Overvalued in Silicon Valley, but Don’t Say ‘Tech Bubble’
nytimes.com
nytimes.com
A bubble is when a sequence of stupid people pay more for something than it is worth, get lucky by managing to find someone stupider than them and hand it off to the bigger idiot for a profit. If this runs long enough, the original idiots tend to lose all perspective and get sucked into a loop of idiocy and hubris, which establishes crazy new value norms.
The bubble bursts when it is no longer possible to find someone stupid enough to buy the overpriced object, due to it's value being so high that it is worth more money than stupid people can put their hands on. That's often a depressingly high figure.
I know that silicon valley investors don't like that description but please, let's not pretend we don't know how it works.
I don't know whether things are in a "bubble" or not, but reasoning like this does not instill confidence. "At least things are not as bad as the worst they've ever been", no need to worry about a thing.
That level of investment is huge. The second hump was caused by the real estate mania but at least the country ended up with a bunch of houses out of it.
For comparison, US GDP in 2000 was $10 trillion and GDP today is well over $17 trillion.
http://www.advisorperspectives.com/dshort/updates/NYSE-Margi...
It happened to people who invested with Bernie Madoff; if you were getting outsized returns (e.g. the Wilpon family), there were clawbacks. Shouldn't the same apply if/when Airbnb and Uber start losing in court? Start fining the investors who clearly knew that the companies were living on the edge, legally speaking?
What about the $1.5bn that Uber is trying to get from a bank? Don't banks have to do a LOT of due diligence into businesses they are doing loans from? I can't imagine the "waste management" companies run by the Mob can get a huge loan from banks, even if they can pay a premium in interest charges. Why can Uber?
Their actual valuation is much lower. Announcing this big number does the advertising for them, the recruiting for them, and it even writes the press release for them.
It's amazing what a very large amount of money can buy. You don't even have to spend it.
Nobody is or has invested $50 billion into Uber.
And no investor will be getting their money back due to 'restrictions of some kind.' That is not legally how investing works, not even remotely close. The investors own part of Uber, they are the ones committed to Uber's business model (which they bought into). They are assuming risk like any other investment. If Uber fails, they'll liquidate the skeleton that remains, and get pennies on the dollar (if they're lucky), there isn't going to be billions sitting in a bank account waiting to be recovered.
It still streamlines recruiting, business operations, and press releases.
We may be in a bit of tech bubble right now, and it would suck if a lot of people lost their jobs (although firms are a lot smaller than they were in the last one), but there is barely any public money on the line these days.
Yes VC backed firms supposedly generate 21% of US GDP right now (although I find that number to be a tad suspicious), but we have to allow that a huge chunk of that number is for new-tech companies (someone at MIT invented a new type of concrete, or a robot), biotech (someone at Johns Hopkins invented an artificial heart), and other niche businesses where the goal is definitely not to be a unicorn, but to hit a definable market.
Certainly it would be sad to see some of these unicorns die, but as an overall percentage of where a lot of VC money goes (and I mean the whole world of VC, not just the SV VCs that are interested in the next billion dollar companies), they don't make up a huge percentage of the employment or income in this country.
We might be in a bubble and it might pop, but the assumption that it will hurt the economy like it did in 2000 needs to be backed up by a stricter line of thought than, "the last bubble did".
He denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back.
'When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,' he said in an interview with the FT in Japan."
http://business.time.com/2007/07/10/citigroups_chuck_prince_...
(emphasis mine)
My point was that there aren't any entanglements, there isn't any exposure. Prince was making the point that there was complicated entanglements that existed at Citigroup so it would be hard to predict what would happen, but hopefully their lack of exposure would help (which, by the way, it did).
There simply isn't enough public exposure to SV to make a bubble popping important to the overall economy.
If the current mini-mania slows down at all or a couple of big names hit some bumps in the road... the financiers' portfolios also are also affected, and if there a GSIFI's that can't afford to take that hit and can't find the liquidity to paper over the losses... yikes
The bursting of the current tech bubble will come when other, larger bubbles burst. You should be concerned about those other bubbles.
I think Uber and AirBnB suddenly going to zero would be described by many people as a bubble pop and that may have dramatic effects on the sector, particularly financing going forward, regardless of its impact on the broader economy.
> “There’s definitely some craziness and people overpaying”
> “I think we’re in a period of overvaluation and frothiness”
> "A bunch of bad decisions don’t necessarily mean we are in a bubble.”
So its just unrealistic valuations and a frothy investment market leading to bad investing decisions. Right. Totally not a bubble.
What are your thoughts on the massive valuations of companies that might struggle to manage a profit 3-4 years down the road?
All the VC money that is driving huge growing in SV may disappear for a while. A lot of the money won't come back. This means unemployed people, which means pay falls for everyone.
It means less small VC fueled companies buying services that more established companies sell.
So yea it might not crash the S&P500 like 2000 did, but it would still have a huge impact within tech companies.
A flip side of this is that one of the many things that contributed to the housing bubble was the requirement that many pensions have to invest in bonds of a given rating. This helped fuel the market for rubber stamped mortgage derivatives.
