Andreessen: Bubble Believers 'Don't Know What They're Talking About'
online.wsj.com
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The 1990's were a retail/buy side bubble. The current bubble is a sell-side one, driven by the Fed. They are completely different. Disproving a retail bubble does not exist (correctly) does not speak to a liquidity driven bubble existing / or not. The people funding VC firms...have too much cash. That's good for VC firms...and the reason you won't seem them point out this fact.
It would be more interesting to hear marc's view on the amount of money chasing deals. Perhaps he will chime in.
Fact: The Fed has injected large amounts of cash into the asset markets using http://en.wikipedia.org/wiki/Quantitative_easing . I've never added up the cash as a percentage of GDP or one of the Ms, but it always seemed significant (i.e. 5-10% of GDP, but this is debatable). I should caveat by saying that this cash never entered general circulation, which has meant treating it as part of the monetary supply is tricky.
Now, based on this fact of Fed intervention there are a few opinions:
1. While the Fed directly isn't buying equities (i.e. stocks, but this is as far as we know), its presence means that all the other cash holders have to seek out other investments to get inflation-beating rates of returns. There isn't hard data to support this, but it is the conventional wisdom of both people in the game and macro economists.
2. The magnitude of the impact on the asset markets is up for debate. I've seen numbers as low as -5% and has high as 60% of last year's stock market returns can be attributed to the Fed intervention. Some of the difficulty is that there was large federal fiscal stimulus impacting during this time, and counter-intuitively there is some argument that the Fed neutralized the fiscal stimulus to hold inflation rates constant. The important part is that there was a stock market surge, and it is not a result of retail investors pouring in money: It is a result of institutions balancing away from bonds to stocks (this is what the GP means by "supply-side"). It's just not clear if the institutions did it because they have confidence in the economy or if they were "forced" by the Fed. The "why" is opinion, and many people believe the fed is the "why."
3. On the micro side, seeing 20-something kids get 150k budgets to screw around for a year is maddening. "It's ok, VCs play the numbers game... we just need one tulip to pay 100x." There is too much money chasing "talent" right now, and should the correction to the asset market happen this year (as I predict from the fed's cessation) then we will see the startup bubble unwind.
Nonsense. This is but an externality.
What is maddening is the current state of the financial system as a whole. Though its intellectual underpinnings should have been completely shaken by the events around 2008 and the subsequent rescue of its champions, vested interests would prefer to pretend the emperor still has clothing -- and thus the externalities of QA, of which startup money is actually among the most palatable.
It's awfully self-serving for pmarca to deny the existence of a bubble. Leaving aside the question of whether or not there is a bubble, how much does he — personally, nevermind a16z — stand to lose if people were to start behaving like there's one?
How many times in the history of mankind have we wired the planet to create a single marketplace? How often have entirely new channels of commerce been created by digital technology? When has money itself been transformed into thousands of instruments of investment? It may be that at this particular moment in our history, the convergence of a demographic peak, a new global marketplace, vast technological opportunities, and financial revolution will unleash two uninterrupted decades of growth.It's also not just tech bubbles. The recent US housing bubble (when housing prices would never go down, because shut up that's why), and China's real estate bubble are great examples.
However. That does not mean that denial implies there's a bubble. We must evaluate each case on its merit. Every bubble will be surrounded by lots of people saying "it's not a bubble". But so will every non-bubble. That statement alone tells us nothing.
Sometimes there are good reads, though.
Snapchat is a one-trick pony and about as special as a snowflake in an avalanche.
But to pull Tencent out of your ass and compare it to Snapchat? There is no basis on planet Earth for the comparison. None. You're just tossing out random names at that point. Tencent is literally as old as Google is. They had $7B USD in revenue last year. They have 21 thousand employees. They run the China equivalent of PayPal. Their messaging service, QQ, has 798 million accounts and has seen peak usage of 176 million users at a single time. It is here that I remind you that the entire population of the US is only 313 million. Mathematically speaking, Snapchat doesn't stand a chance. No one "plans" to become Tencent. No one. I don't care how good the prospects are for Snapchat. You tell me you want to become Tencent and all you have is a sexting app? That's when I laugh at you. Then I pull up the App Store and flip through all your competitors. Then I remind you that your entire value is derived from fickle teenagers, that won't be there a year from today.
