A few points about the “tech bubble” debate | Hacker News Reader

A few points about the “tech bubble” debate

cdixon.org

56 pointsicey24 comments

"I don't know whether successful private companies like Groupon, Zynga, Facebook and Twitter are over or under priced since I don't have access to their financials"

To play devil's advocate, how can anyone call FB, Twitter, Zygna, etc., "successful" (in the financial sense) without that information?

I was under the impression that everyone believes these companies are printing money, but don't know how much money they're making relative to their valuations. Although, I'm not sure about Twitter, are they considered to be significantly profitable?

I find the argument that this isn't a bubble because the people driving up valuations are private investors to be a bit of a red herring. That doesn't affect bubbletude, just who gets hurt if and when it pops. Inflationary bidding with the expectation of continued growth forms bubbles wherever it happens.

Otherwise, the point about bubbledom being determined by the strength of the companies involved is valid. So too, is the point about diversified revenue streams speaking to a stronger underlying market. I'd actually like to see more on this last point. We can all agree that it makes sense that a market that relies on a single revenue stream (advertising) would be shakier than a diversified one, but I'd like to see some analysis into how diversified the current market is, and what that says about it's fundamental strength.

the argument that this isn't a bubble because the people driving up valuations are private investors

Whose argument is that? Chris certainly didn't make it.

His argument (implicitly) is that this isn't a bubble because the tech sector has sound fundamentals. The point about private investors is unrelated. If anything it's somewhat at odds with the rest of the post.

You're right, I was imprecise with my statement. His argument is that it's better that inflationary investing is happening in private markets, and while that's true for the general public, I'd still say that that has no impact on whether or not we're in a bubble. If there is a bubble, and it does pop, that would be very bad for the HN crowd. The fact that VCs and investment bankers would be losing most of the money doesn't change the fact that a whole lot of devs will be out of work, and there will be a few lean years of funding for people trying to launch. In fact, for just about anyone who cares whether or not there's a tech bubble, its existence would be bad. So yes, while it may be better for the economy as a whole to have the risk taken by a select few, it won't matter much to the rest of us.

Chris is conflating the startup bubble with a general tech bubble and using the strength of profitable companies to defend startups.

Twitter and Color are startups with no clear business model. Groupon and Google are going concerns.

As per the blog entry: "A bubble is a decoupling of asset prices (valuations) from their underlying economic fundamentals". [Agreed!]

Throwing $45 million at Color with nothing more than an idea and the hint of an app is evidence of a bubble. So is Twitter's recent $7.7 billion valuation based on a predicted $150 million in 2011 revenue.

I know it hurts - hell it's going to hurt all of us - but you better believe it. Prepare to be profitable or die.

Twitter has a very clear business model: advertising. They are on track to make $150+ million this year from it.

I thought much of Twitter's revenue came from licensing their firehose to Google, etc.

That was true for a moment. They did the Google/Bing firehose deals before they had promoted tweets/trends program.

Which means they're valued at 51 times revenue. To put that in perspective, Google is valued at just over 6 times revenue.

Totally different stages of business and incomparable. Google revenue is growing steadily, since $30B p.a for a single revenue stream is about as big as you can get.

If you want a proper comparison, Google's PE ratio was 150 at IPO (and 300 at the high range of estimates, and it eventually reached that)

A lot of smart people thought that was a bad buy at the time, as well:

http://nikcub.appspot.com/the-google-ipo-skeptics

Google turned a profit every year since 2001 and earned a profit of $105.6 million on revenues of $961.8 million during 2003. They IPO'd August 2004.

and Twitter has revenue of $150M and is probably 2 years away from an IPO. Just because it hasn't made a profit each year, like Google, doesn't mean that you can compare its current 50x PE to Google's current 6x

I would suggest that Twitter are likely waiting to book an entire year of profits and 3-4 years of revenue growth before they file

Analysts are searching for simple analogies to explain what is happening - and in tech it is either bubble or not bubble. Nobody is bothered or able to explain in any real terms how a company like GroupOn can go from unknown to a billion in revenue in 24 months. They only know to take the easy analysis by looking at valuations and calling bubble.

It takes a hell of a lot to bore me when the topic relates to startups/tech/silicon valley but all this Bubble Talk seems so silly and pointless.

