I'm calling this Bubble 2.0, and it's ready to burst

During the lead up the 2008 debt crisis I saw a lot of people talking about how house prices had been going up year on year and questioning whether we were in a property bubble. There was a debate though. Demand for housing was strong (partly due to population growth) and it appeared that globalisation had freed up the capital so banks had plenty of money to lend to people to buy houses. So the rising price of property, it was argued, looked like the natural effect of market forces. In hindsight it's easy to see that there was an oversupply of wholesale debt, but at the time I think people assumed that it was just a more efficient distribution of global capital that was opening things up.

Similarly, in the lead up to 1999 people seemed to know that there was too much money floating around. Everyone seemed to be investing in stocks or property and swapping stories of how much they had made. Yes, tech stocks were rising quickly, but so was everything else, and there seemed to be no shortage of investors coming up with money to fund these tech companies so what's the problem.

I think what happens is that people always look at current circumstances in the context of recent bubbles and try to look for patterns. When they don't quite fit, they argue over whether this really is another instance of a previous bubble. My theory is that the overpriced asset is rarely the same thing as in the last 3 or 4 bubbles.

So, back to the present day. We have lots of high valuations for tech companies. But we also have lots of tech companies actually making a profit, plus operating costs are a lot lower. So we're not about to see a burst in the sense that the funding will dry up and companies will run out of runway. Instagram was like, 12 people(?), if they couldn't have got that $50mil investment I'm sure they could have found a way to keep operating for another year or two.

The challenge is to think about where the bubble might actually be. Could it be in advertising revenue? Are advertisers burning though reserves trying to get attention? Could it be in mineral resources? Are server or bandwidth costs artificially low? Could it be a bubble in intellectual property? Is the exact implementation of Facebook not actually as valuable as the companies valuation suggests. I have no idea, but I don't think this a complete re-run of 1999.

TLDR; I don't think this is "[Tech] Bubble 2.0", this is probably "[Something else] Bubble 1.0".

The 1999 bubble was only an issue because it happened with publicly traded companies that lots of people were investing in and making unrealistic gains on. You couldn't watch television without seeing ads for online brokers showing how easy it was to get rich quick, and your "My Account" page on said brokerage site was eager to tell you about your 10X margin and encourage you to use it. When it popped, all those stock portfolios went back to where they started (or worse), and hilarity ensued.

This time around, there's none of that. The "Bubble" is simply a handful of private companies getting silly valuations. If that stops happening, there's really no aspect of it that will bankrupt your random average family in the Midwest.

So yeah, sure, call it a bubble if you'd like. But it seems from here to be a harmless one floating off in the distance rather than a 1999-style one that we were all living on top of.

Last year I didn't believe it that much, but this year I'm starting to see crazy company evaluations, highly inflated that don't generate any revenue at all, so I don't know how can they be worth billions of dollars, but I know math and little about economics.

But if bursts, it's a good thing. It brings perspective, a thing that's missing a lot these days, where every social app or thingy that's the hottie of the week is evaluated on > $400M.

What I think we are seeing now is the Venture Capital bubble. Lots of funds have shitloads of money they MUST put to work. If they don't put money to work most firms can't raise another fund and at some point the LPs can back out of their commitment. For a while now there is a market where the only way to put large amounts of money to work is to make much larger investments at a high valuation, expecting a lower return.

9 and 10 figure valuations are being driven by too many large funds chasing too few good companies. The LPs will get burned, funds will close, but there is going to be no collapse of the venture/seed market.

If you see this Bubble "burst" it will slowly over the next 5-10 years when second tier funds can't raise more money. VC is turning to a winner-take-all game where only the top 3-5 players make sizeable returns, because their brands are the only ones who afford them access to deals.

