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.
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!
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.
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. ;)
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'.
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.
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.
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.
As Keanes said "The market can stay irrational for longer than you can stay solvent".
And, probably, more reasons. That's one contrary indicator that seems to be very reliable.
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.
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.
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.
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.
Snapchat, written down 25% by Fidelity ($31 -> $23)
Depending, of course, on a whole bunch of details about the investment and Fidelity's assessment that I personally don't know.
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:
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.
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.
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.
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.
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."
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).
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.
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.
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.
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.
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.