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steven2012

"I am pretty paranoid about bubbles, but things still feel grounded in reason."

Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006. They have a self-interest to believe that the good times will keep going. During the dot-com bubble and the housing bubble, the rationalizations that were being spouted by those in the midst of it were incredible.

The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.

The only thing keeping the valuations high are because people delude themselves into believing that Google or Facebook will pay billions for customers. If Google and/or Facebook declared they would be doing no more acquisitions, valuations would plummet immediately.

The valuations given to companies with no real revenues, or profits to justify ridiculous valuations. But the rationalizations that get spouted to justify them are what is a big indicator of a bubble to me.

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> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

What if they're worried about an independent Whatsapp being a threat to FB's business model? As in, maybe Whatsapp isn't "worth" $19B (whatever that means) but it's a threat to destroy $50B of Facebook shareholder value? In that case it would be rational to buy them out to ensure that doesn't happen.

If Whatsapp puts $50B of Facebook value at risk by simply existing, that means that $50B had little value to begin with.

I think that so far it suggests that that hypothetical $50B was worth $31B + whatever positive value WhatsApp has.

Saying that a product used by 500 Million people (that's ~7% of the population of planet Earth) earned its value by "simply existing" is a pretty hand-wavy.

That's incredibly difficult to do.

I didnt really say that. I said that if it puts Facebook's value at risk, what exactly was that value? Why is it zero sum?

This. Facebook did really throw startup valuation out of whack starting with the Instagram acquisition and following up to Whatsapp. They appear to have no idea what they're doing with their money, they're in a rather vulnerable spot with their core business, and their demented frenzied spending seems to have infected everyone around them.

Instagram has turned out to be an amazing acquisition for Facebook. Facebook make >$12 billion dollars in 2014. You're saying Instagram wasn't worth 1 months revenue for Facebook? It's a double digit percentage of all time people spend interacting with Facebook's app constellation.

Warren Buffett looks for investments with an economic moat around their economic castle. If a startup could get close to doing that much damage to Facebook, maybe Facebook's business isn't very defensible.

Successful social businesses have a big moat in the form of network effects. If it were any easier to cross the social-networking moat, Facebook would not have paid $19 billion for Whatsapp. Attracting and retaining users is hard.

The numbers needed to match Facebook are big. The fact that Whatsapp, Viber, Line, etc are even able to approach those numbers speaks volumes: they have succeeded in executing on their businesses, and there is demand in the market for solid messaging products that evidently the incumbents have not been able to fill. Buying out a (exceptionally successful) startup before it becomes a potential competitor makes total sense.

I know of multiple ways of trying to estimate the magnitude of network effects. All come up with social networks creating O(n log(n)) value for users. If true, that result demonstrates that network effects are significant, but a better competitor does not have to have nearly the scale you'd think to be able to compete head on against the big giants.

That said, I wouldn't recommend going head to head versus FB for your next startup. But there will be no shortage of future companies posing a threat to FB like the one that FB posed to MySpace before it. And like MySpace posed to Friendster earlier on.

Let's be honest. FB has a lot of advantages here. They are the first mover, they have a ton of resources, and they have appropriate levels of paranoia about this issue. But still I'd give them substantially less than even odds of being the social king when, say, 2030 rolls around.

> I wouldn't recommend going head to head versus FB for your next startup.

Yep. The threat to FB or any similarly dominant company isn't head-on, but rather sideways, where peripheral businesses could eat into their core. So far, Facebook is doing a pretty good job of recognizing those risks.

An interesting exercise is to think of how companies have handled those risks and the effects of that. Eg, IBM's stance on software as they gave Microsoft exclusive licensing rights, only to backtrack with OS/2 and giving up. Microsoft dismissing the Internet, then playing "me-too" ever since with Bing, Windows Phone, Azure, etc etc. Google's social networking efforts with Orkut, Buzz and Plus.

> less than even odds of being the social king when, say, 2030 rolls around.

Agreed, when you're dominating a competitive industry, it's pretty hard to stay on top indefinitely. Nowhere to go but down.

Attracting and retaining users isn't hard. Attracting and retaining users that will pay you is hard. Give out free slices of cake to people on the street and you'll have lots and lots of users, and they'll probably come back. Selling marketers billboard space behind your free cake stand isn't very profitable unless the cake is very cheap - but if the cake is cheap then just about anyone can bake cakes.

> Attracting and retaining users isn't hard.