$100B my goddamn ass.
Also, you clearly didn't read my response carefully enough.
I never said Snapchat had a 2% chance of becoming another Tencent. I said that if Snapchat had a 2% chance, the valuation is justified. Clearly, some investors think that chance holds. Some investors think that chance does not hold, and they did not participate in the deal!
I'm also not tossing out random names. Did you even read your own post, which mentions Tencent? I was addressing your argument in the context of your post.
I would also argue that a16z would benefit if investors thought there was a bubble. They would get tremendously better valuations and there would be so much less competition for the best deals.
Also, anyone who says Snapchat is just a sexting app for teenagers clearly doesn't understand their product, speaking as someone in college who sees Snapchat used all the time (by lower and upper year college students alike). It's already moving upstream.
Once a VC gets involved, they also reserve the right to fire "Bob" and replace him with a CEO/Management team of their choosing. Also, don't underestimate the ability of 10s of millions of dollars and some hi-powered talent (plus the VC team pushing hard) in changing a "one-trick-pony" into a category competitor.
This explains why Snapchat walked away from $3 billion dollars. If you have a VCs mindset and even have a 10% belief in that bull market, then the offer was too low.
First, gaming consoles are illegal in China. Second, Chinese people prefer to pirate rather than to buy software. Third, Facebook is blocked by the Great Firewall of China.
This means that Tencent faces no competition from console games, from packaged PC games, or from Zynga and clones. Thus, Tencent gets to collect a large percentage of the total gaming dollars (or rather, yuan) spent in China.
What's the likelihood of Snapchat getting game consoles and Facebook banned in the United States?
Does Snapchat really have a 10% chance of turning into the next Tencent? Or is it more like 1%? Or 0.1%?
Unofficially, who knows what the real reason is? It certainly hasn't hurt Tencent, whose market cap is now greater than that of Sony + Nintendo combined.
http://www.reuters.com/article/2014/01/07/us-china-gamescons...
If they have a 10% to turn into Tencent tomorrow, at 10% chance there is some value. If we are talking about 5-10 years down the line, a reasonable discount rate like 25% puts the $100B of future value at something like $10-30B. Suddenly a 10% isn't even close to good enough.
This ignores the extremely unlikelihood that consumers in the US monetize the same way as in China to even reach a similar market cap (Tencent has higher top-line than Facebook).
Teens sexting tool vs legitimate messaging service adoption by demographic that can afford the add ons.
apples and oranges imo.
All you need to know is that in 2008 the stock market crashed. More than likely within the next few years, before 2015 is out (~7 years later), all the investors who will the increasingly expect a crash, will get one. Oddly enough, I think that human greed, expectation and fears of loss drive the cycle.
All it needs is a trigger to start the mass sell off. Then Facebook shares won't be worth diddly squat. That's when you buy again.
A tiny minority of investors can read the signs of impending doom. Lucky investors, including some Wall Street traders get lucky and sell before the crash. The vast majority of investors miss the boat and lose out big time.
The trick is knowing when to buy and when to sell. I think the whole thing is smoke and mirrors. 99% of it is probably luck.
http://www.forbes.com/sites/kenrapoza/2012/05/25/buy-when-th...
In the long term, the stock market trends upwards. In other words, what goes down, almost definitely will go back up again. The ups-and-downs of the short and medium term are can be mostly ignored by those who aren't day trading.
> The trick is knowing when to buy and when to sell.
A bit understated, don't you think? Finding a peak is hard enough, when you're in it -- many were crying 'bubble' and moving out of their positions at the beginning of 2013... what suckers they are! And having the courage to pour your money into a fear-driven market when you've determined it's in a valley is even more difficult - if it wasn't, everyone would be doing it.
Smart investors don't try to time the market. They put their savings in carefully, consistently, and sometimes buy what's on sale.