In MBA school, you learn about stuff like discounted cash flows and how they are ultimately what is used to value a company. (Comparables and multipliers are really just proxies for the notion of what the present value of a company's cash flow is)

Then you get out and start raising a round, you throw valuations around in the air and to most outsiders it seems illogical. I think this comes about because many founders simply aren't financially literate enough to do more than say "If AirBnB is worth X, then we must be worth at least Y"

Some people get excited by these uninformed valuations, others write blog posts and call it a bubble. In my opinion, the truth is somewhere in the middle. This crop of entrepreneurs learned some big lessons from their older brothers. They've learned the importance of revenue and having an unfair advantage. With a few exceptions, my experience leads me to say that most entrepreneurs are trying to build real businesses and are not gaming the funding community. This is very different from the IPO fever of the dot-com bubble. (Not to mention the fact that the size of many seed rounds today would barely cover a month of runway in 1999)

Capital is out there but the funding environment is not loose and there is less cash in the system than there was the last time around. TechCrunch and YC make it look easy, but fundraising is still fucking hard. Anybody who's pounded the pavement or sat through months of due diligence only to miss closing date after closing date will confirm this.

Instead of arguing on what our companies are worth, we should all be focussed on building a strong, diverse and healthy North American tech industry. It's time to get back to work and stop giving a flying fuck about what some investor thinks you're worth. Debating whether or not we are in a bubble are simply unproductive.

i.e. Tell a Pets.com shareholder in 1999 that owning company stock and they'd look at you incredulously and tell you how we're in a new economy. Or tell a homeowner in early 2007 that prices are crazy and it might be a good time to sell, and they'd look at you like you had two heads because, as everyone knows, house prices always go up.

Look at it this way. There are plenty of talented engineers, designers, and entrepreneurs out there trying to build the next big thing. Due to the incredible scale and reach of the internet economy, those who succeed will become fabulously wealthy. But most will fail (or at least not reach that scale) due to various circumstances---a misstep in execution, a superior competitor, our simply bad luck. There are certainly many small successes, but success or failure can seem like an incredibly binary event.

Why should engineers shoulder that risk? That’s the raison d’etre of finance and investment. Let those with capital take on the risk, and give the engineers enough security so that a “failure” doesn’t put a talented person out of the game. If every startup that demonstrates that it execute on an idea and can clear some threshold of viability gets a reasonable exit, then the investors will still get enough Facebooks to generate a good return, and the startup teams are much less captive to chance and fortune with respect to whether they can pay the bills or not.

If things like this poetry IPO idea haven't happened and garnered piles of cash from unwitting investors throwing money into a market they don't understand in a herd mentality ... how exactly is it a sign of anything other than a goofy idea?

Asset bubbles occur when people are more interested in acquiring assets rather than effort to acquire the money used to buy the assets. Basically, people start throwing money around just to get that asset.

It usually occurs when money is easily acquired through loans, etc, and as the asset prices increase, the general idea is "I can borrow the money, make some money on the asset, and then pay back the loan".

Usually a lot of delusional math occurs that convince people that the price they are paying is actually "cheap". For example, people who made $50k/yr and bought a $1M house would delude themselves into buying the house by saying "Well, I can take the teaser rate for 2 years, and by then the price should go up by $100k, and then I can sell, and use that money for a downpayment on a house I can afford." Or, similarly during the dotcom bubble, analysts would say "Well, the P/E ratio is currently 1000, but based on the projected earnings 5 years from now, it's actually only 20." To be honest, in the midst of the bubble, this type of thinking works well. We all know what happens once the bubble bursts, though.

So when popular products like Instagram with zero revenues are being sold for $1 billion, there's a lot of the bubble math going on. "There are 30M users and we're paying $1 billion, so we're only paying $30/user." Anyone remember the acquisition of broadcast.com by Yahoo as a strategic acquisition? The same goes for the rumored attempted acquisition of Path for $100M a couple of years ago. Or Color.com paying $300k for their domain name. I think these massive Internet companies like Google and Facebook are taking a product, and applying dotcom math to it, and coming up with sky-high valuations given the size of their audience. Maybe they're right, maybe not. But they are the ones contributing to the idea that revenue-less products are worth hundreds of millions or billions of dollars.

