41,000,006 reasons why I think we're in a bubble | Hacker News Reader

41,000,006 reasons why I think we're in a bubble

jacquesmattheij.com

369 pointsrevorad254 comments

I don't know about the rest of the world, but we sure are in a bubble here at Hacker News. There seems to be a real disconnect between what people want to build/invest in and what people in the real world actually need and want to pay for. Just as sample of what I've witnessed in the past few years:

  Ask HN: How do you like my file sharing app?
  Ask HN: How do you like my social app for niche <x>?
  Ask HN: How do you like my twitter app?
  Ask HN: How do you like my facebook app?
  Ask HN: How do you like my iphone app?
  Ask HN: How do you like my facebook app that writes twitter apps?
  Ask HN: How do you like my game?
  Ask HN: How do you like my photo sharing app?
  Ask HN: How do you like my video sharing app?
  Ask HN: How do I monetize my free flashcard app?
  Ask HN: How do you like my app that helps other hackers to do <x>?
  Ask HN: How do I get traffic to my freemium app?
  Ask HN: How do I get angels/VCs interested?
  Ask HN: Look what I wrote this weekend!
  Ask HN: Look what I wrote in one night!
  Ask HN: Look what I wrote in 7 seconds!

  Customer 1: How can we sell through Amazon.com?
  Customer 2: How can we reduce inventory by $300 million?
  Customer 3: How can we increase conversion from 2% to 4%?
  Customer 4: How can we use software to reduce energy costs?
  Customer 5: How can we migrate one app into another?
  Customer 6: How can we get our phones to talk to our legacy apps?
  Customer 7: How can we take orders through the internet?
  Customer 8: How can we get our software package to do <x>?
  Customer 9: How can we reduce credit card fraud?
  Customer 10: How can we increase SEO effectiveness?
  Customer 11: How can we connect fulfillment and ecommerce?
  Customer 12: How can we increase revenue?
  Customers 13-200: How can we increase profitability?

That's really unfair. Whilst I agree there's a disconnect, I wouldn't say it's specific to HN, but rather to the entire industry. The reason why you see those Ask HN posts is because people are looking around and realizing that those types of services have been getting tons of funding and attention.

There's a disconnect, but it's in the social web world, not just HN. And I would say HNers are trying to capitalize on the hype.

I disagree.

I think the reason you see those kind of posts is that those kind of applications are low-hanging fruit. The development of Yet Another File-Sharing App or Social Media Service can be accomplished by anyone with a "Learn Rails In 21 Days" book and a credit card.

Companies that are also getting tons of funding right now are biotechnology and solar energy startups, but I have never seen anything along the lines of a "Ask HN: Review my research on getting 3.3% more current per solar flux unit by doping gallium with boron" post, despite the fact that such an accomplishment would likely garner extremely good investment and/or business prospects.

Yeah, really good point – I agree for the most part and would say that it's really a combination of both.

More to the point, people lack any domain experience.

Don't get me wrong: it's cool to be an awesome hacker... but if you don't know about anything outside of hacking.. chances are some neck-beard somewhere has already solved all of the problems of which you are aware.

> if you don't know about anything outside of hacking.. chances are some neck-beard somewhere has already solved all of the problems of which you are aware.

I'm saving that quote for later use.

neck beard, that's awesome and so very true.

The other issue with domain knowledge, at least in my experience, is that it takes a significant effort to become sufficiently knowledgeable in a new domain to discover and solve the real problems faced by people working in that domain.

Which is why you never engage in business ventures based on what customers claim they need/want. How many companies expressed a need that would make Twitter or Facebook happen? Yet these services are nowadays a crucial part of many companies marketing efforts simply because a bunch of business people had a vision or scratched their own itches.

I wouldn't say never, but I do agree that scratching your own itch is a great way to go. If nothing else, for happiness.

Agreed. It's not to say these products aren't successful, but you and I seem to be very traditional business people. I always find at least a few customers willing to pay for what I'm going to build and some sort of a competitive advantage I have over the potential competition.

The customers in your first list are individual consumers, and the customers in your second list are businesses.

You're right about the triteness of those Ask HN examples, but let's not go so far as to suggest that we should all be building for businesses, and only businesses.

Those needs are dismissed as lifestyle businesses that can be bootstrapped and/or cater to enterprises and SMB. It's more glamorous and HN-friendly to be working with the latest technologies and recreational uses of them for consumers.

B2C (and tools for programmers) is overrepresented amongst hackers because it is easier to gain domain knowledge in these territories especially for young hackers. I also think that B2B is still underrepresented, and I am more interested in that. But we should also note that solving Customer n's problem is very different than solving Customer M's problems at once where M is s big set of customers. The first is 'consulting', the second is building a product and a scalable startup. The second is much harder than the first, that may be also a reason for not being there that much B2B startups (but lots of consulatants).

I also think that B2B is still underrepresented, and I am more interested in that.

It is, but there are a few of us around. I'm working on an enterprise software startup, focused on information retrieval and knowledge management. Pretty far removed from the typical HN "location aware, social photo-sharing with gamification" stuff, but I think it's actually more interesting. But that's just me...

You know we're in a bubble when everybody thinks that everybody else is a hacker ;)

b2b startup here! We got our idea b/c 2 of my cofounders worked in the industry, and spent 3 years noting the problems with their field.

That's a very difficult thing for a 23 year old hacker to get exposure to. In order to get that job in the first place, you'd need a mechanical engineering degree, then spend several years at the plant.

On the flip side, we've just started to place ads on our sites via google's adsense, and we're getting > $15 RPM already.

B2B is where the easier money is, in my opinion. (That also applies to women-focused companies).

Definitely agree. There are lots of large problems and lots of behind the times applications being used by businesses. There is a lot of room to improve efficiency and cut down on costs.

I have a couple ideas for B2B type systems, my real problems are how to market and sell those applications. I guess I don't really have knowledge in how companies adopt technology. It seems easier (although less profitable) to sell to individuals since it's one person's decision process, not an entire organization.

It's more fun to build consumer apps.

Q1) How can we increase conversion from 2% to 4%?

A1) Well, this [file sharing/social/twitter/facebook/iphone/game/photo/video] application sure has people's attention. Their developers are wicked smart and have a plan for monetization by utilizing the geo/demographic/taste data of their customers to make it easier for you, the b2c business to target them with advertisements.

Q2) How can we increase revenue?

A2) See A1.

Q3) How can we increase profitability?

A3) See A1.

See also: why should anyone publish this magazine, TV show, blog?

I'm fairly often here, but I've never, even once, saw "How do you like my game?" except for that little airplanes game (but it was mentioned in the comments, not a post)... care to provide me with some links to those games? I'm interested to see those.

Who would take pleasure in reading Hacker News if it became about almost any of that customer stuff? All that stuff could be getting submitted and just not upvoted, because it is boring.

All that stuff could be getting submitted and just not upvoted, because it is boring.

It's not boring if you want to become very wealthy. For reference, see jasonlbaptiste's "How to become a millionaire in 3 years?" post:

http://jasonlbaptiste.com/startups/how-to-become-a-millionai...

These bits in particular:

Charge for something- Building a consumer property dependent upon advertising has easily made many millionaires, but it isn’t the surest path. It takes a lot of time and scale, which due to cashflow issues will require large outside investment probably before you are a millionaire. Build something that you can charge for. That’s how business has worked for thousands of years prior to the 1990s.

Make Sure You’re Robbing A Bank- When Willie Sutton was asked why he robbed banks, he said because that’s where the money is (Thanks to edw519 for this phrase). Make sure whatever you’re going after is where the money actually is ie- a customer that will pay you. Consumer markets are tough, especially with web based products. People expect everything to be free. Businesses are usually your best bet.

If you buy into that, then reading about customers (and business customers in particular) is VERY interesting.

To add, approximately one half of people in the real world share a common demographic category with a sliver of HN users and a fraction of a sliver of what we create.

Women have money. Go take it. Nobody else wants it in tech. (Well, aside from Groupon, Zynga, and a few other companies that missed the opportunity to make an iPhone app that you could wiggle to share photos.)

They do not only have money. They have a strong influence (and almost always the last word) in most of end-consumer buying decisions.

It's strange so little companies focus on them

People are taught to focus on a market they understand, specifically themselves if nothing else. Women, on the other hand, are hard to understand, even to other women.

really?

http://www.neosprockets.com/index.php/2010/01/chick-flick-ge...

If that worked, then movie studios would just churn out chick movies with guaranteed profits aplenty.

(actually this does seem to work in the Harlequin romance corner of publishing - if you can apply this to a startup, more power to you)

They pretty much do, it's just that women aren't the only target demographic that you can do this with. Think comic book movies, etc. They're all aiming at a very specific subset of the population and tailoring films to that group.

http://www.cracked.com/article_19012_5-hollywood-secrets-tha...

They do, it's just not what you'd expect. For example, here in the UK, Volvo are big sponsors of the Twilight franchise. How does that make any sort of sense!? Well of course it does, because Twilight's core readers aren't teenagers at all, they're 30-something women. Same demographic that're buying all the Kindles.

Any ad you see that you don't understand, any product you think is irrelevant, someone must be buying it or it wouldn't exist. So, pause for a second and think, this is not for me, who is it for?

  > someone must be buying it or it wouldn't exist

That's assuming that no product is ever a failure.

Very few products are not bought by anyone, ever!

You may not be aware but there are a lot of other websites taking money from women. IE. shoe website innovations. I recall there was also some fashion site at TC Disrupt that reminded me of Swoopo. I wonder what happened to it.

Women are interested in much more than fashion and shoes (and there are many men who are interested in fashion and shoes). The market seems pretty poorly understood by tech innovators.

"Women are interested in much more than fashion and shoes" - source please.

http://knowledge.wharton.upenn.edu/article.cfm?articleid=793

Also, your joke is not funny.

I know what you mean. When I've suggested targeting a female demographic with things that are somewhat silly, but most women just go crazy over (seen by how many women get into similar thing in several businesses) I was dismissed out of hand.

The Palm Pre used this strategy. Not that it's necessarily bad, but I don't think it's necessarily an instant cash-in either. You have to do things correctly and carefully, and I think the difference between appealing primarily to women and appealing to men is fundamentally a stylistic one.

