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Comment by 1971genocide | Hacker News Reader

1971genocide

The amount of money and media attention around "startup" is eventually going to lead it to its downfall. There is no quick "make money fast" schemes in life. The reputation that the tech sector has created after the dot-com era was created purely on sweat and hardwork ( not mine but the veteran engineers in SV whose shoulders I am standing on). Now the vultures seems to back and many tech products on the markets seems to have a over-inflated valuation because of this dumb hype.

I am keeping my options open since I know this is going to lead to a crash in the next few year.

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From what I've read, towards the very end of the last crash - a measurable number of "ivy" league school MBA's were leaving their mgmt consulting, investment banking offers to pursue startups. I believe when the most risk adverse, conformist, security of self focused individuals (which tend to seek MBAs) pursue startups - it is an indicator of the peak.

Peter Thiel had a few good things to say about this in Zero to One along the lines of what you wrote.

Perhaps it isn't so helpful to generalize here but,

a) New businesses that are built for non-digital processes and workflows are very inefficient. Not every new small business is going to gain a decisive strategic advantage in their market. Almost none will. That doesn't mean we shouldn't be teaching students business (value of the MBA another conversation.)

b) I'm not a VC but the returns for startups is something along the lines of lose 100% of the money, may be return the investor's capital, or post a great return. All the mechanics underlying what it takes to make it to 'great return' by itself limit the number of big winners. This isn't investing in apartment buildings, creating a new food franchise, or arbitraging bonds. Most likely the "me too" trend riders will end up in the lose 100% of the money box. That is unless we get leveraged start up investing. Then it could get quite interesting.

I like Nassim Taleb's extremistan analogy for this conversation.

So how does this market crash? This is something I have struggled with for some time. Markets have typically crashed because public investors buy at very high prices and then the market loses faith that the future cash flows of the business will pan out. But IPOs aren't happening like they were. Facebook buying Instagram for $! billion is crazy, but Facebook continues to grow and generate revenue (because of or in spite of Instagram) to exceed investor expectations. If these acquiring companies continue to grow and succeed, then how does the bubble collapse? We have no idea whether Nest can justify the $3.2 billion Google paid for it, we just know that Google continues to beat estimates and the Nest guys continue to afford nice cars.

I also do take exception to the fact that MBAs are all vultures. I am trained as a computer Engineer, practiced as a materials scientist, and got an MBA. Now I am one of those exact vultures you speak of with a startup of my own that I, by the way, believe is going to contribute meaningfully to society.

>If these acquiring companies continue to grow and succeed, then how does the bubble collapse?

Simple: the bubble collapses when the acquiring companies no longer grow and succeed.

Facebook et al are doing well, but also have sky-high valuations. Current investors aren't satisfied with current income, they expect massive growth going forward.

If current investors weren't satisfied with current income, they would sell. Facebook's margins are excellent, and while I will agree their P/E ratio is high, Google's is quite near that of GE (which should have a much lower multiple considering their return on assets is MUCH lower). I'm sure it will happen eventually, but tech companies are making money right now, and they aren't built on broken economics like the dot com bust in 99.

I guess while I agree there is a bubble in startup valuations, I do not think Google, FB, and friends are at huge risk of going bankrupt or losing a substantial portion of their enterprise values.

If current investors weren't satisfied with current income, they would sell.

The market is not about current, but about the future. Stockholders are banking on FB figuring out how to monetize all the users.

I do agree with you that companies today are mostly all making money which is very different from the 90s. Whether companies like FB can maintain growth to sustain their valuations is something that remains to be seen.

Evan Spiegel's view of everything got leaked with the Sony Hack. Take it for what its worth:

Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets - at these values, however, all tech stocks are expensive - even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won't be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks. Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars -- largely due to mobile advertising performance - especially App Install advertisements. This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded). VC dollars are being spent on user acquisition despite unknown LTV of users - a recipe for disaster. This props up Facebook share price and continues to justify VC investment in technology products based on abnormally large mkt cap companies (i.e. "If this company attracts just 5% of users that FB has, it will be HUGE" - fuels spend on user acquisition as user growth is tied to values). When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease - compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough. Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.

Do you have a link to this?

http://www.businessinsider.com/snapchat-ceo-evan-spiegels-em...

It was submitted on HN couple of weeks ago, here is the discussion: https://news.ycombinator.com/item?id=8764135

Thanks for this. I am not sure I am quite so gushing, but the analysis seems reasonable. Time to go and short Twitter :)

Interests rates rise, investors pull out of riskier assets, like tech/VC. Funding dries up, businesses start to fail, causing further investor pull back, which in turn causes more businesses to fail.

It feels a bit bubbly but a lot of the risk has shifted to the startup. It's a lot easier to get the small funds to start but harder to get the big bucks. The valuations make sense if you think about talent costs, customer acquisition costs, and that the deals often include a lot of stock.

For now, but what happens as the bubble continues to grow and more and more people start seeing dollar signs amidst the irrational exuberance?

Most companies are sweat and hard work without a doubt. That said there are occasional stories, Groupme comes to mind, where you build a product, work hard on it for a year or so and get bought out by a bigger company with no serious plans for your product. Then you just ride out the golden handcuff period and collect your cash. By no means should anyone expect starting a company to be that sort of experience but it happens and some people believe they can be that company.

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