Interesting conversation between Dave McClure and DHH about Facebook | Hacker News Reader

Interesting conversation between Dave McClure and DHH about Facebook

bettween.com

62 pointsrevorad64 comments

This mostly demonstrates that Twitter is a very poor medium for complicated conversations. I'm sure the conversation would have gone very differently if they had used, say, IRC.

Twitter seems to make it astonishingly easy to have a dialogue of deaf people, where each side fails to hear what the other side is saying. Throw in the fact that both sides are, to some extent, posturing to their audiences, and you have a recipe for a non-conversation.

I find it a typical conversation between someone healthily skeptical of capitalism and someone unwilling to really consider its downsides. Twitter, irc or posturing have nothing to do with it. I fully understand what DHH is trying to make clear to McClure, while the latter is channeling the naive view that has become American gospel, where downsides are continuously swept aside with a 'meh, worksforme'.

I totally get downside, but it's somewhat limited if FB is making $500m on $2b in 2010, and 100%+ growth in ann revenue, along with likely biz model improvements & increase in per-user economics.

reasonable floor is prob $20-30B, whereas upside could be $100-250b if growth & profits hold up.

downside at .5x vs upside at 2-5x seems like a reasonable bet to me.

DHH seems to ignore most of these metrics, except for saying that 100 P/E ratio is high. however that doesn't really acknowledge growth or biz model changes that will bring down P/E ratio over next few years.

to say it's high is perhaps reasonable. but to ignore that they are dominant, that multiple market participants have set a value (not just GS), and finally to call Rushkoff's recent article about Facebook "fading" a "thoughtful"... all of these strike me as more biased than not.

of course my opinions are biased as well -- I've worked with Facebook running their incubator program in 2009, and I used to work for Founders Fund, one of their early investors.

anyway I thought it was fun back & forth, given the limitations of the medium.

I can't comment on the conversation itself because I don't understand (the subject) well enough. But I found the tool very interesting. This is the kind of thing that twitter should have natively.

I don't know if the bettween guys posted this, but if they did, then I say it's a brilliant promotion.

[edited for typos]

I've been searching for a tool like this. Bettween is just perfect.

i agree.

a while ago i proposed to twitter that urls of the form:

twitter.com/username,username,username/startid-endid

to display a series...

I wish someone would whisper Paul Buchheit's advice into Twitter's ears: "it's better to make a few people really happy than to make a lot of people semi-happy."

Instead of trying to be as big as possible, if they just worked on improving the website, it would be a lot more useful.

Being as big as possible seemed to work out, though.

I'm not sure what you mean by that. What I mean is that, at least now, they could focus on improving their product for the existing userbase.

The nice thing about markets is that people can put their money where their mouth is. I wonder if DHH, assuming he had an opportunity, would short facebook at $50 billion valuation. Investment banks have talented people working for them, and they have excellent knowledge on how different assets are priced, they may be wrong but it's very hard to tell exactly when they are wrong. I guess betting against them would be rational if DHH had some unique insight as to why $50B is too much. However a claim about the bubble 2.0 or frothy markets is not something unique -- I'm sure they have already priced this public sentiment into the deal.

Well, his whole point is that Goldman isn't value investing, but hoping to profit as a market maker. Goldman may believe the stock is basically worthless but still think they can make big profits on the deal.

As for "people can put their money where their mouth is" and shorting:

"Markets can remain irrational longer than you can remain solvent." -Keynes

shorting means you have to also be able to stomach the upside pain. Maybe it'll end low, but you have to have enough capital to float against margin calls while it climbs. I know people that got eaten alive for shorting yahoo back around 2000 - they were certain it was overvalued and rode short positions from $40 till over $100. Then their wives made them liquidate the positions; if they'd held out a little longer they would have won... shorting isn't all about being right - you also have to have enough capital.

The above quote is very apt. Even if I didn't believe in FB's valuation, I wouldn't short it because I doubt I have the financial fortitude to take the pain.

Wait till they bring the economy down again and the smart talented people at GS ask for a bailout.

Besides how would you short shares in a privately held company?

By trading securities that derive from a private vehicle that owns shares.

I can never tell if DHH is trolling or not.

My first thought was that DHH was being reasonable and rational in his skepticism. Then my thoughts about fees, etc., were mirrored and confirmed http://www.businessinsider.com/facebook-now-it-all-makes-sen... .

It smells like a money grab for GS, and even at $2B in revenue for 2010, still seems at least a little over-valued.

The bubbles they lament are caused by the Federal Reserve's subsidy of debt. All that extra liquidity does not flow evenly through the economy; it flows faster into those areas that have been rising, buoying the returns of earlier investors and creating an even steeper price increases.

And this will continue until everyone that could possibly buy in finds they find no one to sell to.

Granted such a pattern is inevitable to some degree, but all this hot money, which we all pay for indirectly through inflation, blows them all out of proportion.

jeez, my grammar sucks sometimes

Moderate inflation is actually a good thing. Without inflation, there is no reason to invest your money -- the incentive is to hoard wealth, like in the Middle Ages.