Have you tried? It is hard, especially in a saturated market with plenty of choices. For mass media (TV, news, social), the scarcity relationship is reversed: you're effectively competing for the user's time and attention. Almost zero-sum, especially when considering the allocation of advertising dollars.

Additionally, the barrier of entry is low, since anyone can make a Twitter clone in 20 lines of Ruby on Rails. So you'd be trying to carve out a niche in social, fighting against network effects and the dozen other college dropouts working on the same idea, while hoping Facebook won't decide to implement your differentiating feature. That's not easy.

> Attracting and retaining users that will pay you is hard.

For purely discretionary purchases, yes. This is what makes the success of eg, Viber all the more remarkable. They made a $900 million business by selling electronic stickers. Anyone can sell stupid stickers, but it takes sheer execution to get $900 million for it. Not easy at all.

Since it's so difficult to get paying users in social, you can hedge by relying on a (slightly) less elastic source of revenue: selling those eyeballs and clicks to advertisers. But the traffic needs to be high and consistent for a scalable operation. And again, you're back to square one. Not so easy.

Attracting and retaining users, on mobile especially, is extremely tough, no matter how good your "cake" tastes, even if it is free.

Facebook has a lot of business moats, but when it comes to the fleeting attention of the youth, and trends, there is no way to moat that. The second you moat a generation's trend, the next generation declares you old and busted and will do anything but use you.

Which is probably why Buffet doesn't invest in fads and social media: http://www.fool.com/investing/general/2014/01/27/why-warren-...

I actually think this is awesome. This means a few motivated individuals can put together a niche social network and have a guaranteed buyout from Facebook. Basically, if you get big enough, they have to buy you.

I think the only option they really have is to spin off new social networks to cater to new generations and become just a holdings company for them. Sort of a YC of social networking. Their main advantage would be the ready source of funding vs a random college student thinking up the next Whatsapp or Instagram.

> maybe Whatsapp isn't "worth" $19B (whatever that means)

It means it'll give an appropriate ROI for 19B

> but it's a threat to destroy $50B of Facebook shareholder value

If you think the destroyed 50B is greater than the expected value of the next best option for those 19B, then I suppose it's justified.

But then again, that does mean that it's relatively easy to poke at Facebook's empire. I think it implies there's not a very efficient market. It means these things can keep happening over and over, draining Facebook's bank account, until it's no longer worth it for them to keep buying. (This may be what the other poster was alluding to by saying that the 50B isn't actually worth much.)

Benedict Evans has made strong points about how mobile and the open address book has changed Facebook's position significantly. Well worth reading or listening to some of the a16z podcasts about the topic.

I think it is a very positive thing for the current ecosystem that there are many mobile apps with which we can communicate and share content. Contrast this with Google's dominance of search for the past decade.

The bigger question to me isn't if Facebook wins or loses but what control Google and Apple are able to exert on communications platforms in the future. (Possibly none)

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” - Upton Sinclair

Not the hackers I know. I bet Upton was like that though [0].

[0] http://en.wikipedia.org/wiki/Upton_Sinclair

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.

I hate to pick on you, but anyone who says WhatsApp is not worth $19 bil has not seen the Chinese version of WhatsApp, WeChat. WeChat is a combination of WhatsApp and Facebook. Everyone in China uses WeChat as messenger and as a pseudo-Facebook. The risk of WhatsApp becoming the WeChat for the rest of the world was a HUGE risk for Facebook. It has a very strong hold in the middle east and was gaining a ton of traction every where else. WeChat is a less-invasive version of Facebook that many people would gladly flock to.

It's very likely a bubble when suddenly huge portion of people you knew are leaving their jobs to do startups en mass. Lot of these people hardly have anything significant on table and still get funded anyway. This is very similar to mortgage crisis where large number of people who don't qualify can easily get mortgages anyway. Accelerators have mushroomed all over places doing dozens of meetups and networking events powered by "luminaries" that no one knows because they are literally now running out of even Class-C startup celebrities.

I believe it is well know that economic condition have been very unique last few years in that there is lot of investor money in market trying to find its home. Even if returns on VC is subpar many investors wants to give it a try because returns elsewhere sucked anyway and also there is a chance of winning the lottery. As the stock market and real estate continues to gain momentum and confidence, money would start start migrating back.

