2016. The year we welcome squirrels – Unicorn Bubble | Hacker News Reader

2016. The year we welcome squirrels – Unicorn Bubble

filipmaertens.com

71 pointsdexterm24 comments

D grade.

Too many mixed metaphors, not enough copy-editing, and he never even defines what he means by "squirrel". The author uses a lot of words to make a very simple point: many unicorn valuations are bullshit, and we should pity the company founders and early-hires who are paying tax on stock options as if these bullshit valuations were real.

Agreed. If by 'squirrel' the author means a business where fundamentals matter, he's trying to re-coin an existing term, RABBIT

Real

Actual

Business

Building

Interesting

Tech

Founders have options?

Perhaps squirrels find and hoard nuts? I don't know which current unicorns may be trying it, but the much older example that springs to mind is AOL-Time Warner.

All the YCombinator companies are going to deflate.

AirBnB - https://news.ycombinator.com/item?id=10913151

Stripe - http://venturebeat.com/2015/09/17/paypals-braintree-is-now-l.... Braintree was bought only 2 years ago for $800 million. 6x less than Stripe's valuation.

Dropbox - http://www.theverge.com/2015/9/22/9372563/dropbox-really-is-.... They are bragging about the number of users, but I bet many of these 'users' are fake accounts made to get free space from referrals and never used again. Plus, there is so much direct and indirect competition. Their privacy policy is also very bad.

Zenefits - http://fortune.com/2015/11/11/snapchat-isnt-the-only-startup...

Stripe is solid but others I have questions about.

> Braintree was bought only 2 years ago for $800 million. 6x less than Stripe's valuation.

Ask around: Braintree's product isn't as good as Stripe's.

Like many others, I think that tech valuations are quite frothy, but this article is hyperbolic.

"Selling and buying stock with foreknowledge, manipulating the company valuation at will, or simply witholding information from others."

First of all, this isn't a complete sentence. Second, this article is very light on supporting evidence.

"But of course, anyone holding preferred shares or enjoying the protection of a hefty severance package, as most outside CEOs do, walk away clean."

How many CEOs of unicorns are outside CEOs with hefty severance packages in terms of cash and preferred shares?

"Taking a step back – doesn’t this situation feel a lot like Enron?"

Nope, not really.

"Just like the legal definition of obscenity, nobody can describe why we’re in a bubble, but everyone can tell you 'I know it when I see it.'"

With pornography, this is a reasonable claim (though of course there are debatable cases). With markets, it's actually notoriously hard know when we are in a bubble. Many otherwise very successful traders have lost a lot of money on false positives.

> Many otherwise very successful traders have lost a lot of money on false positives.

I think you are confusing false positives for "this is a bubble" and false positives for "this bubble is about to burst".

Or maybe it's just a very radical definition of "losing money": is it really lost money when an investor leaves an already successful investment before it is getting even more successful? Sure, you could argue that the lost opportunity is a cost, when the replacement investment is less successful than the continuation of the previous one would have been, but if you follow that path some more then you will see that any investment is a massive loss, compared to the benchmark of buying winning lottery tickets every week.

its not as hard to determine if we are in a bubble as people try to imply. Perhaps its hard to admit we are in a bubble, and even harder to know when said bubble will pop.

you can read the comments above and think you were back in 1999.

To me, we are not in a bubble, we are in THE bubble. The early signs with retail sales starting to flag aren't enough information to say when it will pop. Auto sales continue to be strong, I think as long as that continues things will continue to chop along.

This bubble should be interesting, I cant think of one in previous history happening with so much cash sitting around.

A lot of smart people have lost money on the belief that trends that seem unsustainable must reverse or that history must always repeat, when there are factors that can cause wildly diverging outcomes even when there are many similarities between the past and present. You can have a situation where the past matches the present with 99% accuracy, but that 1% makes a huge difference in outcomes. This is related to chaos theory, where small perturbations in the initial conditions can cause the evolution of the system to change dramatically. Many people lost money shorting Amazon and Facebook stock between 2012-2015 on the belief that we are in another tech bubble, and while there are many similarities between 2000 and now (such as high stock prices) there are some subtle differences, too, such as better fundamentals. And those subtleties make the difference between a profitable trade and losing your shirt. Or another example, may people got burned betting against the stock market recovery, since 2009, believing that there would be a double dip recession, that there would be a 'Great Depression', or that America would become Japan 2.0, when, in fact, neither happened despite the many similarities. These short-sellers grievously underestimated the propensity of the consumer, undaunted by the doom and gloom in the news, to keep consuming and the unimpeded ability of S&P 500 companies to keep generating record profits and earnings.

Maybe they didn't underestimate the consumer as much as the Federal Reserve's desire and ability to inflate stock market valuations and other asset prices.[1] Certainly helped Silicon Valley and the unicorns, but we will see how it plays out over the next couple years.

http://globaleconomicanalysis.blogspot.com/2016/01/former-da...

I'll believe it when I see actual secondary shares for major companies like Uber and Pinterest see substantial declines. Until then, this is all speculation. It's weird... It's like everyone want it to be 2000 all over again, even though that was a bad time for tech.

Some people want to be correct at the expense of everything else.

I think it's some kind of psychological thing, because there's no real reason to be a doom-sayer. It's not like you get more respect or something.

> Everyone knows the party can’t last forever, at some point the music will stop and not everyone will get a chair, but nobody knows how it will end – Anand Sanwal, CB Insights

I think we know in many cases. Business fundamentals haven't changed. In the case of food delivery, what's better about the year 2000 versus now? An app? Does the app make these companies more money? It doesn't look like it.

