Pmarca: OK, you're right, it IS a bubble
blog.pmarca.com
blog.pmarca.com
Marc climbed up from grad student to monster IPO, rode out huge corporate stuff at Netscape/AOL, left and started another company, raised huge money, built a huge business during the dot-com winter, and piloted the ship home through a dizzy chain of IPO/merger/acquisition. He is now blogging the best stuff about entrepreneuring you can read anywhere on the net right now.
You should listen to this guy...
The problem with the first bubble wasn't caused by non-profitable companies. It was caused by hubris over stock prices. The reason why so many people lost their shirts in the first bubble was because millions of Joe Averages took out cash advances or cashed out home equity to buy Internet stocks. There was a lot of hubris around the NASDAQ and average investors jumped in on the action en masse. I personally knew at least 4-5 people who had left their jobs to become day-traders.
I worked with a Med student who had maxed out 8-10 credit cards, bought high tech stocks with them, and then bought a collection of motorcycles with his stock earnings. When the bubble popped, he was left with a bunch of loans on expensive motorcycles, $100,000 in credit card debt and a great position on worthless Pets.com stock.
Sarb-Ox has really clamped down on the number of IPO's that are occuring now. So, even though there might be hubris around web apps right now, the average investor has no way of pumping money into those businesses, and that's a good thing.
What start-ups are creating are several products in tandem: The first is software that actually does stuff. The second is a community of users that develop and grow around that software product. The third is a small tight-knit group of people who have proven their capacity to produce.
Big Co is interested in all three of those things. And Big Co has proven repeatedly that they are willing to shell out a bunch of cash to aquire the software, the community or the people. Even if the startup isn't profitable, the software, community and people are still very valuable to companies that need those things.
What start-ups aren't creating this time around is IPO fever where the stock price gets ramped up while the founders and employees cash out. This is what's going to prevent the next big bubble from forming around web apps for quite a while this time around. The fundamentals are much better this time around.
The Web 1.0 bubble wasn't based on the way in which people found the money to buy these stocks or the hubris in the expectation that these stocks would always go up. It's just about fundamentals. When you buy a stock, you are buying how much the company earns today and adjust that for how much it could earn, say, ten years from now.
People bought Pets.com either with the naive expectation that it would earn billions in the future or with the expectation other people would think so. There was no evidence, just lots of hope and the eternal wish to get rich.
So you and Marc are telling me that Facebook is really worth $10 billion. You two are saying that that's a realistic expectation based on an objective evaluation and anyone who doesn't agree should be ridiculed. Ah... there's the hint. Ridicule is a cover for fear. Personally, I don't need to hide. I have the fundamentals -- and time -- on my side.
The term "bubble" scares people because of events such as those that happened in 2000-2001. It's an imprecise term because of that. If you mean "inflated valuations" we might be in a bubble, if you mean "reckless speculation by average consumers" then we're probably not.
If Facebook turns out to be a dud before they ever have an IPO, who are the big losers? A few hundred employees, and some professional investors. Microsoft is still plenty profitable without Facebook, and VCs will bounce back or be replaced. It'll indirectly affect many others, but the typical portfolio of a typical working American will remain relatively stable.
Conversely, if 500,000 average consumers average $20,000 invested in Facebook and it suddenly goes bankrupt, that's a huge problem. It causes a massive disruption in their lives, and it will have a much more noticeable indirect effect on everyone else. (eg nobody can afford to buy Christmas presents this year)
It's a free market, and Facebook's valuation is whatever someone is willing to pay for a piece of Facebook. If Big Co purchases a piece of Facebook for $500 million, then someone at Big Co made a guess that either the software, the community or the people were worth that much.
Mind you, I don't think that Facebook has a 10 billion dollar valuation, but that's a moot point, I don't have the $500 million to purchase those shares.
My hunch on the Facebook deal, though is that Microsoft is trying to beat Google to the punch and wants to provide search services to Facebook. The software, community or people might not be worth that much to them, but I'm sure that keeping Google out of Facebook probably is worth $500 million to them.
What's the worst case scenario for Microsoft? Google doesn't get Facebook's search, Facebook goes poof in a couple of years and Microsoft is out $500 million. No big deal. Microsoft's cash reserves are well over $25 billion anyway. They have to spend it on something. Might as well spite Google with it.
On one hand, it's clear to me that whether or not there's direct financial value to building a super popular site, there's definitely societal value to products that people like. I really, really want stuff like Facebook to be worth a ton of money, because they mean something to (a lot of) people. Plus, my personal instinct is to build social websites, so if I'm gonna be a millionaire, it's going to be along the lines of something web2.0.
On the other hand, it absolutely kills me that a tech company can get a valuation of 100x of their current revenue, mostly on the hope that somebody somewhere'll figure out a way to make real money on a product (and in the meantime people will make acquisitions believing that it's an inevitability). Posts like pmarca's make me feel like people believe in Facebook because if Facebook doesn't work, nothing will, and we really will be back to boring 2003 instead of exciting 2007.
Say all you want, no sustainable revenue means no business, sooner or later.
The problem with sarcasm is that it allows the writer to frame the opposition in exaggerated, silly terms. For instance, the post derides people who claim VC's are "All stupid, and unnecessary to boot".
Nobody would half a brain would make that claim. Of course capital will still matter, in many cases. But there is still an interesting emerging argument that the cost of server space and programming tools have dropped to the point where bootstrapping has become a real option.
I'd love to see a writer as good and experienced as Marc give me his take on this new trend. Is it a good idea? A bad idea? When would you want to do one rather than the other? This is all lost in the sarcasm format.
But I agree with the other posters here who have pointed out that Marc is just having a little fun taking the piss out of the naysayers. Nothing really wrong with that. I enjoyed the post, but I hope he gets back to his more insightful style in his next post.