Who Will Be Hurt Most When the Tech Bubble Bursts?
techcrunch.com
techcrunch.com
Mark Cuban is certainly a renowned Angel investor, but not a VC.
> For instance, Uber moved from $17 billion to $40 billion between the two funding rounds within six months.
Amazon, a public company worth ~200B billion dollars, is up 40% in value in 5 months this year. Valuations can change very quickly in technology companies, whether public or private.
> This bubble is bound to burst.
Ok, well I guess that settles it!
> Take Uber and Airbnb for example. Both co-founders ... wealth was calculated on the basis of notional post-money valuations, figures far in excess of what these companies could actually be sold at in the market right now.
Uh, says who? Both of these companies make tons and tons of money and have business models that make sense. Whether or not they are good for the world, they are certainly good businesses. What makes you so sure the valuations are wrong? All of the late-stage investments in Facebook worked out pretty well.
> VCs will most likely walk away with their invested money, if not more.
A VC who returns the initial fund amount (or even a small gain), over 10 years, is losing their LPs tons of money to fees and inflation. LPs will not invest in that fund again, and one bad fund has ended a lot of VC careers. Granted this is probably good for the world, but not for that VC. Saying a VC has liquidation preferences and thus they are immune from any negative consequences to a bad investment is ridiculous.
Is it because founders for the most part accept whatever the VCs dictate, even things that benefit the VCs only slightly but still get thrown in because the VCs pretty much get their way no matter what?
Founders certainly don't accept anything the VCs dictate, and terms like this are on the table during negotiations. This is especially why as an founder you want competition from multiple VCs so you a little bit of leverage. But at the end of the day the VCs are going to want some sort of preferences over the common stock, and this is a fairly easy one to toss in.
As to why the preference might not be so great for a VC, let's imagine a hypothetical scenario. I make a 20k personal angel investment in a company with a 1x liquidation preference. A year later the company is tanking and sells for less than the valuation, but enough that I get all my money back. Great. I lost the opportunity cost of that 20k for one year, but nothing else.
But imagine the same scenario with a VC, but let's say it was 20 million of their 100 million dollar fund. A year after they make the investment, they get the money back. But they now must return that to the LPs. The fact they got the money back quickly makes no difference to them, because they can't re-invest it. And now they now have only 80% of their fund left to try and generate a big return. Yes, getting the money back is better than not getting it back, but is wasted ammo they cannot re-use in their quest to generate a big return.
And also lost in this is that many times when a company is tanking they will either go completely bankrupt or not return all the money that investors put in (see: Fab).
A bubble exists when enough people decide that it exists (and it seems that many people have decided this [1]). The mere existence of this article and the thousands like it that have been written recently are setting the stage for it. It probably won't begin to pop until the fed raises rates (likely starting next month), but it appears inevitable that a major slowdown in tech funding will occur this year. It's highly likely that a fair number of engineers are going to be unemployed by the end of the year.
[1] http://www.google.com/trends/explore#q=%22tech%20bubble%22
Some of these companies will undoubtedly be successful, as the ability to spread virally and scale the IT infrastructure to meet demand these days is absolutely unprecedented. That is the primary difference between the first "bubble" and now. It looks the same in terms of frothiness, but anything that delivers real value to people these days will spread very fast, largely for free, and may actually become profitable.
Whether or not the value of the successful companies that emerge from this era will make up for the massive losses of those that fail remains to be seen. I think it's actually possible. The real losers will be the engineers, because when interest rates rise and people pull money out of these funds, all but the most promising companies (in terms of actual traction) will see their funding vanish, and millions of people (thousands of top engineers among them) will be out of work.
A couple of things:
1. The first dot com crash also co-incided with the telecom crash (Lucent, Global Crossing, etc) so you had a lot of VERY skilled technologists suddenly hit the market
2. The first doc com crash also co-incided with Americans' ill-fated experiment with whole-sale outsourcing development projects to India which is what caused the huge crash in rates. As we all know, this was not sustainable as most off-shoring projects at those bottom rates failed. Rates eventually stabilized once companies realized those rates were too good to be true.