I don't know how the hell they did it, but it worked for Palm. I was watching 'born rich' recently and one of the celebutantes says, referring to a handbag, 'it has room for my palm pilot, or paper, if you are still into that'.

I've got a web app that's used by mostly women, but for some reason I'm not swimming in cash. But I wish it was true!

As far as commerce, Etsy has done very well in the female demographic. Their membership is heavily female.

> Women have money. Go take it.

What do they want?!? I could never figure that one out.

It's about what humans want. Humans act the same, for the most part, accounting for cultural differences. (Fashion is an example of a cultural difference, In Turkey, for example, men often place as much importance on being stylish as American women do.)

So, think culture development. Talk To Customers. (And don't try to flirt. Look at their faces. Write notes.) Talk to them both individually and in groups.

Have a partner actually in the demographic.

This is common advice, but I find it frustratingly vague. Talk to people? I talk to people all the time. Heck, I talk to women all the time — half my friends are women, I currently live with two female housemates and used to live with a third, and my mother is a middle-aged office manager. After years of talking to them, I can only conclude that I've missed the boat on making Facebook, Etsy, The Sims and Model Mayhem.

I imagine a lot of people are in the same boat. It's hard to talk to people in a way that reveals product opportunities. That's why they make things for the only people who will actually tell them what they want — themselves.

You may find this a helpful starting point:

http://www.dlt.ri.gov/lmi/census/wf/female.htm

Shoes.

There is also a huge (multi-Billion dollar) "industry" for corporate level software that is under serviced in many areas (i.e. the software is churned out by large development houses and is below par).

Yet very few startups seem to target these areas.

We took a product into a badly serviced industry and were wildly profitable within about a year on minimal funding. I always worry that there is a growing amount of speculation on "great teams"/social media and less focus on creating useful stuff that companies/people want/need (and, damn, there is a lot of it).

My boss always moans when I talk to him about startups and VC's, he usually says "if you give me $100,000 and 6 months I could come out with at least 5 profitable pieces of software and sales to return your investment by the end of the next year".

Selling software to large corporations however requires significant support effort and bending over backwards to make the sale. I seem to recall an article about hunting elephant versus deer that covered the issues quite well.

Dealing with just the development side of it in my day job, no way does dealing with them on my own or in a small startup team appeal.

It depends which industry you pick - but often the problems are over-hyped. It's true; I had the same trepidation you talk about when first having to face doing sales... and at the start it can be a disaster ;) but you can soon pick up the tips & tricks needed to sell to corporates.

In fact; as hackers we are actually at an advantage selling to corporates, so long as you "get" the process, because they tend to be "attuned" to the sort of tactics employed by sales types. Often you can cut through that using feigned ignorance and a little simple social engineering :)

And at the end of the day... once you have a little traction hiring a dedicated sales guy is easy :) Many startups do exactly that when completing the first major round.

I may well be somewhat jaded because my job is coding for the financial side of things. When you're dealing with money and banks things... suck. A lot.

That would be it then :P Finance is very very definitely in the category of "industries not to pick" in my experience.

If you have any pointers to advice on how to go about this kind of selling, that would be very interesting.

There's no real secret to any of it (that's the first pointer).

The few things that spring to mind:

Be polite but persistent

Procurement people at corporates are used to really pushy sales people; so if you barely make any effort you won't get through at all :)

Judge who you are talking too

Most people you talk to won't be able to give you a "yes", get past them as fast as you can (I usually just ask straight out to speak to their superior/boss etc.), they are there mostly as a filter. Also consider what sort of firm you're calling - in a 50+ person company it is likely to be a specific department who buy things (even if it is just an individual), below that the person probably has a different day-to-day job. I've had a lot of success, when talking to smaller firms, with the line "lets just drop all the corporate nonsense, we're both small firms and there is no need for me to make this the normal pain in the neck".

Forget all the marketing nonsense

You'll see a lot of "marketing best practices"; I mostly ignore them, they are designed for a company with a number of sales people to normalise the sales routines. You're hacking the sales routine, so take it naturally.

I particularly advise avoiding the template emails that you stick a name in front of... keep the templated stuff to short paragraphs in your emails & material you attach (i.e. PDF's) and try to write an honest "personal" note.

Honesty does get noticed BTW, it can set you apart from the usual inundation of marketing they get.

Be open to adaption, but have a firm limit

I once committed us to a normal sale but "with a few tweaks", it took me the best part of a month to get the tweaks in place. :) Accomodating companies requirements gets you a good name, but really consider if it is worthwhile, and be happy to say no.

Be prepared to walk away

You can't sell every time. And if you are desperate to sell then they can take advantage of it! Either by getting impractical modifications (see above point) or drumming down your price. Either that or they are just not interested, and you end up sounding desperate and silly.

Invest in CRM

Biggest piece of advice IMO; it is so so so so so easy to forget who you contacted & about what. It might take you weeks to find the right person to talk to at a firm, but in 6 months when you try to upsell them the new product you don't want to have to do all that work again :) Plus I had a silly incident a while back where I kept emailing the same introductory email to a poor CEO; I think he got it about 86 times before calling to ask me to stop :)

Call the CEO

Doesn't work all the time, but sometimes (particularly in smaller firms) you can get things moving (and seal a sale) by calling the CEO. It takes a bit of balls and a fast pitch (or social engineering) to stop them hanging up :)

My favourite line was "X suggested I call you about this product, Y, we're selling you so you can have an idea of how it will improve your business"

Where X is someone in the middle of the food chain who has, at some point, said "you need to talk to my boss". :)

Thanks!

You guys are a security consulting firm from what I see. What products did you create for that?

That's just one (the main) side of things; the specific piece of software I mention is in another market.

Would love to see a blog post on how you guys did this. And also some of the other industries your boss mentioned :)

I'll try and put something together.

There are loads of industries/areas to disrupt, a quick list from the top of my head:

employment databases,auditing,ISO,internal communications,document control,security control,anything government,caterers (booking systems, big area)

"Yet very few startups seem to target these areas."

Perhaps you're seeing an artifact. Generally the startups you hear about on HN and elsewhere are trying to generate 'buzz' and 'raise awareness' to get to 'closing a funding round.'

As you yourself demonstrate when one starts a company to solve a problem for which there are already customers in pain (and thus willing to buy the product), they can generally, if they execute well, get started and get profitable early on and then grow organically by expanding out from their customer base to adjacent markets. All without any big funding round or 'buzz gathering.'

Solving known problems well, gets you a steady paycheck, its not 'sexy' and its not usually 'disruptive' and it is very very rarely even brought up in places like this.

Because the problems are known it also means are are usually several players trying to get to the same dollars and margins are limited right from the start as people compete to be the chosen solution out of a variety of solutions.

Disruptive changes on the other hand, take a market with a reasonable capital flow and shift it all to a single player. Depending on how long that shift lasts, the return on investment for that player is 10, 100, even 1000 times higher.

The other problem here is that if you are a VC fund you can't leave the money you've raised in T-bills forever, you really really do need to invest it. So there is pressure to put it out there and get it working for you, and if its been getting 2 - 3% in T-bills and your clients were expecting 20 - 30% then the longer its been sitting the bigger a pop you want to spend it on. A very strange but measurable forcing function.

This is very true. I can give another example(maybe bit-offtopic for HN).

A very good friend of mine worked in IT for like 10 yrs. He was quite good programmer, CTO etc. One day he decided to radically change his carrer and opened... 5 Subways in Eastern Europe (he is originally from there). FFW 2 yrs => his restaurants making him $400-500k/yr, he spends zero time managing them and just focused on opening new ones.

His lesson: IT industry has one of the hardest competition rates cause all super-smart geeks are competing on relatively small marktets. Other industries competition (esp in emerging markets) is seriously overrated.

Another example - my very stupid app for selling video files just crossed $1000/day mark in sales. Ppl just need simple tools to get things done.

Argh, don't remind me about Subways in Eastern Europe. When Subway opened in Indiana, I told my (Hungarian) wife that if she wanted to make serious money, we'd open a Subway franchise in Budapest. She said, "Why would you try to sell crappy bread like that in Hungary?"

Sigh.

Do you mind sharing a link to your video selling app?

You're missing the point.

Most geeks that I know aren't trying to build apps that make money, they're trying to build apps that are fun, and that their friends think are fun.

If you offered me two choices

A) Make a million dollars a year doing something you hate that nobody will know about or care about

B) Make no money doing something you love that your friends think is cool.

I will almost always choose B, and I think most hackers will also always choose B. I would go as far as saying that choosing B is one of the defining characteristics of a hacker.

I got into computers because it was fun, not because I saw dollar signs at the end of it. Writing a video sharing app is a lot more fun than writing a software that reduces credit card fraud.

Can't you have both? Take option A for a few years. Save most of that money, then quit. Take option B for a lot longer than you could have if you didn't take option A first.

But seriously, I understand that option A almost never pays that well and is usually not guaranteed. For example, working for stock options that you'll most likely never see vest.

Also option B is not guaranteed to make no money either, and at least you like option B. So, I'd take B too.

Am I correct in my opinion that people following option A tend to be, though perhaps not universally, driven by a certain kind of greed that promotes cold, unfeeling non-authenticity? These effects ripple throughout our society at a deep level.

Some superficial examples--Zynga, advertisements for female facial creams, etc. But I feel it goes much deeper. It's like an emergent phenomenon, a parasitic infliction upon our society. Imagine where those dollars and energies and attentions could go.

I haven't looked for the article I am talking about since I last read it (back when dead trees still dominated). So I can't vouch for its veracity anymore. Its essence may be interesting or jog someone else's memory. (I may try to find it later)

The article stated that a group of college (MBA perhaps) students was surveyed and asked "would you work for the highest paying salary once you graduate?", or "would you work for what you want to do and enjoy after you leave college."

The answers were compared against reality and the respondents life after a few years - It showed that whoever chose to do what they were interested in were more successful in monetary and career terms than people who chose to follow just the cash.

It does have further support, in that we generally value passion and drive as key predictors of success over someones ability to choose better paying jobs.

When I was younger, all I wanted to do was make video games. But as I got older, I found I had writing business apps was more fun (especially when I picked the language).

