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Comment by canterburry | Hacker News Reader

Yeah...I see what just happened...we are back in 1999. Enjoy it while it lasts.

This time the money is mostly coming from wealthy individuals. While some of these folks have certainly shown regrettable judgment, this is completely different than in 1999 when literally billions of dollars were flowing from institutional investors and the general public. If this trend continues for another 5 - 7 years then we may get back to where we were in 1999, but I don't think we're anywhere near there yet.

That's changing, and fast. In Canada, pensions and retirement funds are getting involved in the startup funding game - and that's up north where funding is dry to begin with. I'm sure the same is happening here.

Source: http://business.financialpost.com/2012/03/29/vancouvers-hoot...

"OMERS Ventures, a $180-million fund established by the Ontario Municipal Employees Retirement System last fall, said Thursday it has picked HootSuite Media Inc. as its first major funding recipient."

Many pension funds have had some sort of high risk component to their portfolio. http://www.cppib.ca/News_Room/News_Releases/nr_02031001.html talks about the CPP's, which has been going on since 2005. I'd suspect we're only starting to hear about it because it's getting into our space.

Disclaimer - I work for one of OMERS other (earlier) investments. I guess we're just not "major" :P

"This time the money is mostly coming from wealthy individuals. While some of these folks have certainly shown regrettable judgment, this is completely different than in 1999 when literally billions of dollars were flowing from institutional investors and the general public."

Doesn't matter whether coming from wealthy individuals or institutional investors or the public.

Both are susceptible to the halo, follow the bandwagon, and hype. The decision are ultimately made from people. It's what drives any tulip craze.

Don't the big VC firms like Sequoia raise a lot of their funds from institutional investors?

Good point. Though I think the top VCs hardly ever lose money on a fund, they just make lower profit margins. In fact Doug Leone of Sequoia once said that they never had a fund that lost money, although in 2002 they almost did [1]. But even if they did, if their investors had consistently invested in their funds over the years, they would have been ahead of the game. So in the long term I believe that top VCs and their investors are going to do well.

[1] http://techcrunch.com/2011/09/12/doug-leone/

If you define losing money as generating a lower rate of return than you'd get by investing in an index fund of the stock market, then IIRC ~3/4 of VCs generate negative returns.

this is right thinking.

every asset class has a benchmark asset, and you measure the return against it.

the issue is that i don't know what asset class funds would place VC investments in. they could (but i doubt) benchmark against treasuries or whatever.

iirc a sufficiently good vc return is 3x over the life of the fund, which translates to an IRR of maybe 20%.

Since VC investing is supposed to be higher beta, I think an index fund of U.S. small cap stocks would probably be fairly appropriate, possibly with some investments from emerging markets (e.g. Brazil) thrown in. The person who would know exactly the right benchmark would be Paul Kedrosky, I'm sure it's appeared on his blog at some point or another.

I really doubt that's the right benchmark.

What do you mean by "high beta"? LPs are looking for uncorrelated returns. If you want high beta you could just make leveraged investments in an index.

People outside the finance world seem to think beta is the same thing as standard deviation, and forget about the market correlation factor. I think the natural conclusion goes like: beta ~= risk ~= potential reward. It's hard to remember the bit where the ups/downs correlate with the market.

Could be. I do get the sense a lot of people here learned everything they know from blog posts, unfortunately.

For the rest: beta is defined as correlation to the market. Sigma is standard deviation of returns and also called risk.

The most common way I've heard the term used is to mean correlation to "the market", meaning "the set of things that you can invest in".

A high beta asset goes up more than everything else when "markets" do well, and a low beta asset less so.

It is common in a multi-asset-class trading environment to make a grab for beta when the belief is that the short term trend for markets is good. Like when there is unexpected positive news flow about the global economy. "Buy some beta!"

