalists would be the richest group in the world.

This is a sad and futile argument.

You're also trusting too much in Twitter tech celebrities.

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