    A) Make a million dollars a year doing something you hate that nobody will know about or care about

If you got million dollars paid for the thing you built, that is million times "know about" + million times "care about"

    B) Make no money doing something you love that your friends think is cool.
    I will almost always choose B, and I think most hackers will also always choose B. 
    I would go as far as saying that choosing B is one of the defining characteristics of a hacker.

One can find the golden path to make something one loves, something his friends think it is cool and yet, something which million people will find it worth paying a dollar a year.

Doing cool things, things "friend think it is cool" is nice, but you cannot go to the grocery with, nor pay your bills with it, right? Besides, that cool thing, will soon loose it glory to something cooler unless it will be maintained and evolved. Money is a great way having one stick to a project and keep it up and running.

You're frontloading the question. What if it was:

A) Make a million dollars a year doing something you love that nobody will know about or care about OR

B) Make no money doing something you hate that your friends think is cool?

...

If the question that you're trying to ask is, with all other things being equal, would you:

A) Make a million dollars a year doing something that none of your friends would know about or care about OR

B) Make no money doing something that your friends think is cool.

I would choose A every time. Also I'm not sure how you can say that writing a video sharing application is a lot more fun that writing software that reduces credit card fraud without knowing about the techniques used in the particular pieces of software. I'm interested in algorithms and neat techniques, not sharing videos or credit card fraud.

I'm still vain enough to think I'm a hacker, though:)

I would take A without question. After just a year or two I'd have enough money to work on my own fun-as-can-be-but-will-never-make-money projects for a decade or two.

Writing a video sharing app is a lot more fun than writing a software that reduces credit card fraud.

I knew a guy who wrote software to reduce credit card fraud and he thought it was great fun with lots cool statistical analysis and data mining problems to play with. And personally I think that sounds a lot more fun than writing video sharing apps.

this is true. definition of hacker is being always hungry for challenge. nothing to do with being cool... damn, we are freaking introverts, right?

That does not a bubble make. Hackers are hacking a lot != we're in a bubble. A bubble is a stock market bubble based on mass amounts of over-investment by VCs and the public.

Re: Customer 2: How can we reduce inventory by $300 million?

I'm wondering if anyone has explored the outsourcing of inventory? In other words, would it be viable to establish a giant warehouse of all things that people could use as their own personal warehouse... like co-locating a server.

This is how a lot of businesses work. You place an order with company A. Company A orders from company B, then delivers to you.

There are reasons some companies do well at this. A lot of it has to do with setting expectations, and giving accurate information about pricing and availability.

Company B may only ever sell to a handful of other "retailers".

Yes, "pick and pack" warehousing / shipping facilities will store your stuff and even put it in boxes and ship it to your customers for you. The problem isn't storing the inventory, the problem is owning the inventory. Ultimately, reducing inventory must go along with having a quick delivery time from your upstream suppliers...

Probably unsurprisingly, Amazon and a bunch of others offer this. http://www.amazonservices.com/content/fulfillment-by-amazon....

If you were at YC demo day this week, you would have seen some very solid companies that are addressing those 'Customer' issues that you list below. I was expecting bubble when I walked into the door at YC, but walked out of there thinking the total opposite.

I can't speak for all the other companies out there.

Back in the old timey days, you made a product people needed or you were through making said product. Today, I'm astounded by how many products/apps do the same thing as their competitors. Take iphone camera apps for example; why are there so many? Why are they getting funding? Do people need a sepia toned camera app? Is it making their lives easier?

This is not so say that innovative and "cool" apps don't have a place - they do. But it is to say that there's something concrete about making a product people need that solves a basic human problem. “My damn phone won’t take a sepia toned picture,” is not a basic human problem. In terms of a bubble, and more so, in terms of revenue – making a product someone needs assures revenue and harkens back to the old timey adage.

So is there a bubble? Yeah. Can it be quelled by a return to making products that help people with basic needs? Yeah. Do I want a camera app with sepia tone? Sure. Do I need it? No.

I come to Hacker News to see what interests a small demographic with whom I share some. To find out everything else, I go out on the street and interact with people.

I guess it is a matter of terminology but I have to disagree on this one.

A bubble is all-pervasive and extreme. It represents a systematic investment mania where everything becomes surreal. People sell vast tracts of land for a prized tulip. Junk companies with nothing to offer but a vague concept about revolutionizing how this or that will be done owing to some new phenomenon such as the internet make serial stock offerings to the public and get hundreds of millions for a modest percent of their unproven company. Lenders pile on with countless real estate loans to unqualified borrowers secure in the belief that what are really worthless loans will make them huge profits because they can be packaged and disposed of through artificial securitized instruments and because housing prices will continue rise broadly for endless periods. All this begins to occur in endless and ever-expanding streams until, in the end, large numbers of people are sucked into the vortex.

In such cases, broad markets affecting an entire society are sent into a frenzy by which average people start both to get rich quick and to want to get rich quick. Large numbers of people leap in, therefore, in the hope of making fast money and abandon their common sense in the process. And when things go bust, this has a major systemic effect on the broader economy. A stock market that had reached stratospheric heights loses 70% of its value. A real estate market that had become so pricey as to make housing unaffordable for average buyers plummets to the depths, taking down people's savings en masse.

The current phenomenon represented by high valuations in parts of the startup world is more transient and limited. It has not affected the broader society at all, only an insular investment community. If it fell apart today in toto, it would leave a trail of victims within the VC and angel communities but would be felt scarcely at all in the broader economy, or at least would likely have no systemic impact.

Viewed from the standpoint of the broader society, I think what we are looking at here is a speculative frenzy affecting a comparatively narrow asset class. The prices of some startups have increased considerably. The prices of companies generally in the business world remain moderate, if not depressed. Is it a pricing frenzy within a particular segment of an asset class? Probably. Is it a bubble? No. Or at least not by historic definitions.

Again, I wouldn't disagree with a single specific point made in this piece, and the author as usual makes some astute observations. I would disagree about the terminology, though, and would say that we should reserve use of the term "bubble" for the sorts of massively dislocating events that it historically has come to represent.

This is a great point. To condense what you said a bit: the dot-com bubble followed the democratization of stock trading (which itself got a technological assist from the internet). Lots of people, myself included, who never bought a stock start using online trading accounts. The housing bubble followed the democratization of home buying. Lots of people who never had bought a house before (or a second or third house) start buying houses.

The question I've been asking for a while now: what's the next great financial innovation that's going to revolutionize access to some market to which average people don't currently have easy access?

I want to be on the upside of the bubble.

Going to offer an answer to my own question: where's the next bubble?

My boring answer has always been: commodities. Yeah, ordinary people can buy and sell precious metals now. But wouldn't it be more convenient if you could just directly buy a nicely packaged product online (with no service premium) that represents whatever arbitrary commodity or commodity future (or whatever it is you trade) you desire? I'm sure this would do wonders for oil prices. All those gold trading services that advertise on cable seem to be a niche example of the phenomenon.

However, I just came across something which may offer a more interesting answer: bitcoin, or more generally, currency. I going by what I was just reading here:

http://www.reddit.com/r/programming/comments/g7zlw/google_en...

I don't fully understand what bitcoin is. But I'm sure that will only be part of its charm if it ever goes mainstream. At any rate, just an idea.

bitcoin is just p2p paypal

It is energy generation, and energy saving.

There has been a recent democratization of web- and mobile-applications, has there not? It's super easy for me now to make an site with Rails to do x. Same goes for creating and publishing mobile applications. Anyone can now easily make and sell an iPhone app. When has this ever been possible? This is the current democratization, and I don't think it would be unrealistic to suggest it could lead to a bubble.

Sure, whatever. I think we're splitting hairs.

I think the overall point is that what we're currently engaged in isn't sustainable and the contraction is going to be painful when it hits in 6 months to a year once all the cheap money[0] dries up. There's a bubble within our asset class.

My question is: how does one short this phenomena?

[0] http://news.ycombinator.com/item?id=2363903

"A $41M investment at this stage in the life cycle of a business is normally associated with either something that is technologically complex and thus capital intensive or that requires new processes to be designed from scratch."

This is what struck me when I heard about the deal. Color is cobbling together existing technologies and not creating anything new. This deal pushed me into the "There is a Bubble" group. They had better have an ace up their sleeve.

don't focus on the features of the product - focus on the team. it might end up being something completely different (there is a word for that)

from the perspective of 'can these guys spin a $40M investment into something that is worth more?', the answer is probably yes (probably enough to worth investing in)

it isn't a bubble because this is still VC money, not crazy mom and pop shooting at the NASDAQ money. during the bubble this company would have already IPO'd and been worth $5B, and you parents would have called you up to ask about it.

From everything I read, Color has a fantastic team and the Techcrunch article is actually pretty positive on the idea. I'm sure that the company will succeed.

But saying a company will likely succeed and deserves an investment does not mean VCs shouldn't be making rational valuations based on real business metrics. And as the OP remarked, this is probably funding at a $80m+ valuation for a company with no product (when funded), no revenue, and plenty of competition.

Right, this puts their valuation above those of already very successful companies.

Actually it puts their valuation around the same that Lala was purchased for!

Cuil had Googlers behind it. The people behind it can make a difference if the other fundamentals (market viability especially) are in place.

Is there a $40m+ market for a group photo album app? This app is free, so they'll need a great monetization model even if the market is there.

For $40M+ investment it should be $1B+ market. I guess they probably pitched something, like: "COLOR - the Facebook for Mobile"

Cuil was trying to solve a problem that was already solved, and they were so arrogant in their media briefs you could just tell that they were on another planet

Color, on the other hand, if they at least solve the problem of figuring out where somebody is I can see someone paying 200M+ for that (fb or google)

The team behind it makes the work I've seen so far all the more surprising. Have you played with the app? It's horrible. It's really bad. It's not fun to use--it's confusing and frustrating. The UI is a nightmare. It's buggy. I know some of those things can be smoothed out over time, but it doesn't feel like those early apps you see that have tons of promise but a few rough edges. As an investor, I'd be worried.

I'd probably never install the app, but then I don't even use a smartphone - but they have enough money to make this mistake 10 times over

who knows, they might end up powering location for foursquare, facebook, and google etc. in 3 years time as the new GPS.