I think that says alot about the Valley today. "I might miss out" seems to be a mantra on Sand Hill Road these days. If you or one of your cofounders has dropped out of Stanford or Harvard, you can and will get funded. Despite Peter Thiel's protestations to the contrary, Stanford in particular is worth the money for a year or two if only for this reason. Any education you receive is just a bonus.
To me, the writing on the wall for VC companies was when Paul Graham stepped aside. Based entirely just on my own conjecture, I suspect he realized that the glory days were coming to a close and chose to look for something else to do. Curious to see if that's how it'll pan out.
PG is a founder. The company he founded (in this case YC) has succeeded and matured. It needs managed now, not kicked into existence. Who knows? Maybe he'll find something else exciting to do.
We see large corporations like Facebook grabbing up applications solely for their user base to defend its current flawed business model instead of adapting. Perhaps Facebook should extend its idea of connection to include a method of discovery rather than sharing. Essentially, let me pay a dollar to find all the single girls in the bay area who like Starbucks and C++ that have a primary or secondary connection[friend of a friend]. Really stick it to okcupid.
That is a really creepy idea.
How is this influenced by city regulation? There are several cities that are now taking measures to ensure that homes cannot be used in an Airbnb fashion and it hurts Airbnb business.
You're Airbnb, you jump out to a fast lead, and dominate your segment across the whole of the US market. You move so fast that regulations and politics trail years behind you.
You operate in every major city in the US, 300-400 of them. Out of hundreds of cities, two dozen cause you serious problems, such as bans or hard restrictions.
Now, even if six of the 24 that cause you serious problems are major cities (NY, SF etc), you've got 90-95% of the market (along with the rest of the world to go after) that isn't causing you problems.
With your new vast scale, and large pile of cash, you triple down and go to work on the politics in SF or NY or wherever else you're having problems. There is no scenario under which, assuming you keep your 90-95% rest of the market, that you can lose. With enough time, you wear down SF and buy enough politicians to squeak back into the market. Your network effect instantly brings you back up to dominating in SF upon being allowed back into that market.
It's a form of the little bighorn market attack. The only variable is time, and that will give way eventually, so long as you don't lose a massive portion of the US market (which is extremely unlikely in Airbnb's case).
Meanwhile, they can attack the rest of the planet, and pull off the same jump-out-in-front move, and then lean on their vast scale to go to work on the problems.
In total, you end up with no terminal risks to the whole system, merely a few broken bones.
Perhaps cigarette companies too?
Rather, the problem is when unsophisticated investors buy in because they don't want to miss out of the gravy train. It does not matter if the mantra of the day is "Computing/BigData/DaCloud is eating the world" or "Real state prices will keep going up in the foreseeable future" or whatever they said during the years of the Tulip mania; it is always magical thinking.
In theory, everybody knows that VC are high-risk/high-rewards. In practice, once the dumb money starts flowing, it's only a matter of time before short term greed triumphs over common sense and sound business practices.
Laws regarding IPOs create decent incentive to avoid an official IPO. Money follows the incentives.
That's just the thing. If companies truly were profitable, in general wouldn't investors want to keep the company private? No overhead of having to manage SEC reporting, no oversight, nobody to answer to except themselves. The problem is, investors need the public markets to make money, because their money is not in the company actually turning a profit, it's in convincing the public that the company is worth whatever they say it is.
Think Zynga/King. They were very profitable for awhile, but for their investors to make money, they didn't want to sit on $50m/mo profit, because their investments assumed that the company was worth billions. They knew the company was doomed in the long run (meaning they couldn't sustain the profits), so they ditched the company onto the public, cashed in their chips and walked away. Now the company is bleeding money. If the investors thought for a second that they'd continue to make money indefinitely, they never would have pushed for an IPO.
It's not a fictional line, it's a very distinct line. Investors have convinced the public that their company is worth however many billions, usually without ever having turned a profit. They want their money back.
Not really true, most venture funds have a fixed timeline where limited partners want to get their money back around 10 years. And they don't necessarily want just a steady stream coming back, they want their actual money, to invest in things that have just as much growth potential.
Also, employees want a way to cash out, which is very difficult when a company is private. Not necessarily because the company is bad, but because you would much rather diversify your holdings.
Even if an asset is making money, it isn't natural to want to keep that asset.
Same with employees. If an employee has a 0.05% stake in a company that pulls in $100m/year in profits, that's an extra $50k if you do straight-up profit sharing. Problem is, these employees want no ownership whatsoever; they also don't want a long-term stake in the company, they want to cash out and move on.
It feels like the whole startup economy is operating on the "bigger sucker" plan these days. It's not about building sustainable businesses with solid profits, its about sprinting to an IPO and dumping the stock onto the public to let them deal with the consequences. Maybe I just have an overly bleak outlook on the current layout of startups (and I work for one).
This is the rational choice for the employee. Nobody wants more than 10% of their net worth wrapped up in a small nascent (read: very risky) asset. I'm sort of in the situation you describe, and I'd be very happy to sell my share at a steep discount to avoid the risk.
Not necessarily, you might want the stock to liquid so you can sell off some/all of your investment rather than wait for a trickle of income, and selling out will get taxed at a much lower cap gains rate rather than as ordinary income.