So, when VCs know there are giant vacuum cleaners that are willing to pay ridiculous prices for products, of course they are going to drop all their money and invest in as many startups as possible. They would love to invest $250k in another Instagram and make $78M. And this helps sell investment in their funds as well, which causes more investors to pile in, trying to get a piece of a bunch of Silicon Valley startups.

And this is the situation where companies like Facebook or Google, or VCs are more interested in acquiring assets (ie investments in startups), rather than caring about the actual money itself.

My guess is that the bubble will burst soon after the Facebook IPO. Why? Because at that point, paying $1B for a company with zero revenues will likely be the cause of shareholder lawsuits, and there will be a lot more scrutiny involved in these acquisitions. Since selling to Google or Facebook is the exit strategy for most of these SV startups, if that door closes, then funding will get pulled quickly and violently, and it will be the start of the next dotcom bust 2.0.

People will also be closely watching Facebook's financial performance and seeing if they can justify their valuation of $100B. If they miss estimates, or if their ability to monetize consumers flattens, then it's most likely a catastrophic, extinction-level event for most of the startups in the Valley.

I certainly hope this doesn't occur, but I can't see how it's not likely. EDIT: To be clear, I don't mean that I believe Facebook will miss estimates, I do however believe that we are in a bubble that will burst.

The other problem I see is that people are looking at an isolated outlier and making predictions based on that. If we remove the one 1 billion dollar deal (which looks like it could actually have been competitive with FB and cost FB way more in time/money to compete down the road), we're not really seeing any examples of Bubble like behavior, other than what we should expect to see with a growing sector.

Some tech companies are focusing on growth over profitability, with the hopes of being acquired. In almost all cases, those aren't billion dollar+ moves. I haven't seen any broadcast.com like deals. The scale of deals/exits is different now than Bubble 1.0.

Facebook's IPO is relevant here. Once more information comes out, we'll have a better idea of how large user bases (like Facebook's) can be monetized and what it takes to extract the value. Things could go either way after that, and it all depends on how the market reacts to this information.

My hope is that the software industry can weather this storm, and that its now diversified enough to deal with investors pulling out of the startups amassing users and shift to focusing on startups selling to SMBs or enterprises. There's bound to be some collateral damage here, but hopefully it'll be minimal.

http://ixjy.com/post/22704727159/will-somebody-please-disrup...

There are so many cocked up ideas out there (many of them built with someone else's money in the hope that somehow, someone, somewhere will give them money).

Some of these ideas actually get funding, which is tragic, and some of them actually make it, which might be worse, but most of them never see the light of day.

Assume Charlie is right: this is a bubble and the pop is imminent. What would the you in 2014 or 2017 wish you had done now to prepare?

What will happen to your primary source of income when bubble2 pops? How much runway do you have to secure another source of income? What expenses would you wish you had cut? What relationships does 2014-you wish you had cultivated to help find new sources of income?

Then, I suggest you make it a priority now to do those things while you have the chance. If this is a bubble, and if it pops, you won't have any more warning than you do now.

I have taught a very successful class on Investor pitching in SF for 6 months. I have had between 10 and 50 students per class, always sold out, even when I raised prices... (http://fundraisingviparisoma.eventbrite.com/)until end of March. Then, in April, I had to cancel two classes because I had too few students, and I only have 10 next week in a venue when I never had less than 20. It just tells me that we are at the end of a cycle, when everybody who drunk the "Social Network Movie kool aid" thought they could create a Groupon for India, a language learning start up or an Opentable for Hair Salons. It's a good thing for everybody actually.