Without any real knowledge of the VC industry, to me this "bubble" looks like VCs are just suffering from a lack of things to invest in due to the proliferation of angel investors.

They need to show their investors that they're doing something, so they throw a grip of money at a company with a solid group of founders and a roadmap full of the hot buzzwords of the day.

We might be in a bubble. But that bubble will continue to inflate as long as people are screaming Bubble! Bubble!! The danger moment appears when all those predictions appear false and everyone start to believe, maybe this time, for some reason, exponential growth will continue forever.

The moment when everyone shut up and start to join the bandwagon is when the bubble bursts. <-- That's from my experience.

Your last sentence is very astute, and resonates with me personally. I thought valuations were insane in the late 90s but ultimately gave in. I think that was less than 6 months before the crash!

Regarding exponential growth. We need to think carefully what kind of efficiency improvements can SUSTAIN exponential growth. The adoption of the Internet to the mainstream was a major event. I guess people might be betting that mobile/tablet is another one. I thought this was already priced in about 2 years ago. I can't think of what has changed in fundamentals that justifies the current situation (except for inflation perhaps).

Hmph. If nothing else, posts like this are terribly offensive to the entrepreneurs that dedicate their lives to products like Color.

Did anyone consider that maybe Sequoia, who have invested in companies that make up over 10% of the NASDAQ know what they are doing?

Companies like Color, AdKeeper and Flipboard have "crazy" valuations based on the founders having ridiculous resumes. They have all created billions of dollars of value for their investors, hell, why wouldn't you invest in that potential again?

Rationalising this metaphorical bubble to domain prices is absurd, since domains have always been traded for eyebrow raising prices. You think that the domain color.com or path.com will be worth $10 in 5 years time? Seriously?

Color almost certainly didn't require $41M to get to the product you see today, did people ever consider the company is - gasp - launching early and has the capital to iterate and scale for the next few years? I can think of lots of startups that raised $10M - $20M at company formation and has then spent the next few years (or more) iterating.

Investors are less interested in where you are today, compared to where you are going

41 million for growth for an app before it launches?

Color has launched on both iOS and Android. In addition, they didn't spend 41 million, they received funding in the amount of 41 million.

I understand that. My comment was why invest in scaling when the need to scale hasn't been established?

Bain Capital, Sequoia Capital, and Silicon Valley Bank, the ones who are funding this, see great potential in the team that is bringing color to market.

They've given a long runway to Color, and if the airplane takes off those investors reap far more rewards then they would have if Color is wildly successful and other investors were able to participate in subsequent rounds of investment.

I cannot emphasize enough that this is a strong team (investors and owners). There are almost certainly specific targets and objectives this team needs to meet before they collectively decide to spend the entire 41 million.

Which means this thing could crash and burn after spending 3 million, and they unwind from there.

I believe Silicon Valley Bank does debt financing rather than equity financing. On top of that, I believe all 7 co-founders are worth over $1M each and several are worth multiple $M with multiple startup exits over the last 10 years.

They've given a long runway to Color

A long runway? Sorry, but I had to chuckle on that.

That would be one hell of a runway. More akin to a wormhole.

- If it is going to take them a few years to get to their eventual, profitable, goal, why invest $41M now? Why not invest $20M now and another $21M when they're on the track that will be truly profitable, once they've demonstrated where they are going?

- Is calling the investment "crazy" really offensive to the entrepreneurs? It is more a compliment to them than anything else. The investment may be crazy, but the entrepreneurs managed to get people to shell out $41M. That takes serious talent.

- Getting $41M for color is insulting to a lot of other entrepreneurs that have dedicated their lives to products like color and received nothing. Give half of that $41M in $250,000 chunks to 80 other startups and Color would still have $20M to play with.

If you know how these large investments work, $41M in Color may seem very sane, but to a large percentage of the population, it does appear crazy, particularly in light of the dot com bubble.

Perhaps you could point us to a good article showing why this is a sound investment?

I cannot point to an article about why this is a sound investment, I guess my entire point was that I do not understand why everyone has to jump all over this as to why it is a bad investment, since you have such a hilariously small data point to base any opinion on.

You assume that we have a small set of data points, which is a really bad assumption, even if you were just making it about me, personally. Assuming that the HN community commenting on this bubble/not bubble doesn't have a lot of experience is a bad idea. Even more so if you cannot point to a single article covering why this investment is sound.

Picking up on your third point, if your investment thesis is that mobile social networks are a huge untapped winner-takes-all market, spreading your cash index-fund-style over the most promising 80 mobile social startups (kids in college dorms without the resume maybe...) and saving the rest of your war chest and partner attention for the ones showing signs of traction would also probably be a safer bet.

Wait, it's insulting to other entrepreneurs who have created apps similar to color? Since when was capitalism fair? The large funding just might mean color will have the resources necessary for years to completely dominate the mobile photo market.

To put it into perspective, say YC are giving out an average of $17000 a startup, time 43 startups is $731000 for the round.

For the same amount as this investment you could probably set up seed funds in 10 cities and cover all of the overheads involved. I know which option I would pick.

"Did anyone consider that maybe Sequoia, who have invested in companies that make up over 10% of the NASDAQ know what they are doing?"

Neither Merril Lynch nor Lehman Brother knew what they were doing.

"Investors are less interested in where you are today, compared to where you are going"

Yes the future is important, but there's the risk-reward trade-off. If a company looks badly risky today, a rational investor will steer away from it.

"If nothing else, posts like this are terribly offensive to the entrepreneurs that dedicate their lives to products like Color."

And for your first point, a well functioning entrepreneurs ecosystem require both dedicated entrepreneurs AND rational investors. This is not to demean the entrepreneur.

So now whenever someone with a successful past history does something moderately contrarian, people are just going to recite the banking collapse?

"Rebecca Black signed onto the same record label as Miley Cyrus, I think the label knows what they are doing" ... "We all though Lehman Bros knew what they were doing, dude"

Anyway, I like people that stray from the field and do contrarian things that other people think are crazy, if nothing else in 10 years it'll be exceedingly satisfying for these kinds of investors to point at all the haters (and if they fail, well, everyone was right blah blah serves them right for taking risks)

Ok agree the Lehman Brother example was a bit corny, but the point I'm trying to make is that we all make mistakes, including top investors like Sequoia - in fact the business model of a VC fund is to invest in 10 equally promising startups and hope 1 of them will make 100x profit and cover the loss of the other 9, and Color could be one of the 9.

Also, being a contrarian investor means you sell in a bubble (when everyone is buying) and buy in a crash (when everyone is selling).

I don't agree with your argumentation but I upvoted you because there is something very disgusting when people downvote simply because they disagree with an opinion. Why people cannot reserve their downvotes for factually incorrect, FUD-y, abusive or trollish posts is beyond me.

The idea that criticism is insulting, or that we should implicitly trust investors because they have been successful in the past is a bit ludicrous.

I'd prefer to see evidence of success before assuming it will happen.

The hero worship of folks associated/intrinsic to a previous success has a shakey foundation. A good number of successes were at the right place, at the right time. The details of who was manning the ship were, ok not irrelevant, but not meaningfully correlated with the magnitude of the previous win. Sure they were competent managers, which is required of any company to succeed. But they were not Responsible for the success.

So its a little like sympathetic magic - if we get guys who were close to that other success, maybe some of the halo is still stuck to them and voila! investment rationalization.

Some of us have seen dozens of sure-fire new companies, staffed with experienced professionals, fall on their faces. Younger, perhaps naieve investors still have some lessons to learn.

Admittedly, the article pointed to 6 indicators of a bubble which are probably not quite right; then defended only 1 of them, and waved their hands about the others. That is what I found a little offensive, but to my logical sensibility and not as an entrepreneur. Entrepreneurs have to weather a lot more than link-bait, and need to grow a much thicker skin.

I don't know if it's a bubble or not, nor do I have any idea if it's just because of where I browse (self selection), but I've noticed a trend lately. The trend is that people are excited about a startup BECAUSE IT'S A STARTUP, and not because of what the underlying value of the business' model/idea/value. As if the fact something is a startup is, in and of itself, somehow magical and has intrinsic worth.

It reminds me of a few years ago when people were all googaw over social networks, because they were social networks. That seems to have passed now and they're focusing a bit more on how social can help this cause or that business model.

TL;DR: bubble is intentionally blown, so that certain people earn more money

Pumping bubble is intentional. Financial world knows and uses this technique for years. They KNOW we have a bubble and THEY pump it up.

They earn money on stocks rising while bubble rises.

The more they invest, the more people come to them with the money (for investment). They earn money on those people (commissions, investment credits, accounts, personal advisory). And as more and more money pours from the sky, the market rises. And they earn on stock rising.

Suckers (commoners like we) believe that they can catch a train with next Facebook and sell houses or use life savings in hope for a fortune. And financial world earns.

At the proper moment leaders of this mess bail out and we have a "crisis".

Most people decide to invest too late (for example now it's much too late) and also bail out MUCH too late (after few hours or days from bubble blowout).

But those managers and capital owners.. People cry, media report suicides and they just are buying another Ferrari and houses in the Canarian/Carribean. They smoke a cigar, drink whiskey and looking at the sky think: 'suckers, so long till next bubble'.

Works like charm for years. So sad that for example my country's currency ex ratio and stock exchange is so vulnerable to this.

Financial managers are not stupid. They are pragmatically cynical.

Someone should track the Color Fund vs. the 43 participants in YCombinator W2011 class:

Round Color's (err) round up to $43m. Then say that Milner's 150K was actually $1m with the same terms (convertible debt). You'd have 2 investments of $43m. Track follow up rounds for the 43 YC alumni and Color and see which pot grew the most.

I know which side of that bet I'm taking :)

One of the arguments I've heard that state that things are different this time around goes like this: it is far less capital intensive to do a startup now rather than in the late 90s because of open source software stacks and cloud computing providers. I agree with this statement but it means that the average software startup doesn't need a lot of cash to develop their product. Apart from ads and perhaps domain names (haha), why does anyone need so much cash?

EDIT: I guess it could be patent licensing. I don't buy the technological complexity bit, personally.