3. A lot of developers from Big5 firms also flooded the streets. I was at Accenture -- we went from 60k employees to 28k. Rather Andersen went bankrupt entirely. So you had not only the telecom talent out of work, but also Big5 integrators.
Overall, for entry-level employees, it was fine since you weren't competing for high salaries. It was more difficult for pthose set in their career who couldn't move around etc.
-Saif
I think it's a positioning thing. If you're at a big consulting firm, it'll be tough. Companies that used to pay $200+/hr for projects will find it's better to bring in some generalists and pay them $80k/yr.
During this time I was a developer in HR in travel, 9/11 hit, and I went to building web apps for health care. No issues whatsoever with work. During this time I also did some smaller projects, again, in mainstream industries: transportation/logistics, telecom, etc.
Today I have a far better connection in my pocket, servers can be rented by the hour of Amazon (so you can scale as you grow), stripe is available (at least in some countries) and Postgress is free. We also have much more productive languages than Java 1.2 (now with generics!!).
More importantly still, IT is everywhere. Every business needs, or could benefit from, a programmer. It might be something as simple as converting an access database into a real database and do some queries on it (say get a list of all companies with more than X foozies and send that to sales so that they can call them up and hear if they are totally happy. That query alone could be worth north of 10k month for a small medium business) or it might be to do something more complex.
"Unlike the 2000s, VCs will not be in the line of fire. Employees and founders would take the fall."
Employees and founders were in the line of fire in the 2000s, but unlike last time, the VCs won't be joining them.
I was doing a lot of ColdFusion at the time (as I did most of my career). It's an easy language, and attracted a lot of folks that really weren't developers, but could bang out some script. I tried to counsel all I knew to be diverse, learn other languages, etc. Salaries dropped, but not too much, it was the total lack of jobs that really hurt.
This time around, whenever it happens, it'll be the 8-week "bootcampers" and those who specialize in pretty much only "front-end" development (meaning they do Angular/Ember/React/etc but can't be bothered to produce the back-end json) that will have the hardest time, IMO.
(For reference, I identify with both groups, being a 38 year-old self-taught developer, no issues during 2000-2002 bubble, and learn at least one language a year.)
Also after the burst, my roommate and I asked our landlord for a $700/mo rent reduction, and we actually got it.
[1] Been there done that :-)
Obviously, VC-funded startup's with no cash-flow and only one or two years of funding will be the first to go (dot-com comparison: pets.com, WebVan), then next will probably be any relatively new consultancies (dot-com: Razorfish, coding schools of the late 90's that taught people for MCSE/CNAA certificates).
Next in line to fall is unclear, all the hardware and network infrastructure companies suffered in dot-com (e.g., Sun, Cisco) with layoff's due to no demand anymore to buy expensive high-end servers and routers. But today with the cloud infrastructure, would AWS division, Azure or IBM be able to weather the storm?
On the other hand, peeps I knew who were able to weather the storm were people who had critical domain knowledge in a stable or booming industry at the time (e.g., HPC specialists for defense contractors, Bioinformaticians working for the Human Genome Project, system developers for high frequency trading right after RegNMS). Unfortunately, cycles have also turned for these fields too and demand has matured or waned.
Curious what you guys think are the next "unsexy" but potentially lucrative fields that has demand for IT workers and should yield fruit in the next 10 years that you'd angle for, if you were starting anew? Farm tech, AdTech, FinTech, personal genetics therapy, or even plain old but reliable fields like oil & gas, healthcare or e-discovery?
Here are my thoughts. Disclaimer: I'm just some guy. epistemological confidence: low.
There may be a bubble in consumer tech. There isn't a bubble in tech in general.
Consumer tech is weird right now because consumers are so weak. Bob the plumber has a laptop (good!), he's using a WIMP interface (not good!), but he knows a little Excel (great!). All in all he's a reasonably empowered internet citizen with a real internet presence.
He closes the lid. BLAMMO! He now has has zero internet presence under his control. Not a single thread, not a single cron job, nothing. He's lost the most basic information organization functions: "share", "receive", "do at this time", "do repeatedly", etc.