Now as for Facebook's valuations, the question is - will Facebook bring as much traffic to applications in the future than Google did to commerce websites. My belief is yes (look at Viddy, SocialCam, Zynga, Pinterest, Draw Something if you need examples). In that case, Facebook, like Google in 2004-2008, will grow into a 100B-$200 valuation (which does not mean that I think it is the best stock purchase to do, the big money on Facebook has been made already by earlier investors). Same for Pinterest. If Pinterest users convert like crazy, then they will be able to demand emerchants to "pay to play" and... they will.

Would it be fair to say that, until the IPO, every player in the system has an incentive to inflate the price?

And in our little world even the press doesn't usually see itself as having a critical role. Quite the contrary as with Arrington & Calcanis and their ilk.

I was certain this charade was going to explode in 2008/9 but it didn't and it even got bigger.

A guy I know mentioned the only thing that's going to pop this bubble is the Fed raising interest rates, which are near zero. That will severely limit the amount of money available for investments like these.

The problem is with a shitty job market and an economy that's doing bad almost everywhere else but tech odds are the government wont do anything that could risk heavily indebted California sinking into the sea because SV imploded.

Back to jobs, the amount of ex-something-else (not coders) turned watrepreneurs is staggering, and that's because they all want to ride the gravy train and "get paid". This is one aspect that's almost exactly like during the 1.0 bubble.

One scenario I think could pop this bubble is a new bubble in another industry siphoning the money from tech VCs to that other industry's investments. But it would've to be a revolution to beat the insane returns of some tech M&As.

But as long as there's people rushing in because they are afraid of missing the next instagram-like opportunity this is going to keep going.............until the "nextagram" explodes in a ball of fire burning everyone involved...

Then again chances are the guys who started this will get out mostly in one piece, since they already made their money. But like when the previous bubble collapsed there are going to be a lot of actually good startups with great ideas caught in the shitstorm, seeing their valuations drop to the price of a used geometro, and no way to get a loan let alone investments.

And the culprits? they'll be back the moment valuations get crazy again, and they'll make more money, again.

As awareness of startup culture grows, it is necessarily going to attract some goofiness. That's OK. Not every idea is a good one, and not every good idea is going to work. We need these stories to make the successes stand out so much brighter.

You may be right, but I hope you're not. I see things like Pebble's success on Kickstarter, Amanda Palmer bringing more attention to the idea of crowdsourcing funding for something that is every bit today's poetry, and see the spread of the paradigm shift we all already value (or else we wouldn't be here). I think it's right to be nervous, but I am cautiously optimistic that hacker/maker/startup culture is an attractive alternative to the existing production model.

I always appreciate your thoughts, but nowhere near as much as I would appreciate a new Laundry novel. Thanks for the good times.

Instagram, Colors, Zynga and others like that are still exceptions rather than a rule. Indeed media attention for these social apps/gaming companies tend to be high which might give the illusion that internet industry as a whole is moving towards valuations without any base underneath.

If YC had accepted the application, I could see it used as evidence that too much money is chasing too few ideas. But they didn't.

The entire "get a bunch of users and worry about making money later" mindset seems somewhat broken. Let's see what happens if all major browsers come with ad-blockers preinstalled overnight or more importantly if people/governments? start taking privacy more seriously.

What happened to the good old bootstrapping mindset that used to be the go to philosophy in IT. Seems like it got replaced by a cracklike addiction for VC-money-shots.

So a relatively large audience then with no revenue meant nothing, but today a much larger audience still with no revenue is somehow different, somehow worth a lot more.

This sounds to me exactly like the (very old) "we'll make up for it with volume" joke, except people aren't using it as a joke! They believe it!

On the other hand, if one considers the amount of time we're all dedicating to development and market research on our as yet unprofitable projects...

shoe-shine boys offering stock tips - Happens in all markets, even in really bad ones.

Head down. Innovate.

So his bubble sample has meaning and therefore his POV rests unproved.

(Don't get me wrong, I love his books. But are we really looking to SF authors for market guidance now? Just because he cites one failed business model?)