Bubble Indemnity

I dunno, that's a lot of causal links that aren't necessarily backed up by quantitative analysis.

I don't think the scale of VC/PE in the tech sector is anywhere near large enough to have macro effects. (Zenefits and Theranos aren't going to move valuation for GE.) Real estate moves locally in sync with the local economy, and the SF Bay Area does see bubble effects in the local housing market... though the dips aren't anywhere near as deep as you think; post-2008/9 implosion, home values took a minor hit then were back to pre-crisis highs within a couple of years. (Source: I was looking to buy a house during that period.)

It's popular to predict doom and gloom, and you can show connections between different events... but understanding the actual dynamics is far trickier, and usually way less sexy.

Dumb money inflating valuations is pretty much the definition of a bubble. Another interesting tidbit: over 200 private tech terms are currently considered unicorns.

200 of what is supposed to be a rare phenomenon.

When the NYT starts talking about it you know the structure of the bubble is weak. Stories like this only popped up in the months before the housing crash. Prior to that all the stories were all about what a great investment real estate is.

Bubbles are odd things though, it could keep going until there are 400 unicorns, but I doubt it.

I think it's a good summary of the tone and generalities that the journalist likely heard from the investors he spoke with.

Does it sound ridiculous? Yeah. Professional investors complain about people whose only qualification to invest is their bank account. They do realize they are investors right?

Well a dollar is a dollar, it doesn't have a brand. The scary thing to professional investors isn't dumb money and large valuations per se. It's the competition that gets the best deals just because it offers more money. How ironic.

To take a more nuanced opinion, I don't think the distinct is between dumb and smart money, but between branded and unbranded money. There is in fact somewhat of a "brand" for a dollar. If A16Z invests in you, their dollars have some built-in, unwritten-but-real future bonus in the professional VC circus that will pile onto your next deal. Some nobody can offer the same deal on paper today as A16Z, but it won't guarantee that brand-name pile on in a later investment. The question is, how often does the A16Z actually pay off in that future-bonus way, or how many VC firms actually provide a meaningful bonus in that way?

If the "Emirati home office" just offers more money up front, the branded dollar's future brand bonus is less valuable in comparison. This helps explain a firm like A16Z's increasingly generous (and preposterous) first investments. Increasing competition, not "dumb money," has negated a valuable competitive advantage American VC firms once had.

Well, this cuts a bit close to home

   The weird thing about dumb money, unfortunately, is that it can act with 
   fiendish intelligence, insisting on stipulations that guarantee returns at 
   the expense of founders, employees and other investors.

They sold over a million pet rocks. Don't underestimate the desire some people have to keep score.

That kind of money should be investing in cutting edge stuff. Real cutting edge stuff. Computational biology, heteromorphic computer chips of various kinds, automation of the construction industry, post-capitalistic economic experiments, and a million other things I can't even think of.

Instead they have tried to play it "safe" and they all propped up the same kind of investment: "the uber of ___" or the "airbnb of ___".

The gains are illusory, because they've all been bidding up each other's bets, and these companies haven't created any real productivity gain.

Sadly, I suspect the "dumb money" is largely your average Joe's retirement money, and it's not "dumb", there's just a lot of it, so it can't be moved out quickly without collapsing the market. Joe's going to take another big hit, but his fund manager is going to get his bonus either way. And it will keep happening, because IRAs and 401ks artificially limit what can be invested in, and because Joe doesn't have enough savings on his own to bother to manage it himself.

If a billion isn't real utility, how is a tech company real utility?

Are you suggesting they get practical use from the kind of tech produced? Otherwise why would monetary returns have more utility than useless billions? Or is it the bragging rights of owning a unicorn or something?

Even when money is just sitting in the bank account it's not useless. The bank turns around and loans out and invests most of that money.

> The lack of IPOs is unnatural in that sense, as late stage investors always seemed to cash out then.

Late-stage speculators, surely? After all, an investor would be invested in the companies success, and would have bought it in order to reap some dividend over the course of many years, right?

I don't think this is actually the case, but sometimes I wonder if the rise of private equity marks a return to the pre-modern order of things. The many costs of financial regulation on the public markets have made returning to an older, far less open market.

What's sad is that this would imply that regulation has finally killed the golden goose. For millennia it was impossible for the common man to save his pennies and buy a share in the success of some enterprise; for a century or two it was possible; and now ­— what?

There are 2 reasons (income stream-wise) to own stock: capital gains and/or dividends.

Capital gains = sale price - purchase price

I think the accounting term you're looking for is "paid-in capital"

> Is there a term or measure for how much people have actually paid for the stock?

Cost basis. That's what the IRS will want to know when it comes time to sell.

"As a founder I have 20% of the stock" You did pay, you just paid with hard work and lost easy income.

In some cases, not all shares are alike. See preferred vs common stock.

I enjoy that your example (Amazon) is not actually a Bay Area example. Your point is still valid though: Apple, Google, etc. are awash in revenue. The article though is about private companies that aren't so clearly generating cash flow.

However, consumers may wake up one day and realize the surveillance web is indeed a stupid fad. And that covers the business models (explicit or implied) for most contemporary "startups".

Bubble != valueless.

Don't have the same expectations for each company, depending on its unique opportunities.

Obviously exceptionally few companies will end up the size of Amazon, Google, Facebook, etc. There is no scenario under which most companies need to bleed red ink to the tune of hundreds of millions in capital. Most companies also will never need to make audacious bets with hundreds of millions in capital, there's no outcome scenario for them in which that makes sense. If you happen to find a potential monster company, you don't worry so much about whether they're burning $40m+ per quarter - they get a larger reprieve than everyone else (Tesla is being given that exception in the public markets today for example; much like in the Amazon / Bezos case, investors want Musk to bet big and they buy into the long-term story).

I think you find these incompatible simply due to the Valley's own particular brand of "audacity." What #2 predicts the end of are build-fast-and-break-things concept-startups that throw tons of energy, developer-wages, and hype into their product, for indefinite periods of time and with umpteen pivots, with no notion of what their eventual business model will be. "We'll figure out money later" has become a startup trope, and while its worked out for several big names (Facebook, Twitter, etc.) its not exactly a good idea.

There are other kinds of audacity, though! Elon Musk has his picture in the dictionary next to "audacious," but likely could have told you on day one how he hoped Tesla would wind up making money, and how he thought he could get there. And by all accounts he's running a tight ship- employees aren't treated lavishly, money isn't being spent where its not needed- all very standard, non-audacious stuff on the business side.

Much of this is of course that Tesla is making cars, not webpages or apps, and the latter categories are much more forgiving in terms of things like unit economics[1]. I think the point is, though, that investors are no longer going to be so happy about founders taking such flagrant advantage of that forgivingness.

[1] What even is a "unit of sale" for something like Facebook? An ad display? Does anyone calculate exactly what operating Facebook costs on a per-ad basis?

> Negotiating tactic, misconception, or real phenomenon?

I think a combination of all 3 depending on the situation.

If you have a solid business with real traction, $6-7m cap is seen as very reasonable. Investors probably wouldn't cite a market downturn for deals like this, and if they do it's most likely a negotiating tactic.

If you're raising money for "the next big app" with no traction and asking for a $10-12m cap, there will probably be a lot more skepticism than there would have been a year or 2 ago.

Note: This is based on my anecdotal experience in the bay area market. Numbers are probably lower across the board in other cities.