I could not have come up with a better way to express it. It seems like every time I look at HN, someone is crying "bubble." If pressed to explain what constitutes a bubble, and why they're crying it now, the answers usually involve citing some company (e.g. SnapChat, Twitter) or small number of companies with an insane valuation or financial transaction. "That's a bubble!" they cry.
I'll point out that this is nothing, nothing like the actual bubble of the late '90s/early-2000s, where the public was buying large amounts of stock in brand new, unproven (but public!) companies. Few or none of these companies had turned a profit. Many were disasters of execution (witness WebVan, which has become Steve Blank's prime example of how not to run a startup). VC investment was at a peak. Founders actually expected that their business plans could be executed without modification.
The mindset has completely changed since the crash. Yes, sometimes you have to wonder what the heck the VCs are thinking, or why the SnapChat guy would turn down a multi-billion-dollar buyout offer. Twitter's stock price seems unjustified, and Facebook's did, too, at least at first.
None of that constitutes a "bubble." As MA points out, "bubble" was short for stock market bubble. This is all private stuff, for the most part; few companies dare to IPO these days, compared to the '90s.
The cost of infrastructure has dropped massively, as well; no longer are you required to buy scores of servers just to host your website. One might even be able to host the whole thing on Wordpress. Servers are virtualized and therefore far more cost-effective. You don't need to own the physical hardware. Bandwidth is far cheaper. There are free CDNs.
So: VCs have learned lessons from their '90s mistakes. So have founders. The price of entry has dropped dramatically, requiring far little investment; meanwhile, business model development has learned from software development so that companies learn to grow and change in order to find their audiences.
That is why there is no "bubble."
Facebook's stock price still seems unjustified. They're losing momentum, and not picking up the new generation of kids, which severely mitigates the relevance of their platform going forward. How, exactly does that justify their price being > 200% of what it was six months ago?
"Markets can remain irrational longer than you can remain solvent."
And, yes; I meant "mitigates." "v.tr To moderate (a quality or condition) in force or intensity; alleviate."
But to answer your question: The stock was undervalued in June.
FWIW, I bought FB stock at $28 and recently sold once I doubled my money. I sold because I think FB has found its value and I don't personally think it will see much growth. This $50-60 range feels right to me. So I took profit.
That, and it's easy to look good playing tech stocks in a year when the NASDAQ goes up by 34%. In another few years, I'm not so certain that a P/E of 140 for a company that seems to have hit its plateau will still look like such a fair valuation.
Like I mentioned elsewhere, I sold FB. I'm not a true believer who thinks this will be the first $1 Trillion company. But I think objectively, you're bearish on FB and I think it clouds your judgment.
This is a company with a reputation for high quality engineering. They have 20% of humanity as users. It's grown to staggering proportions. I'm reminded of the people who called it a house of cards when it hit 100 Million. And it's grown from that insanely amazing number by a magnitude.
Over the last 4 quarters, Facebook has increased revenue and profit by nearly 30%. Net income? Up over 600%. It made a billion dollars in 2013 and should double that in 2014.
I'm not trying to sell you. I'm just suggesting that possibly you are letting preconceptions cloud your judgment. It's growing slower? It has some issues with teenagers? Facebook's history gives me no reason to believe their future growth depends on hooking users at a young age. I'm not sure how you reach that conclusion.
Anyway, feel free to have the last word, I'm not one for internet debates.
How many of those are active? What's the ratio of active:inactive over time? That's far more important than absolute number of users.
The Federal Reserve pumps hundreds of billions of dollars every month into the economy in various ways. The traditionally safe investments (like treasuries) aren't performing well because interest rates have been suppressed for years. As a result, all this cash is being thrown at anything that has a hope of yielding a return.
The bubble here is that, at least in the view of many observers, the current situation is unsustainable. At one point, something will happen (in recent days, the suggestion is that the fed may slightly trim asset purchases). Once that liquidity is sopped up, what happens? Most likely, a bunch of investors will end up suffering losses in the face of "down rounds", early stage investors will tighten in the face of concerns regarding the late stage investors, and the bubble will burst.