I have no opinion on the overall assessment, but about:

In the case of food delivery, what's better about the year 2000 versus now?

For several types of business, the biggest difference between 2000 and now isn't the App itself, but what that represents:

* Almost everyone is connected to the internet (in the US anyway)

* in 2000 ordering something on over the internet was considered by most people to be a risky task. Now it's such a common task that people are confused when someone doesn't do it.

* infrastructure on the business side is better, well understood and more reliable. This means costs of running an online company are way, way cheaper, so profit becomes easier.

Basically it means it's not necessarily bad to revisit ideas that failed in 2000 - because perhaps the cause of failure was "too soon for this idea".

Food delivery is nearly impossible to pull off, because you need to own the entire delivery chain in order to make money off of it. Instacart attempts to leverage existing chains around it, but then the prices are doubly marked up so no one wants to buy things, and replacing entire delivery-chain competitors in these highly ingrained markets is next to impossible.

The only kind of direct-to-home food delivery that will exist for the time being is the kind offered by the stores (because they make plenty of money on the goods they sell already, so they can offer delivery as a sort of perk), or a kind of luxury food delivery (in the vein of Blue Apron or, to a lesser degree, Instacart).

tl;dr: Blue Apron/Instacart, the "luxury" food delivery services, are the only non-chain delivery services that will survive. Stop&Shop Peapod et al. are subsidized and thus don't even need to worry about it.

Source: tried to start a food delivery startup, stopped when the math didn't add up

edit: I guess I should provide a more direct rebuttal. What I'm saying is, you've talked about the tech/PR side of this theoretical food delivery startup, but you've forgotten the food supply chain. That is actually a lot harder than the tech/PR side. It would require a highly substantial investment and fully custom logistics.

We can never know. Nobody knows. Well, maybe someone knows (insider), then he can trade against the market and be rich. Though that's illegal as far as I'm knowledgeable.

Regarding startups, they are risky assets. The reason people/investors are moving to startups, as I see it, is that other assets are riskier than we thought.

When oil drops to $30, it's probably not as safe as people has assumed. Same goes for gold. The difference is that oil doesn't enjoy the same upside of startups. Oil can't hover over $500. But it can potentially hit a floor of $15.

So why not invest in a startup if all assets are going to the red. China growth has stalled, and the entire stock market is in the red. And you enjoy the upside if the startup has a +$1bn exit.

With oil at record low level, China growth stalling and this entire uncertainty; 2016 is going to be an interesting year. But that does not mean the end of high valuations in the tech sector. Maybe investors will move to Silicon Valley salivating for higher returns. And we might see 2000s all over again.

Welcome to the Jungle!

>The reason people/investors are moving to startups, as I see it, is that other assets are riskier than we thought

Quite the opposite as I would see it. There has been very few places to get a return on capital other than in equities. These crazy valuations are a product of that. When the market sentiment transitions from return on capital to return of capital in 2016 (as it's looking to be getting there), then we'll see these valuations drop.

>The difference is that oil doesn't enjoy the same upside of startups

But they will share a similar downside. Oil is the canary in the coalmine, and downward pressure on its price has broad impact.

Man this is a confused piece of writing, but most importantly is this: "Early employees, founders or people at key positions typically hold common stock, more often without any downside protections. These people pay taxes on the options at the high valuations they are offered, often shelling out a sizeable chunk of their savings, with the probable risk of seeing their company being sold for a lot less."

Yes if you bought your common stock and paid giant amounts of tax (via AMT[1]) on that purchase, you have put yourself into the position of losing all that money. But I wonder how many people have fallen for that trap? Of course the worse case would be RSUs where your granted (not optioned) the stock and are stuck paying the AMT without any ability to sell that granted stock at the time.

Everyone who is working for a Unicorn is, in theory, drawing a reasonable salary (unreasonable to those not in the tech sector apparently) so it isn't like your life savings that your living off of are now worthless (that did happen to folks in the dot com crash).

I have had the experience of having a basket of stock and options being "worth" over $12M at one date (when I could not do anything with it) and "worth" less than $80,000 when I could sell those shares on the market. But it didn't "bankrupt me" to "lose" over $11M dollars. Because all of the value is fictional until its actualized into cash. Just like every PowerBall ticket was "worth" $900M before they picked the balls, but after they picked them it was "worth" $0. Nobody should feel like they "lost" $900M because the lottery didn't pick your numbers. Just like you don't "lose" money because your common stock is worth less when you can sell it, than it was when it was optioned to you.

[1] The US "Alternative Minimum Tax" which computes your tax rate in a fantasy universe where you actually saw the gain on the security you just bought and pay that tax as if it were real.

My RSUs only vest after an IPO. There's still the lockup period, but even then, my understanding is that taxes are withheld by giving you a subset of the RSUs, you don't owe a tax bill in cash.

That is clever (presumably IPO or other liquidity event) I think the ideal thing would be to contribute a portion of your stock to the event to offset the tax event (like the way Google sells some of your RSUs to pay your taxes before they give you the rest) In which case you have no downside financially if the company goes "poof!" you just don't get any stock in the newly dead entity.

A somewhat poorly structured piece; just reading the first and last paragraphs of each section shows a more train of thought article than a strict call to reason.

That being said however there is one important take away from this article for employees (or prospective employees, or sometimes even pre series A investors) because of stock restrictions and the nasty valuation overhang; a big valuation can possibly mean a big correction which can wipe out large chunks (if not all) of your stock options or grants. A double whammy if you've already paid tax on it (countries other than the US can vary significantly on this point).

Aw man, I was really excited to read an article on squirrels.

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