My prediction is that in next 5 years, investors are going to realize that it was a good try, VC returns sucks compared to S&P/real estate and they start pulling out. This will first cause shutdown of recently mushroomed accelerators/startup schools. That would then further spook VCs causing chain reaction eventually leading to meltdown. I think more prudent VCs such as Y and Sequoia would continue as usual but many other will simply shutdown because of lack of funds. This is not to contradict Sam's predictions. Lot of the companies in his list can go big and easily double the value but in 5 years that would have much less effect on how much investment money VCs aquire.

Yes, WhatsApp doesn't have any real revenues, but Sam doesn't mention them. YC alum's are not building WhatsApp.

Uber has customers, real revenue (in the billions). So does AirBnb. So does SpaceX. So does Palantir.

Just name dropping WhatsApp is pretty low brow. There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.

>There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.

The 2000 tech bubble also came and went without every single company going bankrupt. So the fact that some companies are doing great things means squat when it comes determining whether there is a bubble or not.

The question about WhatsApp is not whether or not it was worth $19B, the question is whether or not it was worth 8% of Facebook. The bulk of that purchase was in FB shares, not cash. It just so happens Facebook is worth $235 billion dollars itself.

I can see an argument where the worlds most used mobile messaging app is worth at least 8% as much as the world's most used social network.

Maybe they're both overvalued?

I thought that for a while, but the thing is that Facebook's actually pulling in revenue. Internet tells me they have a PE of 60, which is high (20 is normal for a mature company) but not order-of-magnitude insane. If Facebook is overvalued then advertising as a whole is, and that doesn't seem likely in this age of metrics and PPC competition.

During the '00 bubble people said Yahoo's valuation was inflated because all the bubble companies spent their money on Yahoo ads. But for my money Yahoo has turned out to be worth its bubble valuation. Even if most of its value has come from a few clever investments, well, sounds like Facebook's doing the same thing.

A PE of 60 is very high. A very rough rule is that the PEG (PE to Growth, where growth is earnings growth in percent) should be about 1.0.

So a PE of 60 means the market is expecting very approximately 60% year on year growth.

That's probably what facebook is growing revenues, so maybe it's rational. this (a little out dated) chart shows that: https://marketrealist.imgix.net/uploads/2014/05/Companies-Ad...

Probably. But if you put yourself in the shoes of the executive team at Facebook, buying WhatsApp killed off a potential threat , and it was worth 8% of market cap to do that. Everyone talking about how much WhatsApp is worth vs some other company is missing that point.

>"There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money."

More "did" than can. Something is worth what someone will pay. Why was FB willing to pay $19B? The answer is somewhere between what those users are worth to FB and the threat to FB's (very real) business that WhatsApp represented. This doesn't seem bubblish to me.

The prices in every bubble are prices that someone _did_ pay. Possibly with foolish expectations; at any rate, at a level which was not sustained.

Another way to look at it is that FB is dying because simpler and more appealing competitors (Snapchat, Instagram, WhatsApp) are popping up that are threatening to grab FB's users' interest more. FB is faced with a quick death by losing a major share of its users over the course of 1-2 years, and the necessity to buy up the competition while it's still able to. I think that's actually a decent strategy: buy up these other apps and establish dominance in all the niche social networking corners. It'll last them maybe a decade I think. The problem is that these disruptive social networks don't make money. Acquiring them is just a way for FB to not lose money. So eventually FB's coffers dry out while more and more niche social networks pop up to steal its users.

My understanding is that social networks are a generational thing. Even if FB was perfect in every way, no market maven teenager (for social networks the market mavens are teenagers) wants to hang out with their aunt. The next generation will stop watching Yo Gabba Gabba, grab their iPhone 9's and want to get on a social network that's separate from their parents. Because of this, I don't see a general purpose social network surviving for longer than 10-12 years and maintaining market dominance.

What if, that social network was built by 5 people, college aged, and they decided to use FB login to save some time developing because they are trying to see if this thing is worth building. A very real probability.

FB won't be the powerhouse that it is today, but it's deeply entrenched in our internet that there is value in the social data, not the "blue room" product they offer for free now. (I hate FB, but I get it.)

Do you think if all they provide is the service to store credentials they'd be worth what they are worth now?

I don't know much about Facebook's current offerings, but the answer to your question might depend on what other ubiquitous services they offer now or in the future. Maybe they'll become equally entrenched in the online payment market, or things of that nature. I don't and can't know if that will leave them at their 235B market cap, or if it will be lower or higher.

