Comment by 3pt14159 | Hacker News Reader

Comment by 3pt14159 | Hacker News Reader

The graph on the article is misleading. Show me trending for the last 5 or 10 years. The number of exits over the past two is a completely irrelevant metric because all sorts of investors were squeezed shortly after the recession started.

Calling internet startups a bubble in the same breath as the housing market bubble is doing a disservice to the readers. Every single American was seeing housing prices soar. All sorts of people were borrowing 100k against their new found home equity to "invest" in their home, despite the fact that homes have no revenue, while the majority internet companies do.

Most people running startups in the community I'm most active in (Toronto) have revenue. For example: dateideas.ca is only 6 months old and they have revenue, guestlistapp.com has been out of beta for about half a year (launched a year before that) and they have fairly substantial traction, then you have the bulk-ward of the Toronto tech scene, freshbooks.com, with over 2 million users and a solid business model. Just look at their hiring page, 22 positions listed for a 50 person company.

There is a huge difference between building valuations based on a solid business model and changing public trends (ie, more people getting on/trusting the internet), and building valuations on selling ponzi scheme debt that overvalue non-revenue generating assets like housing. The same article could have been written about clothing manufacturing in England just after the industrial revolution started.

Calling both the housing market and internet startups a bubble is not doing anyone a disservice. Both sectors experienced irrational valuation increases in which the bad rose with the good. These increases were not based on economic fundamentals but on the half witted belief that everyone could be a winner and that prices would rise today because they rose yesterday. A classic description of a bubble, in both cases.

> Calling both the housing market and internet startups a bubble is not doing anyone a disservice.

Well it is. It is hurting the egos of many people here as many are involved in startups. Accepting the fact that it might be a bubble would mean somehow joining the ranks of the hated housing market speculators and bankers.

I am not saying whether it is a bubble or not. But if you see a large rationalization effort into making this "not a bubble" that might be a plausable explanation.

That's not a disservice. It's a reality check -- EDIT dispelling the even more half witted belief that "I can make money because he did", regardless of the quality of your idea or it's commercial viability.

it's a good explanation for why many people have an emotional as well as financial interest in rationalizing why it's not a bubble ...

but to the extent people are in denial, drawing this kind of analogy is very definitely doing a service

I don't think anyone attributes the bubble, or lack thereof, to the people working hard to make their visions happen. Rather, the "bubble" aspect usually involves purely speculative investing frenzy from financial sources: be it VCs, angels, or banks.

In the case of Internet Bubble 1.0, you had such a huge buildup (and stage set for a huge burst) because you had three forces working in tandem and reinforcing each other:

1) Big banks underwriting IPOs on questionable businesses with unproven models and no revenue expectations.

2) VCs and/or angels rushing to fund pretty much any idea, no matter how sketchy, because of the above.

3) An influx of would-be founders (especially nontechnical founders) and speculators basically gold-rushing out to the Bay Area to try to get something off the ground -- often driven primarily, if not solely, by a lottery ticket mentality, and not by love of their product or business model.

Whether we're currently in a bubble largely depends on your belief in the solidity, or lack thereof, of the companies being funded. Amount of funding, frequency of funding, etc., are only aspects of a bubble -- but they are not sufficient to describe a bubble. It's only a bubble if the investment has reached a point of irrationality, and the only way to determine irrationality is to examine the companies themselves against the investment they've received.

The underlying asset in a bubble is usually inherently valuable until the bubble itself starts driving creation of assets that wouldn't have otherwise exists. The housing bubble drove the prive of homes up enormeously, but the houses were very useful to their owners and had real value. Then speculators came and made a lot of houses that were above and beyond what normally would be required, but because of the bubble made sense. I think most of the "WEB 2.x IS A BUBBLE!" crowd are seeing people jumping in to invest at dumb valuations and startups being created for no reason other than to chase the money, and that is what they are fearful of. That could inflate the arena and make it worse for genuine startups.

Bubbles are, by definition, predicated on the perception of some measure of value that is not really there. This could include creation of unreal assets or fictional derivative values on real assets, as happened in housing. But it doesn't have to. You can easily have a bubble that involves nothing more than overvaluation of tangible assets. Commodities bubbles, for instance.

> Well it is. It is hurting the egos of many people here as many are involved in startups. Accepting the fact that it might be a bubble would mean somehow joining the ranks of the hated housing market speculators and bankers.

If the shoe fits....

I agree with you on the graph--very poorly constructed, and the time interval is too short. But:

Calling internet startups a bubble in the same breath as the housing market bubble is doing a disservice to the readers. ... All sorts of people were borrowing 100k against their new found home equity to "invest" in their home, despite the fact that homes have no revenue, while the majority internet companies do.

I wouldn't go as far as saying this comparison is a "disservice." Sure, the article is judgmental and poorly researched. But when Patricof says there is "probably a bubble in the number of start-ups," well, that's supported by what we've heard recently.

Don't we see Ask HNs from failed founders who took out a large amount of savings to start their companies? And don't we keep hearing about how more people are starting businesses while their opportunity cost is low during the recession? These are traits we share with the housing bubble, and they shouldn't be ignored.

bubble or not, I can't help point out that it's profit not revenue that is important - it is the easiest thing in the world to make loss making sales.

Unless you give dividends, profit is mostly just money you forgot to invest in your business. A successful business is about sustained growth with a balanced budget.

In accounting terms, an "investment", at the time you make it, does not change your profitability. This is because you are assumed to have received in return an asset of equal value. For example, the purchase of equipment results in a decrease of your cash balance, but an increase in your fixed assets of the same amount. An "expense", on the other hand, does reduce your profitability. So profits are not a sign of a lack of investment, but of revenue that exceeds your expenses, which seems pretty desirable to me.

Accounting: Assets = Liabilities + Capital. This deals with the Balance Sheet. Expenses/Revenues are reported on the Income Statement. Two completely different things. An income statement basically explains how well you're using the items on your balance sheet.

There is some value to revenue though; it represents traction in generating money. It's a step on the road. It's past idea, and getting customers. It's not profit, yet, but it's something.

A lack of revenue means nobody is paying for your service or products, period, which is very troubling. In the first big bubble, there were a lot of companies that sold at huge valuations while having no or negligible revenue.

It's one thing to be in the process of monetizing, another to have your monetization plan as "advertising(?)"

From my point of view, you get an idea first, customers second, revenues third, and profits fourth. Only once you have profits is your business really successful. To command large valuations without even generating revenue... that seems crazy to me.

Because you haven't proved that anybody will pay for what you're selling.

If you have revenue, but not profit, that means people will pay (either for advertising or the software)... which is a very promising start. All you "need to do" from there is increase their number... at least with software, where making more is essentially free.

But you will never have profit without revenue, unless you call an acquisition revenue.

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