I wish there was a "reply to multiple comments" button, because there are about eight where the reply should be, "well yeah, it's a Twitter conversation". People are expecting PhD-level discourse over people tapping out messages on their phone while they're using the bathroom. This apparently leads to disappointment. :)

Isn't the term "value" derived from how much a particular item is worth to someone else?

Having said that, I cannot understand why people say that "Goldman may know the shares are worthless but are hoping to profit from the deal". If people are willing to pay for it, it has value.

As far as Facebook's valuation, the old model of figuring out a company's worth by is revenue is not applicable. Why is a company worth $50b if it produces $2b in revenue? There is no guarantee that it will make even $1 the next year. Whereas, just because a company produces $1 in revenue does not make it worthless because whose to say it wont produce $2bln next year.

i don't think dhh actually understands what a marketmaker does.

I bet you're wrong, based on what little I know of his social circle in Chicago.

But (sincere question): what's the thing he said that tripped your alarm?

A marketmaker is someone who stands ready to both buy and sell at some published price.

They're aggregating a deal which they are then reselling. That's more like a broker-dealer, I guess. Taking principal risk in what might eventually IPO is more of an underwriter.

Actual marketmakers tend to try to go home with no risk on the books, because they have no interest in exposing themselves to gap risk.

I think lots of people have casual understandings of what financial terms mean and then just sort of guess the rest of it (much like people think SecondMarket is the secondary market; it's not.)

All I'll say in direct response to this is that Chicago is not a trading backwater, especially at the small-scale entrepreneurial level. I'd put money on him passing the Joshua Schacter Trading 101 exam. (Seriously, it sounds like a fun bet.)

No, I'm pretty sure he does. The details of the deal are complicated. Most of the money that Goldman is going to invest for Facebook is not coming from Goldman itself, though Goldman will invest almost half a billion of its own money.

What does a marketmaker do?

They sell liquidity, Josh. They quote bid and ask price spreads and rejigger them like bookies to keep an order flow. They extract a premium from dumb money that wants to trade now, which offsets the tax that the smart money in turn extracts from them by knowing more than they do. That's the basic idea.

But having established that order flow, isn't part of the point of being a market maker to (carefully) speculate based on information they get from being at the center of the order flow?

Is Goldman a by-the-numbers market maker? Of course not. You're obviously right; a much bigger part of the point of being a market maker is to keep two-sided order flow and not soak up risk. But that doesn't make it totally asinine to compare Goldman's role as the primary facilitator in (what I assume is a) thinly traded market to that of a market maker.

Knowing your background, I'm sure you know this stuff better than I do; don't hand me my head for taking a stab at your question (or, do; >shrug<). I'll go toe-to-toe with you on FIX and order routing any day, though. ;)

BTW, it's Joshua.

The point of being a literal marketmaker is someone who stands ready to buy or sell at a published price at all times. The implication is that it is an ongoing position - they do so over time.

There's a bunch of things that a marketmaker has to do to do his job, but then there are the things he does that defines the job. Does that make sense?

The simple fact is that Goldman is not publishing a price in it right this second, and you can't call them up and buy or sell shares right now.

The marketmaker's job is to literally make a market. They aren't doing that. Just providing some liqudity.

Re: FIX and order routing: Do you know what a hidden quantity is? No fair googling. I concede on FIX, though.

Sorry, it's the josh-u in the name. "Tom" bugs me a bit too.

You're obviously right regarding Goldman not publishing prices; I'm just saying, being sloppy about terms --- particular when you're just being sloppy about what kind of dealer we're talking about --- doesn't mean you don't know what a market maker is.

I had to look iceberg orders up.

Icebergs are when someone is trying to do a much larger trade, piecewise. This is what my group at MS facilitated (automated algorithmic execution of order flow.)

Hidden quantities are an order type that some markets have that allow you to hide the total amount you place in an order, more or less.

Client-side versus server-side, if you will...

As luck would have it, one of my best guys is a former MM -ish trader on the CBOE.

For whatever it's worth: total agreement with you that GS isn't acting as a MM (after an earful about delta and position risk and volatility risk and long strangles and gahhhhh). He says "GS is a BD, MM's can't trade for clients" and a bunch of other stuff.

You are 100% right. GS is not a market maker. "Doing trades that help provide liquidity to Facebook instruments that somehow down the line helps build a market for Facebook" is in no way the same thing as "being a market maker". People should stop saying "market maker" when they mean "market helper" or something else.

On the other hand, had no clue what a hidden quantity was; neither did my exchange engineer friend. So I feel a little less dumb. He knew what an iceberg order was. Also, note that there's at least one exchange that doesn't draw a distinction.

That was fun, thanks!

Hidden quantities are an ECN thing, I think, so options markets might not have had that order type.

Which exchange?

I was not under the impression icebergs are an order type. Maybe my knowledge is a bit dated?