Funny. I can't recall where but a few days ago I overheard a teenage say something like, "I wanted to make a Tinder account but I didn't have a FAcebook, so I had to go make that first."

Mind you, it seems like a really low quality user for FB and not something I would want to hang a bubbilicious valuation on for them -- unless FB's able to track her activity off FB as well. And I think this is the case.

Actually I wonder how Facebook's user tracking is actually dealing with mobile users who only use their mobile app. It seems like they'd potentially lose a lot of tracking info unless they can track an app login through the mobile browser.

I wonder if this is part of the reasoning for their increasing centralization by offering a browser and supposedly actually hosting highly shared content.

"Something is worth what someone will pay"

I've never been to keen on that statement. It approximates something about fairness. It's expresses something about subjective worth. But, we're talking about something with a fairly objective, if ambiguous value.

The price of something may be what someone will pay. For the value of something... I don't think this holds true. The value of a stock is objective, it's the future incomes discounted or somesuch. If you pay more than that you over payed.

The value of a share of a stock for a typical investor is net present value of future cash flows, but the value of an entire company to one of its competitors can be something very different. As others in the thread have mentioned, the strategic value of removing a competitor can be significant.

Only $2B out of those $19 were paid in actual cash, right? So the remaining $17B can still disappear at any time?

The remainder was in FB stock. Personally I think the amount of stock they paid points to FB's acknowledgement that they are overvalued, i.e. part of a bubble.

The valuations are crazy because investors get paid out first. So if I invest 1 billion for 10% of company x it gets a 10 billion valuation but we only have to sell for 1 billion or more to break even. Banning preferred stock for startups will result in more accurate valuations.

A "bubble" isn't defined as the absence of any irrational valuations.

Yes, but wouldn't you agree that the high profile valuations are over way over the top? Facebook, Instagram, Twitter, WhatsApp, etc. were/are valued extremely highly, I would say unjustifiably so. If there was a mechanism to go long against them and I had money to gamble with, I would.

My go to example for this is Facebook's IPO. Their valuation was at the time at $50/user. Can they extract that much lifetime value out of every user they have? It seems rather high to me.

I don't believe there is an industry-wide bubble going on. But it seems to me that if you hit the right keywords (social, sharing, advertising), you will be valued at the top of the range, not the bottom. Moreover, I believe these particular valuations will get market corrected sooner or later.

Selling Facebook's stock short would indeed let you bet against the valuation of the Facebook platform, Instagram, and WhatsApp. Keep in mind that markets may be able to stay irrational longer than you can stay solvent.

What I'm talking about is holding a long term investment against FB. I don't think they'll go bust tomorrow, but I am willing to bet some amount of money their shares will go down sometime between 2-5 years from now.

There are exchange traded funds (ETFs) that short. You can probably find one for the technology sector. You'll probably have to short Intel along with Facebook, but that's the safest way to do it I can think of.

It's almost as if the markets are intentionally structured such that it's easy to place a long-term bet that asset prices will rise, but relatively more difficult to bet the converse :0

You can always buy long-term put options. The premium is high, because of the time range.

That's exactly what I mean by "relatively more difficult."

There is no premium if you buy and hold, in fact that's the baseline situation from which the premium is calculated. And buy-and-hold works for arbitrary timescales, while even long term puts come only in certain flavors.

That starts to seem a lot like structurally built-in upward pressure on prices.

For $12 you can buy a put at FB's current price ($85) for Jan 2017.

But FB has real profits, so you may not wanna bet too much against them. They're also locking up users' Internet access in many markets, making it literally impossible to run a competitor (without negotiating the same ISP access).

Perhaps look at Splunk, which does great not only in losing money, but accelerating those losses. (Er, I mean, they "focus on top-line growth".) But hey, maybe they can cut their costs by over 2 (eliminating all R&D wouldn't be enough) but keep the revenue coming in. Then they could be profitable before other systems and hardware catch up. They're only 12 years old, so it's still very early in their long-term story.

I really enjoyed this comment. Thanks. Yeah, I was thinking of the put options. Now I just need that spare money I can gamble with and I am all set.

FB has put options listed for Jan 2017, that's nearly two years.

Not sure if you're still in the edit window, but there is a triple negative thing going on that makes this statement both confusing and less interesting (if there were no irrational valuations, no one would call it a bubble).

None of the six companies he mentions (Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX) are publicly traded.