Instead he has to rely on others for all those functions. These are really basic functions. Like "baby food" level. If he's so helpless his computers can't handle something as simple as "do something at 5:00 tomorrow" reliably, of course he's going to get taken advantage of.
Pinterest, Dropbox, AirBNB, Slack, Evernote, Facebook, LinkedIN ... all exist because users don't have servers. If personal servers take off, consumer tech will pop. Of course, normal people aren't going own UNIX servers ever. Sandstorm though . . . that's a lot easier to set up than a Linux box.
(I don't think tech in general is a bubble though. "Software is eating the world" seems entirely accurate to me.)
It'd be really tough to compete without the massive consolidation benefits of the big players. Moreover, it'd be tough to position the product because it's essentially the same service, but with privacy benefits.
You got me. Hopefully my point is interesting regardless though -- basically that some companies like Pinterest are vulnerable in ways that others like Square aren't.
> Moreover, it'd be tough to position the product because it's essentially the same service, but with privacy benefits.
Oh man, I'm glad you brought this up. I think one of the only interesting insights I have here is that _the personal server stuff is totally tangential to privacy_. Personal servers are cool because they're useful and technically sweet -- I can move from querying my friend's review of a software product, to looking at his code using that software, to reading his blog posts about it, all without leaving the same datastore (on his side) or the same UI (on mine). Right now that would involve searching Acme Software Co's website, then GitHub, then Blogger, which is a plain worse process.
EDIT: spelling
Honestly though, while I'm sure they're cool, I'm not sure NASes will do much good here. Most people need something as simple to use and set up as Evernote or Gmail.
And consider a VC that makes most of their money from management fees. This means LPs are literally paying the VC to lose their money. The LPs will figure it out eventually and stop investing, at which point the VC needs to find a new career. Maybe the cycle takes 5 years, but it will happen. VCs want to make good investments as much as LPs want them to.
Current employees have had it drummed into them enough times that the EV of their equity stake isn't likely to be significant and they should negotiate for cash over equity. Worst comes to worst, their options go underwater but they're still highly compensated professionals with in demand talents.
Founders knew the risks when they negotiated the terms of the funding round and they have nobody to blame but themselves if they got too greedy with spending.
Departed employees though, have to face the choice of whether to exercise options before they expire or forego them and potentially lose out on a huge payday. They're the ones who have to put up real cash into the system for paper gains.
Most importantly: why is this bubble worse than the last one for employees? Employees all had stock in the dot-com bubble as well, and were equally wiped out when it burst.
Personally, I think this argument is much less feverish than the last one. Unicorns might not be profitable, but they're generating substantial revenue. Uber has a crazy valuation, yes, but they're also making $10 billion a year in revenue. [1]
[1] http://www.businessinsider.com/uber-revenue-rides-drivers-an...
At least uber has revenue though. Lots of companies are getting funded with zero revenue (nevermind profit for now) and no clear revenue model. Crazy in my opinion.
And does this mean that TC feels that we are in a bubble?
And if so why?
That's about as open and shut as it gets as to why we're in a bubble.
Remember, profit is basically returning money back to your shareholders. If you have an investment opportunity that's 10x better than public markets (100% growth vs 10% growth), why would you ever want to return money back?
No, paying a dividend is returning money back to your shareholders. Profit (revenue in excess of expenses) can be re-invested back into the company, for example, to hire more people or finance the development of new products. That's how companies grow once they no longer have VC funding (or if they never had VC funding to begin with).
For example, Google is a very profitable company, but none of that profit is being returned to their shareholders since they don't pay a dividend. It's all being reinvested into the company. (The only way a Google shareholder can benefit from Google's increased value is by selling their stock to somebody else.)
Of course, even the word profit itself is ambiguous because it's potentially referring to multiple different concepts. The aim, for this was to illustrate at a high level why investors generally don't want a company to be profitable until they want it to be very profitable.
The burden of risk is just not directly put on them.
That's a different question. The claim that a VC investment collapse would hurt ordinary people through their pension funds is false. There may be other important effects for specific sectors or groups of people.
Worst part is that it was claimed as some genius idea by some top VCs like Marc Andreessen (who ended up blocking me on twitter when I told him it was stupid)