Also, if you know that everyone's headed towards a bubble, what is the correct response if you are a rational entrepreneur? Riding the bubble to the top and bailing before the crash does not jive with me.

Developers are not cheap.

True and false, assuming color has one tech cofounder. What they need at this point is an Android and IOS client that can take pictures and record the current position of the user then you need a backend system that can handle the massive concurrent upload of pictures and do concurrent geo-spacial lookups. This is by far the most difficult part but MongoDB has a filesystem component and there is a plugin for Nginx that allows you to serve files directly from it.

The geospacial indexing can be accomplished by creating a 2-dimentional index of picture buckets where each bucket contains the pictures taken within a small geographical area (say 2000x2000 meters) then all you only have to iterate over the pictures in the buckets that are within the current distance from your location. The clients can easily sort their images before their are uploaded.

It may sound complicated but games do that kind of thing all the time, and often with bigger constraints (skipping a picture or two isn't going to be a big deal).

So yeah devs are not cheap, but a technical co-founder should be able to develop this.

but could you make Color.com in a weekend?

The android client capable of taking pictures and communicating with the service? Yes (minus the graphics, I draw like a retarded goat).

The service behind? No, but I highly doubt they have been spending only a weekend on it.

In two months? Properly, though it assumes that there is nothing more to it than has been described so far.

Advertising. People are already bemoaning the network effect in the lack of content on color - I think maybe the plan is to buy their way into users.

Just because there might be a bubble doesn't mean that all startups will autofail. However, if I ran a startup with ads as my main source of revenue, I would be worried as advertising budgets are the first thing to be axed in a crisis.

For entrepreneurs crashes are the best times to innovate and launch new ventures because while everyone else is angsting about cutbacks and surviving just another day, the entrepreneur can launch lean businesses and products AND usually get great deals on people, equipment, office space, services, etc.

Do you mean crashes are the best time? During bubbles everything gets more expensive.

I agree that a bubble doesn't mean all startups with autofail. I would like to learn from the past and understand what worked.

Yes, I meant crashes. Fixed. Thank you.

I seriously doubt that modern democratic-capitalist societies as a whole can avoid bubbles. Individual business owners OTOH can not only survive but also thrive in the aftermath given that some basic conditions are meet.

The $41m injection might well kill the company. I've never seen startups with too much capital early on to become the next Google/Facebook/Twitter - you lose your chance to become "relentlessly resourceful"!

there is a big difference between having the capital available and actually spending it.

Doesn't it make you a bit relaxed? I've seen the effect of "too much money" first hand, regardless of spending

Sorry, but your company dies when you have no more cash. The $41 million will help them survive for a long time.

But the point of the $41m from an investor's perspective is to get them to scale, not survive.

Well, I am not in a bubble. If anything my software is vastly undervalued. I wouldn't know what to do with 40M. I could use 100k though..

Yes, I see that some mobile-social-consumer stuff with very good connections to investors may be overvalued (but who knows?) (and they get huge tech-media attention), they may be in a bubble, but for most startups it is still 'business as usual' I think.

The very fact you wouldn't know what to do with $40M is why you couldn't raise $40M, and they could.

Yes but knowing what you'd do with it and that being a good thing to do with it are different things.

I don't see what they need $40m for that's going to deliver real value.

Why would you see what they need $40m from when you are on the outside looking in on a single product? Seriously.

Fair point, just $40m is a lot of money for a start up software business.

If they're looking at something with a bricks and mortar component that would be different but I'm generally with DHH on this one - businesses of this sort can grow quickly without the need for this sort of capital.

There's absolutely nothing in the Techcrunch article that would suggest this company is doing anything so technologically complex that it can't be easily duplicated. They even admitted they have no concrete plan (or proof) they can monetize.

The one thing in their favour (potentially) is network effects.

If they can get everyone using their software before someone else comes along then the collaborative nature of it gives them a significant advantage in that there are more people you can collaborate with.

But even that isn't a particularly strong lock in when the apps are free or cheap and available near instantly anywhere you have a data signal. Someone using a different app? Just go grab it - it's not like convincing all your friends to leave Facebook to go somewhere else.

The would appear to have a coherent story as to why they need $40m, and they found some VCs who agree with them and think they'll make some money (normally 10x, right?) at the end of it all.

More power to 'em.

I recall that being the justification for a lot of VC stuff around 1999/2000.

But what's the answer? Regulate the size of investments in early stage companies? Point and laugh at seemingly crazy valuations? Ignore the market and concentrate on building our own things?

I'm trying to ignore the market as it really has little significant impact on what I'm doing. The effects it has on me are:

- It is creating a scarcity in developer resources. This just forces me to relearn how to write good software, definitely not a bad thing. - It is generating a lot of interest and investment in various tools that I can build, saving me effort and producing a better product.

Those are the good impacts.

It does create a sour grapes type of emotion that I try to put aside. $41M would go a long way towards funding a lot of small startups, or supporting animal shelters that are swamped due to people no longer being able to afford their pets, or building companies that would employ people that lack high tech skills or the opportunity to employ those skills if they could acquire them.

(And if you think "Oh, anyone can refocus themselves and get in the game, come live in the rural midwest for awhile and then tell me that.)

No, people can invest what they like and I'm sure that some of the investments that look stupid work out at least OK.

My point was more that you can't just assume that because smart people think X, X is true. I think this is especially true in the world on VC investment where the investors don't believe that every bet they make will come off - what they're looking for is enough of them to work out that they make a profit overall rather than that every single one nets them a return.

For the rest of us we can point and laugh for the most part because, hey, that's fun, and by coming on here and running our mouths we, in our own small way, bet in the investors do (though we gain or lose tiny bits of our reputation rather than cash). But we might also want it to inform our decisions when it comes to investments and choosing our next job.

same thing here except i would know what to do with 40M: use the software we're writing to launch the consumer-facing location-social google killer armed with AI! (buy servers and bandwidth etc)

isn't it strange? well, as a software devs we seem to have longer and harder path to breakeven.

but consumer startups seem need even more money to serve millions of customers, and the success chances seem a little higher than that of a lottery, as you should predict and check if the inconstant masses would like the app or not.

why we're not in a bubble then?

So flickr goes mobile, gets funding, is sold for some billions, then a decade later it is dumped for a handful of millions?

The lesson here is not to blame the idea guys, they will profit from it dearly. Or blame the initial and subsequent investors all the way up to the (ponzi) pyramid, they will profit too. Or even blame the guy who signed the deal when bigCorp bought them, he got his cut under the table too.

Blame the poor souls who own shares of bigCorp for not enforcing accountability in their C*Os spending money left and right chasing the next bubble.

Best summary of bubble/non-bubble debate I've read yet:

[Are we in a bubble?]

“Maybe,” says Naval, “Certainly valuations are creepy up quickly in all stages of deals. On the other hand, 10 years ago when we all felt like this last time the total market size for any company was at maximum 100 million potential users. Now we’re in the billions of users. Facebook connections alone bring 500 million, Twitter 200 million. 10 years ago we only connected for brief periods of time when we were at our PCs. Now we’re connected to apps all the time, everywhere we go. So maybe there’s a bubble. It’s hard to say. But we’re also looking at unprecedented opportunity.”

- http://www.bothsidesofthetable.com/2011/03/22/the-magic-midn...

We're not really in a bubble until Color.com (NSDQ: COLR) IPOs at a $500MM valuation and quadruples on its first day of trading.

And then we're not REALLY in a bubble until Air.com, the leader in the social breathing space IPOs at twice that.

Make no mistake, a big factor in the creation / encouragement of recent bubbles has been super easy monetary policy that provides cheap and easy credit.

In '00 we had a market crash after a dramatic run up of stocks in general and tech in specific. In 1998-1999 rates were low and credit was easily available [1]. As we led up to the millennium changeover ("Y2K") unprecedented amounts of short term capital were made available to banks and other institutions to allow them to weather any run on banks that might occur [2]. This money made it out the the markets and proceeded to whip them into something that was similar to a drug fueled frenzy: the nasdaq has never come close to those levels again. Alan Greenspan later noted that he believed his actions played an important role in the boom/bust. Once the fed windows closed for Y2K and interest rates were pulled upwards quickly all the money disappeared. Coincidence?

After the dot.com bust targeted rates were lowered dramatically to attempt to smooth out the markets. Check out this chart of historical fed funds rates as it is really easy to spot the cycles [3]. The next bubble was in housing, and predictably it began to burst when interest rates were raised again.

Look at that chart again [3]. The last couple of years have seen the lowest interest rates that have ever been available since the chart started more than 50 years ago. They have been approximately 0 for some time. In addition, the quantitative easing programs that the fed has engaged in (currently, QE2 composed of $600BN worth of treasury debt purchases) has left monetary policy so easy that if it were a woman the village would be talking.

I've heard some confusion about how this money makes it into the markets. It's really quite simple. Many people and organizations who would normally put some of their money into safe debt like treasuries decide not to because they can't make any money off of it and they are concerned about the effects of inflation. This causes them to look for better investments that will have a chance of returning something decent. The explosion of angels in SV is directly related to this process - these geeks, unable to make a good return in some traditional markets switched to making private investments. If more money comes into a sector, valuations will naturally rise and the quality of the companies funded will likely fall (or at least that seems reasonable to me).

QE2 is scheduled to end June 30th, 2011. Unless it is followed by a "QE3" (which there is probably a strong chance of) monetary supply will contract and interest rates will rise. At some point fed target rates will need to rise as a response to current growing inflation in the commodity markets and the retail increases in food and gasoline. Once the fed signals that the party is over, a ton of this money is going to run for the exits [4]. Don't expect to be able to close your next round unless you're of stellar quality or can hold out for 2-3 years.

Or at least, that's one version of it.

Of course, no one whose business relies on the expansion of public and private equity prices will explain this to you. The reasons for that should be relatively obvious.

[NOTE: I am not an economist. I wasn't classically schooled in this stuff. I'm also not a tea partier nor do I have any particular political axe to grind here. I am just a coder who has been watching carefully since the dot-com crash when I took a very big haircut. Take it all for what it's worth]

[1] https://secure.wikimedia.org/wikipedia/en/wiki/Dot_com_bubbl...