It's Joshu because Joshua is usually taken -- and because Joshu was a 7th century Zen Buddhist master, the comparison of which to my anxiety-ridden self makes me giggle.

Broker-dealer is also defined. http://en.wikipedia.org/wiki/Broker-dealer

Yeah, I meant, I'm sorry, not "you should pick a better nick".

I don't need to look up that market makers are dealers. :)

I have a weirdly low-level perspective on markets for weird reasons; I'm fascinated by the kind of stuff you worked on at MS, but still picking it up. Ironically, the iceberg stuff is directly relevant to what I actually do get to do with this stuff.

Exactly what Goldman Sachs is doing right now? They are taking a nontrivial position in FB, in order to grease the wheels for others.

http://www.investopedia.com/terms/m/marketmaker.asp

http://www.wordnik.com/words/marketmaker/examples

Goldman is apparently maintaining a position in Facebook, not just trading them back and forth between buyers and sellers. That's, I think, what Josh is getting at. I think you may only have read the first part of that description.

I did miss the requirement that GS would have to sell their position immediately to be a textbook moneymaker. And that does confirm Josh's frustration that there's people here with a rather casual understanding of the financial lingua. ;-)

Still, my assumption was that GS thinks it can make enough from potential deals to cover whatever risk there is that FB is not worth $50 billion.

Sure, but that's not what an actual marketmaker is. They're just brokering/dealing/trading/underwriting, etc.

I don't know that I would go as far as saying that. DHH has a point, in that the deal - as reported by NYT - will be part market making (through the SPV/SIV) and partly equity purchase. Sounds like FB put the $450M requirement as a gate price for GS to get the rights to do the other transactions - plus also handle the IPO when they are ready. Plus they get to keep the upside of the equity.

Sounds like a pretty sweet deal - if you asked me - for both FB & GS.

GS pushes the bulk of the risk on to it's investors, while potentially participating & handling one of the most anticipated IPOs in Tech since Google.

Win/Win/Win.

I can't understand why dhh keeps saying capitalism is so great. Is it because he has loads of money?

Is it not the greatest idea we have ever come up with? Sure there are tons of issues with it but it also converted the planet from tribal warfare to incredible prosperity over the last hundreds of years.

Where "the planet" is only a subset of the planet.

My guess would be that "the planet" would have preferred the tribal warfare way of life... just a hunch.

It was the dominant economic system in place while that happened. I don't think we can say that technological advances were the result of capitalism, necessarily, or that they would not have happened under some other social structure.

Why isn't it great?

Snarky answer: It's only great for those at the top.

I should prefix this by saying

   There are two kinds of languages: the ones people complain about, and the ones that nobody uses.

This applies equally to governments.

The merits of different economic and governmental systems is a little offtopic here, but I'd suggest browsing some wikipedia pages for some alternate opinions:

* http://en.wikipedia.org/wiki/Marxism#Criticism_of_capitalism

* http://en.wikipedia.org/wiki/Anarchist_communism#Economic_th...

* http://en.wikipedia.org/wiki/Socialism#Economics

Etc. This won't really answer your question, but it should start to formulate a few questions in your mind, and by pursuing them, at least lead you to why others criticize capitalism, even if you disagree with them.

Well I know why people don't like it, but look at any socialist economic alternative and you'll find the opposite: better for those at the bottom. It's kind of like having a job that pays you for performance (sales, executive, etc) vs those that pay straight salary.

I'd rather err on the upside.

What excites me, as an American, is seeing the large amount of immigrant entrepreneurs making major bank...though I'm not in their ranks yet (major bank), I do like seeing it.

But (in anarchist communism at least), there is no "at the top" or "at the bottom". "Better for those at the bottom" is "better for everyone".

If you didn't know who these people were, which would you guess was the programmer and which would you guess was the investor?

altho I'm primarily an investor now, I was also a programmer from around 1980 thru 1995.

that said, I'm sure DHH can/could code rings around my sorry ass.

still, that has limited bearing on our respective positions.

That bettween page doesn't degrade gracefully at all.

It's also missing a bunch of the conversation, making it rather worthless.

I was thinking, "wow, great job!" until I had to click "more" "more" "more" "more, dammit!" just to read a twitter conversation.

Do you know of a better tool like this? I've been searching but this is the best I could find.

Forums, message boards, IRC, etc. ;)

haha i meant a tool for following a twitter conversation between two people.

The weird thing is that it shouldn't be hard to create a thread out of an arbitrary number of @tags. I have to think it already exists somewhere.

The weird thing is that it shouldn't be hard to create an eminently readable thread out of an arbitrary number of @tags. I have to think it already exists somewhere.

Well that's what I thought and this is the only one I found which just worked (sort of).

The colors are incorrect on the bottom. Green and blue should be reversed.

AFAICT: they are correct, the colors are related to the @XXX (i.e. tweets directed at the other person) so it seems backwards.

Thanks you're right. But still bad usability regardless.

Agreed. Adding an arrow for direction would fix that entirely.

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