A correction in startup valuations would be good news for the technology sector | Hacker News Reader

A correction in startup valuations would be good news for the technology sector

economist.com

17 pointsedward14 comments

Damn, a billion dollars is alot of money. Amazing that something can be put together in less than 5 years that is worth multiple billions of dollars. Even more surprising that you can amass a list of 100+ companies that are less than 10 years old and worth tens of billions.

I foresee alot of NFL and MLB team owners in the next 10 years.

I foresee alot of NFL and MLB team owners in the next 10 years.

Especially when that bubble bursts and the price of a major sports team comes crashing down.

Hmm - that's such a tightly controlled market, with such limited ability to disrupt the core business model (tickets + merchandising + licensing rights = cash), that I wouldn't really think of it as a bubble. What are your thoughts?

But it's sportsball! I don't like it, players are paid too much, so it must be a bubble! It's not fair that the Patriots or the Yankees are worth more than my uber-for-toilet covers! /s

Most of the revenue comes from TV contracts which have exploded in recent years as sports have become the primary reason to continue to have a cable subscription.

Netflix has almost 70 million subscribers[1], and cable-based companies, especially for sports networks like ESPN[2], are hemorrhaging subscribers.

TV contracts for sports are overvalued as a dying delivery mechanism throws all of its capital at the last stronghold it has. When cable companies shrink to the point where they can no longer afford to offer these contracts, you're going to see revenue in all the major sports sharply contract.

It's going to be fun to watch. Protracted labor disputes as revenue based CBAs are re-negotiated, mass sell-offs of franchises as sub-billionaire owners are forced out, and (perhaps most exciting) the rise of professional gaming - an industry ahead of the curve in streaming media.

[1]https://en.wikipedia.org/wiki/Netflix [2]http://www.forbes.com/sites/mattconnolly/2015/11/27/espn-dow...

The author never makes the connection (for me) in how this is good news for the technology "sector". Three over-generalized and shaky premises applies to the entire industry? Ridiculous.

There are probably multiple I-told-you-so's waiting in the wings from those who have raised large amounts of investment dollars with potentially hard-to-fathom implied valuations. The causes will be many, and lessons-learned will be summarily written. The label associated with the mythological creature is noise, not signal.

In the end, failure is a good thing in the tech sector. To quote Bill Gates, "Success is a lousy teacher. It seduces smart people into thinking they can't lose."

"A correction may teach startups to focus less on headline numbers, more on fundamentals."

To me, this is the most important sentence in the article. The amount of hand-waving in this industry is staggering. The point of a business is to create value. Most of us would interpret this as, "create value for a customer." The idea being you then capture the value you've created later on.

There are hundreds... thousands of people working in and running startups that totally miss this mark. "Create value," to them, means, "get an amazing valuation." You know those stories about hyper-competitive MBA-types? There are people around us who base their own self-worth on how much money they raise compared to their peers. I have an inkling that it's becoming a bit of an epidemic.

The article hits the nail on the head in that top-performing firms can't create enough of a signal to be heard over all of this "valuation aggression." How can they compete? Get more narcissistic and play the game everybody else is playing... now we have all the makings of a positive feedback loop. It's easy to forget fundamentals.

I welcome a correction, and I don't think it's pessimistic to do so. It's just economic homeostasis at work. Need to negate that feedback loop at some point. The competent and well-intentioned will be the most likely to survive. It's why we argue for a free market, right? :)

This is all true, but a broad-based correction (whatever that looks like) will do little to change the behavior you're mentioning.

Hand-waving? Been around forever, and it will continue to be. Hyper-competitive MBA types? Existed well before the tech industry.

These are personality traits, and while annoying, do not drive this industry.

One way I think it could be good for the tech sector is the return of reasonable angel investment. Outside of YC, angel investment has moved up the due diligence ladder, resembling something nearer to actual venture capital. When you apply VC difficulty meters to quantifying the success on return of investment, then everyone at the bottom loses. Angel investment was supposed to be high risk, high reward but now it seems even angel groups don't do actual angel investments any more. In Texas, angel deals are standardized at the 2-3 million dollar level for a valuation when they should be high 100's instead. Losing the angel syndicates and opening things up again for real, actual angel investment would mean alot more actual unicorns make it to the marketplace. Not just the ones that get high profile coverage because of educational pedigree or VC attention from sand hill.

The focus on specific dollar amounts is a red herring though. The implication of what is "reasonable" depends on whom you ask.

I think a billion dollars is reasonable when you consider that these new businesses pretty much sell either products or services to the entire world, the market is not limited to the united states.

Selling products and services all over the world doesn't add value unless you have a business model that allows you to profit from those transactions.

And what makes you assume that they will fail to profit off of their user base?

I'd say that's a far more reasonable default assumption than that a business does make a profit.

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