So, one reading of the tea leaves is that something like 100B (of non-existent money) is locked up out of the hands of the people who could benefit from trading it. This, at a time when wealth disparity is not far from the Gilded Age.

There's a bubble, all right--just probably not the one the author is thinking of.

Yo got funded for $1.5m.

Secret raised $35m, including $6m of founder cashouts (one bought a ferrari.)

Is this a bubble? Dunno, but that's pretty frothy.

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

But isn't that the most important metric? I would argue there is also no metric by which a Coach purse is worth thousands of dollars but people seem to keep buying them.

> The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

I think it is just too easy to say things like this. Number one, how can anyone know this?

Number two, if not 19B then what? 18B? 5B? 500M? What? Was it overvalued by 2x or, like, 10x? If it was too much, then how much too much?

> Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006.

Except he's the person dictating the flow of money. It's more like a housing buyer saying there's good investments despite signs of a bubble.

But it isn't his money: VC funds raise money from other investors (aka limited partners). It's like asking a banker or hedge fund manager if there's a stock market bubble. They won't say yes because if investors pull their money out of equities, the banks and hedge funds are screwed.

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

Let's observe that WhatsApp besides just being a popular app, is a scalable and high performance messaging app, meaning to emphasize that you can't hit this level without some amazing engineering feats [1]. I think that we can also agree that a company that can build something of this sort might be valuable in itself without generating any sort of revenue. If it can make Facebook more productive/efficient over the coming years, it very well might be worth its weight in bitcoin.

[1] http://highscalability.com/blog/2014/2/26/the-whatsapp-archi...

> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.

The only good metric to determine how much something is worth is how much someone is ready to pay for it.

I can see why Facebook would pay top dollar for a company that can monetise its user base, but why buy a company that will always lose money and can only take eyeballs away from your profitable platform?

Whatsapp is a poor example to use to argue that there is a bubble. I haven't heard anyone try and justify that price beyond that Facebook was desperate and had the money. It's an outlier.

if im not mistaken, whatsapp already monetizes their users, charging $1 / year after the first year.

with 700m active users, they potentially could be generating ~ 3.6% of their sale price in annual revenue.

Generating revenues is not the same as making profit. If their infrastructure costs more than $1 / user to maintain on an annual basis they could very well still be losing money. To compare their price to something you'd have to compare it to dividends to the parent company or net profits for the division if it is integrated.

Revenues don't mean a thing.

Are you a user? If so, and you've been such for over a year - have you paid? I've never been charged, and to my knowledge nobody I know has either. I don't get if we should be getting charged but they just don't seem to bother. I get an annual notification saying I've been extended and no more information.

They might base it on who's likely to pay. It might be better, in their minds, to keep you as a user than to potentially send you away.

They do price testing, if they believe there is no better option for you, and you will pay, they will charge you.

They will not charge you if, for example, you're someone living in the USA. There is far too much free competition.

For their non smartphone market (don't have numbers but its large), there is very little if any at all competition, and people in places like india gladly pay the $1 fee for a years access on their dumbphone.

> people in places like india gladly pay the $1 fee for a years access on their dumbphone.

I am in India and I have never been charged for Whatsapp. Every year, whatsapp decides to add more free months.

Also, there is significant competition in the messaging space in India, and Indians are not comfortable paying for anything other than their phones.

Has anyone ever actually paid $1 / year for WhatsApp? I know in several places they claim that is their business model, but I've never come across anyone that has paid for WhatsApp.

Part of that may be due to the fact that WhatsApp grows so fast that most users haven't been around for a year, but I'm under the impression that after a year, if you don't pay, the app continues to work and you never lose access.

Jan Koum actually stated at Startup School that whatsapp started monetizing to REDUCE load because they were acquiring users too fast and that it backfired, ultimately leading to profitability. From a strategic standpoint, whatsapp puts facebook in a great mobile position in a lot of emerging markets outside the US.

>that it backfired, ultimately leading to profitability.

On what planet can the act of becoming profitable be considered a "backfire"?

I believe Facebook reported in their financials though in their first quarterly earnings report after the acquisition that Whatsapp was losing $100mm+ annually. I'm not saying that won't change, but their business model still needs some tweaks.

take 25+ cents off for cc processing... 700m * .70 = 490 million. Not everyone will do it, but assuming most, maybe $350 million in recurring. Certainly nice, but does that justify $19B? That's something like a 2% return, if my calcs are close.

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