Why is this topic so damn fascinating to people?

There is a strange and powerful drive to be the first person to declare that something has jumped the shark. I don't know exactly what it is about the Internet that has done this, but the time it takes for someone to leap up and declare that something is "over" just keeps going down, to the point that it has now reached somewhat absurd levels. Maybe we're in a bubble, maybe not, but either way the declaration seems to be getting made on awfully scanty evidence... but it's important to be first.

Of course on a long enough time scale a bubble in tech is inevitable almost no matter how you slice it.

I think that it isn't necessarily to be the first to declare it, but people want too see it coming. Where the first tech bubble surprised a lot of people and they lost money. If you know your going to lose some, it doesn't hurt as bad. Kind of like playing roulette. You expect to lose but it feels good when you win.

From a strategy perspective, it matters hugely to anybody in or thinking of launching a startup.

If there's no bubble, then the current happy days are likely to continue: lots of money chasing after good ideas, huge rewards for the winners and so as a result easy access to angel investments and high valuations. Yay! So it makes sense to think of a strategy focused raising a lot of money on great terms.

On the other hand, if there is a bubble, a very different strategy is called for. One option is to sneak in and raise money at bubbleicious valuations before it pops. But that risks setting expectations with investors that will be impossible to meet in a post-bubble environment -- a recipe for a rocky medium term. Another option is to batten down the hatches and focus on getting to cash-flow positive ASAP to leave yourself in the best position to pick up the pieces as other unsustainable companies crumble. Or as I said elsewhere in the thread, maybe it's a good time to be contrarian: work out where the bubble is likely to be, and position yourself differently so that when it pops you can be there as one of the first exciting post-bubble companies. And it's also possible to take a straddling strategy, ready to go either way depending on whether or not it's a bubble.

Of course it's impossible to know for sure what the answer is. But hearing and understanding various perspectives (right and wrong) and others' reaction to them really helps map out the strategy space and highlight the best places to be.

I think the fact that you listed so many options tells the real story: all this thinking about whether there is a bubble is a distraction for entrepreneurs (to a first order approximation). Build a great product that people will pay for - there's money for those no matter the state of 'the bubble'.

I see it differently. A good startup has multiple options about what great products it can try to build, the cost and revenue models behind them, and its funding strategy. Products that are great for people who are throwing around money in a frothy bubble environment can be millsontes in a buttoned-down, post-crash situation. So while too much reading thinking about the overall context is a distraction, ignoring it hugely increases risk and misses opportunities for significant advantages.

"It's not a surprise that we know we have crises every five or ten years. My daughter came home from school one day and said, 'daddy, what's a financial crisis?' And without trying to be funny, I said, 'it's the type of thing that happens every five, ten, seven, years.' And she said: 'why is everybody so surprised?' So we shouldn't be surprised..." - Jamie Dimon (Chairman & CEO @ JP Morgan; Dir of the NY Federal Reserve)

If you agree with Mr. Dimon, the party will come to an end sooner or later - bubble or no bubble. Your best bet is to relax, enjoy yourself, have some drinks and ensure you have a driver to take you home when the party is over. As John Wooden said, "Failure to prepare is preparing to fail."

Personally, I don't know if there is a bubble. But, I see plenty of cracks in the system that are cause for concern.

I don't think Facebook's valuation is "bubbly". However, the valuations of many early stage startup companies are inherently speculative, because they are based on projections which rely on assumptions, and only time will show whether this assumptions were true or false. This bubble is only as "bubbly" as these assumptions are overly optimistic. This is why investors learned to bet on people and teams, rather then on ideas, because the quality of the team is a better predictor of its success then the business idea.

As long as we are seriously having this debate, we are not in the middle of a bubble. It might be an overvaluation, fine, but that's not a bubble.

A bubble occurs when the overvaluation crosses an unsustainable threshold. It's when the values are rising faster than people can properly evaluate the risk.

We are definitely getting closer to a bubble. The euphoria associated with a Facebook IPO might get us there.

Since Sarbanes Oxley has made it unpalatable to sell to the public directly, we really don't know much like the dotcom bubble the current situation is. But we do know that the Fed has pumped massive amounts of liquidity into the economy and that it has to go somewhere. And the Fed is the number one creator of bubbles in the world.

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