On the other hand, there may well be some bubble-esque things going on in the VC/startup area. It's a bit of sleight of hand to try to disprove that by looking at smartphone sales, because those are generally all sold by big established companies like Apple and Samsung, not by startups.
Personally, I don't expect the startup scene to come crashing to the ground any time soon, but at the same time it helps to be more precise in defining what exactly the bubble is supposed to be. The fact that Apple and Samsung continue to turn a profit doesn't necessarily have anything to do with startups like Snapchat.
Stock market bubbles might be the most common kind of speculative bubble, but they're not the only kind. Tulips and houses come to mind as clear counter-examples.
There's certainly a trend, that software companies add value. There may also be a bubble atop that - it's hard to tell.
But I do hesitate over all these social startups; they seem close to fads to me. But this may just be my personal preference for tangible concrete usefulness, as opposed to communications (which admittedly has a history of success).
Note: amazon has never made a profit (partly because they reinvest). No profit from glorified mail-order doesn't surprise me - though AWS is a perfect online business.
With all the recent insane valuations by VC's, you'd assume that there'd at least be a tech bubble in the private investment market. However, VCs aren't even close to investing as much as they did in 1999 and 2000 (less than half). In fact, they even invested a little more in 2007-2008 than they did in 2011-2012 [0].
[0]: http://techcrunch.com/2013/01/17/vcs-invested-26-5b-in-3698-...
'An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values". It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.'
Make a solid argument about whether this is or is not the case but "no cab drivers on the buying side" is a crappy argument.
In addition to the other example that Mark gave ("they don't know how they will make money") another way to keep the competition at bay is by the use of red herrings and by spreading disinformation that is believable.
There are also investors who don't know how a consumer startup is ever going to make significant revenue from it's impressive user base that have to do the "this is an Adwords-type revolution away from being the next Google" speeches whilst gearing up to offload their stock in a pre-significant revenue IPO.
My only theory so far is people like Andreessen are taking the game even further- i.e. he believes we are in a bubble, bets accordingly, and publicly says we are not in a bubble to help increase his profits in some fashion.
Basically I assume some commentators don't know what they are talking about, and the rest (the ones who know what they are talking about) actively give bad advice on purpose, so I do my best to ignore all this stuff. If we know the speaker is either stupid or malicious, best not to listen.
We're all thinking about it because right now it's a very good time to be a coder, and pretty much every time that's been true, something awful has happened pretty quickly. We're all just invested enough to get burned by it, but not well-heeled enough to put our money where our mouths are.
Maybe there's an advertising bubble (I still see a lot of ads for ad-supported services), maybe it's something else, or maybe these toys we've made actually do create a trillion dollars of value to society. Either way, we're along for the ride, and there's little we can do to hedge against it besides being better than the people around us, and hoping to survive the next round of layoffs.
Before you say consumers are lazy and this could never happen, consider the following hypotheticals.
1. Snapchat gets hacked again, and this time sexting photos are leaked.
2. Credit card fraud increases dramatically
3. Google+ starts offering a percent of revenue gathered from people's personal data
4. Someone starts a Lulu for guys (chickopedia) and hundreds are sued for stalking
I think any one of these events could dramatically adjust customer perception of the "stalker economy", as Al Gore so succinctly put it.
Irrational exuberance causes bubbles guys, it doesn't have to be mom or pops, it can be the naive exuberance from those that make up the market, as for as I know most of the market players share the same exuberance.
Once the notion of value from future profitability is crushed for the second time around, the entire models for valuing startups will fail. We saw the exact irrational exuberance during the dot com era, that we are now in a new economic landscape, the old companies have no future, it's basically people with a large equity in such companies spreading garbage. Supply and demand never changes. Inflation never goes away. Cash flow today is more than potential cash flow years from now. It's a giant ponzi scheme, pump and dump, whatever you wanna call it.
If Warren Buffet calls you out on something, I listen, the man knows what he's doing.