[2] http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id...

[3] https://secure.wikimedia.org/wikipedia/en/wiki/Federal_funds...

[4] http://www.chrismartenson.com/martensonreport/coming-rout

Good post. It seems common for participants in an industry undergoing a bubble to concoct elaborate industry-specific theories to explain a sudden influx of new money when the real cause is, well, exactly that: a sudden influx of new money. Unfortunately, we've been trained to correlate the numbers in our bank accounts with actual value, but the link has been all but severed for a long time.

It seems unbelievable that we as a population could keep being fooled by the same trick over and over, but when you look at the sums involved for those who benefit, it starts to make sense. This racket dwarfs even the military-industrial complex. It's rule-the-world money. In my opinion, anyone who tries to portray the situation as obscure or highly complex either has a stake or has succumbed to propaganda--printing money always causes artificial booms, and artificial booms always lead to busts. It's been true since fiat money was invented and it'll be true until we evolve beyond it.

This is completely wrong and absurd. We've had a gradual inflation rate since the beginning of the U.S. Dollar. We were headed toward a deflation without the QEs, which would've been a disaster in a highly illiquid economy. The QEs simply brought the inflation back to a good, gradual rate, and put more liquidity into the economy so businesses can start hiring again.

"We were headed toward a deflation without the QEs, which would've been a disaster in a highly illiquid economy."

Right, this according to the brilliant minds who created the crisis in the first place.

Clearly the financial situation is bad. Your 'good, gradual inflation rate' is WHY we're on the precipice of disaster. It's not like we now have a choice between an economic meltdown and a land full of unicorns and rainbows if only we keep stamping more paint on more pieces of paper. Our only option is damage control, but you'd rather keep piling on the damage.

Google some of the predictions made by Bernanke and his colleagues in the years and months leading up to the crisis. They've been dead wrong every step of the way. Yet now we are supposed to believe that inflation is no concern when food and commodity prices are at all time highs and causing revolts around the world? Talk about absurd.

"Good, gradual inflation" is how The Man keeps the proletariat busy working. They can't afford to stop.

Inflation helps the proletariat, you know. Most of them are net debtors, so inflation makes it easier to pay off their debts.

Only if their wages also get inflated, which does not always follow with price inflation of goods. And apparently would not happen on the free market, or else the government would not have to force it with minimum wage legislation.

> Inflation helps the proletariat, you know. Most of them are net debtors, so inflation makes it easier to pay off their debts.

Not so fast. Lenders factor in expected inflation, so it's only unexpected inflation that benefits debtors.

And, making payments isn't the only way to handle debt - bankruptcy works too. You don't get any more "pay later" pizzas, but you get to keep the ones that you already ate.

However, inflation hurts folks whose income doesn't match inflation. After they stop paying their debts, they still need to buy food.

My cat's favorite food went up 25% last month. Since she was already on the cheap stuff....

It's true that a higher inflation regime will not help debtors. But the net effect of an event like QE/QE2 is to help debtors.

But the net effect of an event like QE/QE2 is to help debtors.

Let's be serious here. Net effect of QE is 0.

QE2 did push US mortgage rates up.

It's unclear why/how though, as the vast majority of new US mortgages end up with a GSE that is heavily dependent on govt support, so the increase was a political decision.

The QEs simply brought the inflation back to a good, gradual rate, and put more liquidity into the economy so businesses can start hiring again.

How is that working out so far?

http://research.stlouisfed.org/fred2/series/EMRATIO

The fundamental flaw in this idea is the assumption that increased production/consumption will in turn increase employment. At the end of the last two recessions, production and consumption have increased, but employment has not. The old theories no longer work.

I don't think anyone is really being fooled anymore. They just get the game, and understand that cheap-money bubbles are a normal part of that game.

Well, a bubble is the result of people being fooled on an industry or economy-wide scale, so I think the fact that we still have them shows that plenty are fooled. I agree that many savvy players will participate with full knowledge of what's happening, but this only works for them because of all the suckers waiting in line.

It's not really a result of anyone being fooled. It's rational economic behavior to get in on a bubble which is why bubbles get bigger. The people that get screwed are the ones that dont get out at the right time.

Unless you are a very sophisticated trader (and likely even then), knowingly betting that a bubble will continue to expand is just gambling. You might get lucky and exit at the right time, but it's seriously -EV. That said, I don't really think the majority of small time investors think in those terms or are at all aware of how the monetary boom-bust cycle operates, which is why they get fooled into thinking they are better off when their nominal wealth increases as their real wealth deterioriates.

In hindsight, maybe. You only know it's a bubble when it bursts and the markets come back to earth. Outside of that it's rational to invest in something that's growing.

I still disagree. During bubbles, it is often apparent through straightforward financial analysis that companies are overpriced. Investing in a company whose price isn't supported by underlying assets and earnings because it's 'hot' is a speculative gamble on the extremely difficult to predict group psychological whims of the marketplace, not a rationally conceived value investment.

The current inflation rate suggests that the supply and demand for cash is in balance. This might not be true, but you won't disprove it with unsourced conspiracy theories.

There are a quite a number of ways to measure inflation, the fed's version of it is quite narrow. If you look at wholesale commodities there has been a dramatic increase over the past year.

Here is an interesting article that appeared in the WSJ opinion section a few weeks ago. I found it to be quite insightful, and it presents a workable explanation about why we might currently be causing inflation and not wanting to admit it.

The Federal Reserve Is Causing Turmoil Abroad: http://www.marketwatch.com/story/george-melloan-the-federal-...

The fed's version is the PCE/PI, which is the most general measure of inflation that is theoretically possible. You might have that confused with the CPI, which is a different index, the one you usually see in the news.

Finance is pretty easy to understand, relatively speaking, but the signal-to-noise ratio is far too high. The average finance news site tends to be a wretched hive of investment advice nuts and unreliable emotional opinionators.

Bernanke has regularly referred to "Core Inflation" when discussing inflationary pressures. You can see his use of it as recently as Feb 3, 2011 in his speech to the National Press Club: http://www.federalreserve.gov/newsevents/speech/bernanke2011...

The Fed's version of core inflation is the core PCE price index as you stated. The "core PCE price index [...] excludes the more volatile and seasonal food and energy prices" [1].

While you may reasonably take issue with my wording of "quite narrow" as I perhaps wasn't choosing my words carefully enough, core inflation/core PCE certainly isn't "the most general measure of inflation that is theoretically possible". I assume you weren't meaning to refer to "core PCE" - but never the less it is clear from federal reserve speeches that it is this measure that has been playing significantly into federal reserve monetary policy.

Core inflation makes sense in trying to smooth out seasonal or short term moves. However, the effects on global food and oil commodities that are traded in US dollars seem to far exceed any seasonal or short term influences. In that case discounting food and fuel influence on actual inflation rates seems unwise.

Bernanke seems to be acknowledging this. The WSJ reported on the 13th of March in an article titled "To Avert Criticism, Fed Avoids Saying 'Core'": Now, Mr. Bernanke is taking another tack in his public communications. In two days of testimony on Capitol Hill earlier this month, the Fed chairman never uttered the words "core inflation" while explaining the central bank's aims and policies. [2].

As a side note, as I've noted I'm in no way trying to put myself forward as an expert on these subjects. I get a significant amount of my financial news and analysis from the WSJ and Marketplace (public radio) (and Morgan coverage, which admittedly is not particularly hawkish here). I'm not above admitting that I could be making some serious mistakes, so if you'd like to suggest better sources of information I am all ears.

[1] https://secure.wikimedia.org/wikipedia/en/wiki/Personal_cons...

[2] http://online.wsj.com/article/SB1000142405274870489360457619...

Core inflation is not the main measure of inflation used by the Fed, so your previous statement is false. But you don't have to take my word for it--read the article you yourself linked.

Nevertheless, overall inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed.

The takeaway is that core inflation is an "alternative" measure used when volatile components are obscuring long-term trends. The intent is to get a good feel for what the real inflation number will look like in the future. This is a big difference from "using" core inflation as the primary measure, and I don't know what you gain from confusing my statements about the PCE/PI with core PCE. I never claimed that core PCE was the most general measure.

Anyway, this is far from the original point, which is that you have some silly conspiracy theory about printing "rule-the-world money", and you won't tell us what it is. But at least I got you to stop citing MarketWatch.

I think you may have confused me with another poster regarding "rule the world money".

I did link to an opinion piece from the Journal that suggests that the Fed is exporting unrest to MENA via inflationary monetary policy. Whether this is intentional or accidental is hard to determine, but it would make a certain amount of sense if it was on purpose. None the less, I didn't write the piece nor is it my theory.

Note that the marketwatch article is a direct reprint from the Wall Street Journal (which I noted). The WSJ version is behind their paywall.

You seem to suggest that I hold a lot of fringe conspiracy views, yet the theories you take issue with come from the Journal editorial pages. Does that mean you hold the WSJ to be a fringe conspiracy paper?

I think you may have confused me with another poster regarding "rule the world money".

You're right, I'm sorry.

But it's curious that you cite the WSJ editorial pages specifically. One of the things the WSJ is known for is how incongruously stupid the editorial section is, compared to the rest of the paper.

It might help to take Chris Martneson's Crash Course (www.chrismartenson.com) where he makes it clear that inflation is necessary under the present Federal Reserve system. Although Chris was a biological scientist before being an internet content provider, he has a pretty good way of describing the economics behind the Fed. It doesn't take a conspiracy theory to address the fairly human activities of the superbanks. Activities that vastly increase their power and in no noticeable way improve our lives. They don't have to conspire. In fact, they are often vicious competitors. Anybody tried to get a home mortgage lately? Hard to get, now. And why? The banks get free (as in no interest) loans from Treasury which the Fed will pay interest on. So they loan it back to the Fed to get paid interest. Why take the much higher risk of loaning us money to buy or refinance a home?

I personally think that the fed now has no choice but to pump money at zero (to effectively negative) interest forever.

There's a number of reasons for this: demographics, peak oil, the massively deflationary effect of certain technologies, etc. The west really looks a lot like Japan, which has pumped cheap money since their economy went through a similar cycle of stock bubble, real estate bubble, and crash.