My guess is that VC returns are dominated by IPO exits, and IPO exits need institutional and retail demand for equities, which tends to happen in up markets. To the extent that VC returns are directional with the state of capital markets broadly, it seems like calling it a high-beta strategy is reasonable.

I probably used the wrong term. What I meant is that for small cap stocks, there is a very high rate of return over a 20+ year timespan, but in any given year there is a lot of uncertainty. Venture capital strikes me as being similar in that sense.

(also called risk, or volatility. oops.)

I agree - it seems true (albeit strange) that only a handful of VCs are making returns that justify the risk. But those top VCs are consistently ahead of the game. I don't think those index funds did very well during the tech bubble burst, when Sequoia almost lost.

The JOBS act is going to let companies like these raise money on the internet from just about anyone.

Yes, but at much lower levels. That's a valid concern with the JOBS crowdfunding provisions, though.

Every bubble is "completely different" to previous bubbles to the core group at the center of it. If they didn't think that, the bubble would never materialize.

I still remember laughing in the year before the dot com bubble burst when I'd hear all the "this time is different" talk about how Internet companies didn't need to make a profit.

I don't think you can compare what we see now to the bubble days. Let's look at some key differences:

- In the 90s there were 50 million internet users, now there are over 2 billion. The internet economy is huge.

- It's becoming easier to get seed funding, but it hasn't become any easier to raise series A (some claim it's becoming harder due to the increased number of seed companies chasing those series A dollars). In the bubble days the madness went all the way to the IPO.

- When the bubble burst, people lost faith in the future of technology, or at least in the rate at which it would advance. Now that phones have become computers, books have been digitized, and people rely on technology for every aspects of their lives (even to socialize!), it's pretty obvious that technology is here to stay.

For sure we may see a down-swing. If macro economics go in shambles due a new war or an economic meltdown in Europe, then technology investment will suffer as well. But as opposed to the bubble days, I don't think technology investment will be the cause for such a down-swing. I think we have matured since the bubble and the fact that it was so traumatic (we're still discussing it aren't we?) also helps preventing it from re-occurring.

One of the reasons it is different this time, but still a bubble, is that there is tons of cheap money flowing around the globe, and sophisticated investors are desperately looking for returns. Hedge funds have had big outflows in the last 3 years. That (risk-seeking)money has to slosh somewhere. The total size of the hedge fund world is larger than in 1999-2000. Also, the concentration of advertising dollars that flows through a few key companies - Facebook, Google, Microsoft, etc., is significant. Ad spending basically drives this whole thing from the revenue side. In 1999 there was less of this money in absolute terms and also the ad and marketing folks had not yet learned how to target ads to users online.

So ads + Quantitative Easing (hope I am not getting too fast and loose here but this is shorthand) means that worthless companies like Instagram can seem strategic to ad delivery platforms like Facebook. And there is so much extra risk capital chasing deals that $1B is nothing to throw away.

PG has been in the right place at the right time, but just because he and his partners do things differently in their business does not mean that the macro picture is not the most important factor.

edit - we have not matured we have just gotten better at online advertising and marketing. But that is arguably a great efficiency for the post-industrial service economy.

it's not entirely the same. while there are echoes, the few companies that are hitting the open market via IPO are not getting massively inflated stock prices. it'll be interesting to see how this little bubble bursts.

http://www.youtube.com/watch?v=YuAJHaXKgFk&feature=colik...

:) liked it. Although, here we are 5 years later and no bust yet...

Funny!!

FIRST POST!

2012 is the year of Linux on the desktop!

Netcraft now confirms: BSD is dying.

What's the keyword for this article on AOL?

I suppose we all ought to move back to Slashdot now.

I, for one, welcome our new entrepreneur overlords.

In Soviet Russia, pendulum swings you.

Dear God am I on fucking reddit? I'm all for a little joking but this is ridiculous and adds nothing to the conversation.

no love for slashdot memes then...

So do the "it's bubblicious!" comments this thread is responding to.

Reply on news.ycombinator.com