So expect bubble after bubble...

That being said, the existing hype is nowhere near 1999 levels. If this is a bubble, it's a mini-bubble. I lived through that time, and it was an entirely different ballgame.

The question is what happens if/when inflation gets out of hand. Raising rates causes deflationary collapse, mass unemployment, and default on government debt. Keeping them low risks crippling inflation which could lead to social instability even in the US. What's a Fed Chairman to do?

Deflationary collapse is the only path back to a sustainable model, but it's extremely painful in the short term and so nearly unthinkable that a politician would choose it unless all but forced. Are you thinking things just won't get bad enough to bring the situation to a head?

Because of things like peak oil, growing resource demand from the developing world, etc., I think it's going to look like this for the immediate/foreseeable future:

Alternating cycles of inflationary bubble economies followed by deflationary collapse. Basically think 1995-2001 in .com or 2002-2008 in real estate, over and over again, forever. Inflation, deflation, inflation, deflation...

Beneath this alternating bubble-bust economy will be an underlying trend that I've heard called in-deflation: deflation in the value of everything you own, inflation in the value of everything you use.

Food, energy, and fuel in particular have nowhere to go but up for the reasons I mentioned at the top. Things like owning a car and driving it everyday are about to get orders of magnitude more expensive.

From a social point of view, the bubbles will serve a kind of bread-and-circuses role. Everyone will get to think they're going to get rich in the Next Hot Thing.

> What's a Fed Chairman to do?

In Australia, inflationary breakout led to the "Recession we had to have". Our Reserve Bank governor quite brutally broke the back of inflation in the late 80s to early 90s [1], culminating in an early 90s recession. With a quite conservative monetary policy we've done quite well since then.

(The mining boom has been a free kick though).

[1] http://www.smh.com.au/news/Opinion/How-the-recession-we-had-...

>>> has left monetary policy so easy that if it were a woman the village would be talking. <<<

I like the comment, but that's just sexist and offensive on so many levels that I lost count.

As someone else commented, Facebook could easily add a feature to show pictures from friends geotagged with your current location. (Not a perfect replacement but a lot of the magic.) Apple also appears to be getting aggressive in this space with the new version of mobile me. Color has an interesting vision, but I think traction as a photo sharing add-on is going to be tough once the social network and the mobile device maker get into the same exact business.

What is far more likely is for Color to try to get themselves acquired by Facebook.

If this is their real company strategy, the $41M investment actually makes sense.

that's exactly what I was thinking. I see this as being a very novel concept that if reaches a certain threshold of brand-awareness and good design could be a perfect acquisition target because merely replicating the feature-set would be like Google Video before Google acquired YouTube (it wouldn't be about the technical capability as much as the culture and community around the novel concept).

Perhaps we're seeing the start of something new..

  B2C = Business to consumer
  B2B = Business to business
  B2A = Business to acquisition?

Building to flip is hardly a new trend.

True, but I just gave it a new acronym :)

Edit: I'd like to clarify that the business model I'm suggesting feels different somehow. Yes people have built companies to flip before, but their valuation was still based on what they do as a company.

If what I am suggesting is true, Color's valuation is based on potential shares in the company that it's being flipped to. These VCs are essentially investing in Facebook, pre-IPO (set for 2012) without going through Goldman's special purpose vehicle, and without dealing with the SEC's 500 shareholder regulations.

If true, that would make this Color investment a very clever hack.

the other scenario is that they have a tiny bluetooth camera pendant/lanyard (like microsoft's sensecam) that would allow people to literally immerse themselves in their friends' surroundings. having this bluetooth device and the platform would allow for a much higher valuation.

I'd say it's the opposite, it's made them very expensive to acquire. It's not inconceivable that with the right team and a very impressive tech demo Facebook might have been prepared to sink >$41 million into a strategic aqui-hire at a very early stage.

Now to give the VCs a return on their investment they're probably expected to exit at north of a billion, which means they're going to have to show Facebook something special in terms of revenue or user-interaction generation or targeting they can't get from any of the many other smart developers who've taken less funding for their location startups.

You don't think the investors would be happy with $400MM in pre-ipo Facebook shares?

I'm not sure Facebook's investors would be happy with $400MM in pre-IPO shares, except in the unlikely event the service is generating significant revenue per user or bigger than all their location-based competitors before Facebook IPOs. I believe that's double Y Combinator's biggest exit, so it's not as if you can't pick up great hackers with great products and actual revenues for a lot less, and with pre-profit location-based startups being not-exactly-unfashionable at the moment Facebook are spoilt for choice if they want to make strategic acquisitions in that space.

I think Color have committed themselves to trying to build something big enough to be considered a Facebook alternative. Taking $41 million in a Series A buys you a lot of premature optimisation or a lot of runway if you don't think you're going to get a better valuation in a series B round. It also more or less rules out the quick exit.

That's pure bubble talk - "we don't have to generate profit to justify the investment, we'll just get acquired by someone else"

SOMEONE has to generate a profit based on the technology which justifies the investment or acquisition cost, whether it's color or their eventual acquirer.

And I'm saying, the acquisition is already planned and these investors aren't investing in Color, they're essentially investing in Facebook pre-IPO without going through Goldman's special investment vehicle.

None of the investors mentioned (Sequoia, Bain Capital, SV Bank) are Facebook investors yet.

But... what if facebook just buys one of the inevitable competitors for a fraction of the price? Or builds the feature on their own?

So far I'm missing the special sauce that makes them a must-buy-can't-clone.

What I don't get, economically speaking, is how we can both be in a bubble and in a barely recovering economy. In other words, how do these angels and VCs still have that much money to invest in such companies?

Ever heard of the term "two-speed economy"? It's happening right now on a much larger scale in Australia.

Indeed. Today in The Australian there was a story about laundry hands on offshore rigs being paid ~$420k.

http://www.theaustralian.com.au/national-affairs/laundry-sta...

Pay attention and you'll see that the rich have been getting richer even with the recession.

They need investment opportunites and investing in real estate probably isn't popular. Hence angel funds have tons of money to throw around.

Most VC's are backed by enormous pension funds and/or other group retirement vehicles. This is how they can afford to bet large sums of money on multiple companies with an expected payoff of only 1 in 10 companies on long time frames.

The pension isn't using that money (right now anyway), so the VC is free to do with it what they want, and in the end the money comes back to the pension in multiples.

At least this is my understanding talking to an actual VC (not in a fund-raising situation, just casually).

One reason I know we're not in a bubble: because everyone is saying we're in a bubble.

For you young whippersnappers who were too young to remember the 90's, a bubble is a manifestation of irrational exuberance- with (almost) everyone saying it's a whole new market, it doesn't matter how much the thing costs it's worth it to buy it because it's price is just going to keep going up up up, so do whatever you need to do to buy in now, because the longer you wait, the less you make.

In other words- it's a bubble when everyone is saying it's not a bubble. But if everyone is saying it IS a bubble, then it's not a bubble.

There is a difference between a healthy (or at least "not on death's doorstop") economy and a bubble.

We might be, but are bubbles always bad? Lots of money gets thrown around. More people get jobs. Ideas are everywhere. People get experience starting and running companies. Interpersonal and business networks are built. Lots of bad ideas are funded, sure, but a few great ones also emerge.

We shouldn't condemn bubbles as automatically bad. We should be aware of them, though.

The problem with a bubble, is not that 'money is thrown around' by investors - but that the source of the money ends up being in public hands.

The founders get their investment from the investors. The investors get their money back when the company is acquired (or makes money).

In the early stages of a bubble, this process generally consists of 'money being thrown around' as you say.

However, due to the hype of the returns from these 'investments' (e.g. Facebook growth) - it attracts the public investors into wanting to get in on the 'action'.

Typically this is done through an IPO, which allows the public to come on board and potentially pay all previous investors / founders down the chain their money back (plus more).

However, even without the IPO's of the last bubble (and they may still come!) - the public money is finding a way in (e.g. Banks setting up Social Media Investment Funds). Not to mention any other general investment companies having some of their portfolio riding on 'internet based stocks'.

Then when the bubble eventually bursts (The trend reverses and everyone tries to get out while they can) - it is often the public investors which are left out of pocket / losing their homes / etc.

The point made at the end of the article is, if you are in a start up right now (or even a VC) - it is better to get out early, than to get greedy and end up getting burnt when it bursts (e.g. GroupOn).

I'm curious about a couple of things, but also ignorant... so here's hoping for a helpful reply:

- How much institutional money (pensions, sovereign wealth, etc) is ending up in VC?

(My intuition tells me that the tremendous pressure on these funds to generate returns, which was a huge part of the housing bubble, is in turn fueling this bubble too, although not nearly at the same scale.)

Don't follow the hype:) The way i see things is simple. X angel/vc knows how to play the game of taking some Y startup with non super unique idea/product and sell it to the Z highest bidder. When X invest money the most important thing is to make Big News. The Z are full with money to spend, they know that money need to circulate in order to multiply. They watch The News. They react. With money. On the other side of the line are X, they also watch the news, dream for success and want to be Zuckerbergs. And so on. From my perspective the smartest move is to connect demands of Z and availability of Y. Be a X or The News channel. But i am small, insignificant, away from first hand experience and everything that i think is away from The Game that is x,y,z. Thinks i can do with one million funding, if i have it, in terms of product development, team building, business development, are so old school and simple that are not interesting to put here at all. For me in this position the only valuable model is bootstrapping everything, test early in real world and iterate slowly and carefully in terms of technology and business model. But i deeply respect The Game of x,y and z, not so in direct meaning but as side effect. If all this money are 20% effective they push new technology to the limit and test the audience and give as a valuable lessons without risking money that we don't have. So if Z want to spend it's their decision to make. Our is to choose a) to be valuable Y or b) to be other letter in the equation making our own working function, with our own proven methods and variables:)

Typically those kinds of things would happen once every year or so, twitter (I still don't fully grok their business model), facebook and so on.

Don't understand Twitter's business model? Promoted tweets have the ability to become AdWords for social. Millions of pieces of content are shared everyday giving insight into user's pleasures, dislikes, and lifestyle. This user data, when analyzed, has immense value for companies interested in purchasing. That information is worth a ton.

Bubble or no bubble, I sure grok their business model.

If the $40m is mostly for marketing / advertising then this is definitely reminiscent of the last tech bubble.

This is a typical business cycle[1]. Easy credit, low interests rates, no incentive to save.

[1] http://en.wikipedia.org/wiki/Austrian_business_cycle_theory

It is not necessarily a bubble yet. I think investors think the mobile-social-local market will be owned by very few companies. (Only a few can survive because of the network effect). They invest into one company and hope that with a lot of advertisement money they can win. There would be a bubble if they would invest the same money into 10-20 or more similar companies randomly.

> No more 'x' buys 'y', where 'x' is some established player and 'y' is some new kid on the block that has a fancy office with pinball machines a hip domain name and an in-house chef.

Or as was often the case, 'y' buys 'x'.

41 million (and growing): The number of views for Rebecca Black's "Friday" video on YouTube: http://www.youtube.com/watch?v=CD2LRROpph0

I would not have paid $1 to view it.

Not sure if this particular investment can be called as a sign of a bubble. Social networks, locality, mobile, and things are still new and unknown. But there is a huge potential. There will be soon 2B people on the earth with constant (mobile) connection to the internet.

In order to make FourSquare clone, you don't need a lot of investment for development but you need a LOT of money to acquire users and become a player in that space.

However, the assumption is that there will be only few players and that is why there is a need for these kind of bold investment moves. I disagree. The system will become even more fragmented, democratized, and complex with many unknowns, so classical ways of getting market share will not work. In other words, even with 41M of investment, the company will not be able to fight against some weird and original apps / social network or even coupon buying system.

The previous bubble took 5 years to form and about 2 months to go 'pop'. I'm not sure if that timetable is trustworthy, but we definitely seem to be accelerating along the curve.

Just thinking aloud here, but how on earth would you make a trustworthy timetable out of that observation? What do you measure? Economy was size A in year Y2K, technological faciliation was a level B, there were C people involved directly with the market; now the economy is size X, tech is level Y, and Z people are at the table... like why would you think one previous bubble was in some way proportional to a present one?

One last thing, what to make of Max Andreeson's pet theory that there never was a real dotcom 'bubble' - that a few companies were ridiculously overvalued but overall most were ok and in fact more investment should have happened (in a more diversified manner)?

At least the domain name is worth some dollars.

I actually quite like the concept - makes group photo sharing fun & easy. But worth $41m? Not yet

I wonder how much they paid for the @color Twitter account.

Twitter doesn't allow selling twitter accounts.

Do you really think whoever owned @color just gave it to them though? ;)

No, I think you're right, but I wonder how they did it. Must have been under the table.

As the great philosopher Inigo Montoya once said: "You keep using that word..."

Let's talk about this chart for a second:

http://www.google.com//finance?chdnp=1&chdd=1&chds=1...

Ok, see that 4000% increase in 18 months? That's what a bubble looks like.

Now, please point out to me where on the graph it made more sense to invest your retirement money in the S&P 500 rather than Amazon.

Wait, you mean pets.com, not amazon.com? Fair enough. But now I'm not sure what your argument is. That color.com is going to fail and the investor are going to lose all their money?

That is what you're saying right? Because if you're saying they're taking a large risk that has a very small chance of paying off then you're saying nothing. That's what investors do. That's what makes us (as a society) all rich.

If your argument is that capital is being misallocated then you have to say why and where the capital should be allocated.

Which brings us to what is actually a bubble and not just people with lots of money taking big risks that may not pay off:

1. capital being invested by (otherwise) non-investors

2. who can't afford to lose

3. who have come to believe, with certainty, that they can't lose

That was the case in both the stock bubble and real estate bubble. It's not the case now. I guess the headline "valuations are unrealistically high" wouldn't generate as much heat and would require a coherent defense.

We're still just starting a watershed moment for ways of finding productivity gains, forms of entertainment, ways to connect and share. We haven't scratched the surface yet. There are huge leaps being worked on in the foundation technology.

Give us a bubble! Spread it out, so that such 41mm deals go instead to a thousand teams. And we will give you the future.

> Give us a bubble! Spread it out, so that such 41mm deals go instead to a thousand teams. And we will give you the future.

That happens eventually, it seems, in a somewhat roundabout way, to some degree. Look at where the money from Viaweb ended up, as one example. Lots of successful people's money ends up as angel funding: Paypal, Delicious, and so on.

What's the difference between proof of it being a bubble and these guys just making a ridiculous investment based on hype?

What's worrying is that these guys are Bain Capital, Sequoia Capital, and Silicon Valley Bank - some of the most influential tech investors in the world. They should know better. That or they have some incredible inside info on the Color team and their product.

They obviously have incredible inside information - you think they invested based on the Techcrunch post? Is it silly day on Hacker News or something?

For real! These guys are masters of the universe. Obviously they couldn't massively overvaluate something.

Asking the wrong question?

What about asking, "How has taking this amount of funding helped this business?"

Strategically, this much funding through all of the controversy it has generated, will guarantee this company/brand gets in front of nearly every early adopter over the next couple of weeks.

It will drive hundreds of thousands of people to try it out.

And that's before they've spent a penny of it.

Loads of Posts on HN alone excitedly linking to the app on Android etc (one on the front page right now).

After that, it will sink or swim on it's own merit.

Would that have happened if they hadn't taken this funding? No. It would have had 5 minutes on TechCrunch, and then been forgotten about because it may not have been remarkable.

Now all they need to do is implement a business model / some way to make money from it so their per-user revenue exceeds their cost of user acquisition, and use the remaining $38,000,000 as a marketing budget to spread it to everyone else. Profit.

So, of the $41M, $3M goes to technologists and $38M goes to ad agencies? Hmmmm....

.com's are no longer important, blekko, duckduckgo, drop.io and similar companies are proving this. It's not a big deal anymore. Every time I pitch Reward.io I get asked "how will It make money" so saying that profits don't matter anymore is a big understatement in my opinion. New business models are being developed and used to make money like Freemium and more subscription models.

There will always be some startups with over valued valuations but the big thing is startups don't think they are invincible, with Digg and Myspace startups know they could die if they don't work hard and try and find a way to make money, even twitter which has gone almost too far recently with DickBar.

So, at first everyone criticizes these guys for being on the wrong side of the chicken-egg problem, then everyone says they raised too much money and are being too ostentatious.

Seems like they're attacking the chicken-egg problem in the easiest way, to me, the domain name and big dollar shine on everything make them look more credible and established. And they have enough runway to focus on product for the first few years while growing the userbase without having to monetize immediately.

Could still flop a million ways, of course. It just seems like going all-in could actually be a viable way to attack emerging social networky markets.

If there is a bubble, then it's balancing stuff like this that will keep things in check. I've been noticing it too, and I think that's a sign that things are getting crazier as the months go by.

Back to the days of which venture has the highest burn-through rate!

When a tech bubble pops, how does it affect a funded startup compared to a bootstrapped startup? I'm relatively new to the startup world, but as I understand it, startups that need funding are generally the only one's negatively affected when the bubble pops since funding becomes more scarce. If so, wouldn't that benefit the bootstrappers?

I think the only thing I'd generally agree on is that "in general it is agreed upon" are weasel words of the highest order.

Sorry, but the U.S. economy is a $14 trillion economy. Anyone who says we're in a bubble based on the aggregate Silicon Valley venture capital funding in the last year is getting ahead of themselves. Before you lecture us on a bubble, try to understand some basics on the U.S. economy.

I am commenting from the perspective of someone who is not in the US. Currently from the Asian region (excluding China), valuations are no where near that of the US. In Singapore alone, even with for a startup with vast customer based overseas is being acquired for only $10million. Yet, that $10million acquisition is more than enough to make the startup a superstar in our ecosystem.

Perhaps this bubble is only present in the states, but elsewhere in the world, valuations are still reasonable.

From Colo[u]r.com:

"Think fast!

Find someone. Take pictures together. Party. Play date. Lunch?

Simultaneously use multiple iPhones and Androids to capture photos, videos, and conversations into a group album. There's no attaching, uploading, or friending to do.

Share together in a new, moving social network. Just look around."

I wonder if encouraging people to digitally record everyone around them will lead to legal troubles at some point? Back in the day when I shot film, I'd often get the subject to sign a model release. Society and technology have changed a lot, but if we're going to monetize something like Color, the people whose images appear may want some of that money.

relavent link to his point about domain names: wallgreens buys drugstore.com for 409M.

http://dealbook.nytimes.com/2011/03/24/walgreens-to-buy-drug...

Nice touch writing out the full "$41,000,000" rather than just "$41M". Definitely makes it look like more. Although I don't disagree that the size of the investment seems unjustified.

Define bubble.

What about the popularity of the lean startup approach? The focus on data and customers tends to keep those startups real. Shouldn't this mitigate some tendency toward a bubble?

I'm pretty sure Dropbox paid a lot more than $7.95 for "dropbox.com" It's actually somewhat difficult to find an unregistered, pronounceable domain that's under 6 or 7 characters.

Dropbox had an already successful product operating on getdropbox.com. When you have some revenue numbers to play with, it makes sense to invest serious capital.

Is it actually important to have a short domain name? I either seldom visit a site, in which case I visit it through google, or I often visit the site, in which case it's in my url history completion list.

Bubble Smubble. This bubble has a long ways to go before it pops. We're coming out of a recession! We have a few years left before we should be concerned.

I think the domain name argument is bunk. The domain market isn't 'hot' again by any means. In fact it hasn't recovered from peaking in 2007-2008.

jacquesm really added ads to his site.

Who cares if we're in a bubble? The only thing that matters is "how can I make money from it?"

There is a bubble in people calling a tech bubble, surely this cannot last!

Anecdotal over-investment on the part of three VC companies != a bubble.

A bubble is a stock market bubble based on massive, irrational over-investment on the part of VCs and stock market investors which, after implosion, will hurt the US and world economy.

"Hey, those VCs are making some stupid investments" does not translate into an economic bubble. VCs frequently make stupid investments, because they're human and they're in the business of taking risks.

Please, I urge you to read a history of the actual stock market dot-com bubble of the late '90s so you understand the word "bubble" in context.

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