The CEO of a $1 billion 'unicorn' startup admits we're in a bubble
businessinsider.com
businessinsider.com
For those companies, it was the fact that they were "pre-revenue" and so the only way to keep the lights on was to raise money. And right up until every investor said "No" and they couldn't make payroll with the money left in the bank, they operated like a company, and then they weren't, For companies these days that do have revenue, they basically have to try to shrink into a profitable place, which is keep as much of the revenue as possible with the fewest possible people / computers / real estate etc. Then they have a shot of surviving. But contracts like leases you can't get out of, can bite you and force you to go into Chapter 11 briefly to renegotiate those contracts.
What is unique I think to tech bubbles though is that the developers are often fine when the bubble bursts, they just go to companies that are built on better financials, its the executives that pay the price and have a harder time finding a new job.
I'd like to add: There is a metric ton of opportunity at the bottom for those who hoarded cash at the top. I used credit card advances, equipment financing, and a SBA loan to buy servers at 10 cents on the dollar when Exodus Santa Clara went bust (I also bought fancy equipment from many other companies.) I started my company in 2001, when I was 20 years old, and in 2007, sold my company ("built on eBay", teased the guy who ran the acquiring company) for over $1 million. This was a completely bootstrapped web hosting company.
This time, if indeed we are in a bubble, I would cash hoard like a mofo, and scout for the new "10 cents on the dollar" opportunities that may well pop up in the next few years. You can build a cash flow-based business relatively cheaply at the bottom. You just have to endure everyone telling you you're crazy (I can't count how many times I heard "What do you think you know better than Exodus/AboveNet/all the big hosting companies who declared bankruptcy?" Well, I know I don't have to sell servers for too much money to clients in order to make a buck, when I'm buying them at 10 cents on the dollar...)
This is a rare form of corporate justice, since it's the execs responsible for building a business around a lack of business. :-)
If this is a bubble (and I share the feeling that it is) when it pops we'll all get to add "I was there when ..." to our lexicon of stories. It is a unique time/situation so be especially observant of things going on around you to get your own sense of how these things play out. The dot com bubble/crash gave me a much better sense of business value versus business flash, and a better personal take on the difference between being wealthy and being rich.
2011: 11 Crazy Signs This Really Is A Tech "Bubble" http://www.businessinsider.com/signs-of-tech-bubble-2011-8
2012: A Non-Tech Person's Guide To The Tech Bubble—And Why There ISN'T A Tech Bubble http://www.businessinsider.com/why-there-is-no-tech-bubble-2...
2013: Here's The Evidence That The Tech Sector Is In A Massive Bubble http://www.businessinsider.com/evidence-that-tech-sector-is-...
2014: Here's The Evidence That The Tech Bubble Is About To Burst http://www.businessinsider.com/evidence-that-tech-bubble-is-...
Have we reached peak, "Tech Bubble" talk yet?
PS. those last 2 articles were written by the same person basically regurgitating the same talking points, but just 1 year later.
One particular reason this might be the case is if the process driving the increased pollen count is a reaction to global temperature (or some other more direct product of global temperature) that moves to slowly compared to the average rate of global temperature change to ever reach an equilibrium point with the current global temperature, so that its always trailing well below what it would be at the current global temperature if that temperature were a long-term sustained average.
Is this actually true?
The question is whether, when and how bad it will burst.
Predicting market events like bursts is extremely hard, even for experts - so hard you can make a lot of money from it - remember that economists too said that the housing market was a bubble and wrote posts to mock how, for four years people kept repeating the claims.
If billion dollar valuations for buttons that text 'Yo' isn't a speculation bubble on the one area of US industrial growth, an area that gets a lot of cash influx to keep it going (much of it taxpayer), I don't know what we could call a bubble.
Not all bubbles burst. But how much confidence do you have that the market will remain the way it is today after another series of Snowden revelations, a housing crises (or water crisis) in the Valley, the release of financial information that makes people lose faith, a shocking event like Alibaba beating out Amazon or something, etc?
If you think something like that could seriously damage the industry then you have to admit that the demand for the good and services is highly elastic - or at least fragile.
Fragility of a market + overvaluation and overspeculation implies a bubble.
That's the problem. Valuations are dreams and "best case scenario" right now because we haven't had an IPO to lock in valuation for a long time.
It'll take a single IPO flop to start the bubble bursting domino run just like v1.
The real question then is: Can IPOs be succesfully propped to prevent every possible flop? because it'll take just one bad egg to bring down the house.
How about Etsy? Their IPO was a pretty big flop and there has been no domino run.
Was there no lock-up[1] period?
anyway, I don't think etsy is a good example - guess who followed the same pattern (of jumping really high on the 1st day and sinking a few months after IPOing) and is now worth 2x the peak ipo price? https://www.google.com/finance?q=NASDAQ%3AFB&ei=tNp7VbG5O9TA...
Do you really believe they're worth more than the entire Taxi industry? More than multinational conglogmerates like Kraft?
41B is an utterly absurd valuation for that company, and anyone sane knows it.
Uber is in 58 countries, and is expanding to more countries. Are you saying the combined value of the taxi industry in those countries is less than 50 billion?
You may not realize this, particularly if you don't travel outside the US very much, but Uber's success outside the US is far more restricted than it is in the US (and even within the US it's variable). They're likely to encounter more and more regulatory resistance (good luck getting an UberPop in Belgium, for example), which will significantly curtail growth.
On top of that, the brutal reality is that Uber could be easily replaced, either by an individual international competitor or competitors within individual markets who can better navigate the local regulatory environment. After all, look at how products like Line seem to have sprung out of nowhere to challenge the Facebooks and so forth of the world. And I guarantee you, the taxi industry will adjust while holding the advantage of being an incumbent monopoly. Uber could be displaced overnight given the right conditions.
So, no, I'm entirely unimpressed by that "58 countries" claim and believe Uber is significantly overvalued at this time.
They're aiming to replace all driving of all sorts. Personal. Logistics. Everything involving road-based vehicles.
They may not succeed, and I do think they're valued too highly.
But based on the risk factors in their plan, not based on the scale of one small market segment they're aiming for.
Where the hell is "Noho"? Is this some ridiculous attempt to Americanize London by trying to rename parts of it after bits of New York?
If the author means the area north of Soho, I am happy to point him in the direction of any map of London, where he will see that area labeled "Fitzrovia".
Also, who points out that they were in a 'trendy' bar without covering the word 'trendy' in a fetid, glistening layer of sarcasm? Business Insider journalists, I guess?
AFAICT, SF doesn't have any role at all in the source of names, but otherwise, yes [0]. Of course, lots of the place name in the continental US (and a number of other places) are a result of the same kind of thing in reverse centering around renaming every piece of the continent after parts of Britain, and particularly England, so turn about is fair play.
Your chances of success are still very small. Almost infinitesimally so, and your valuation doesn't change that.A lot of companies will fail. VCs hope that the ones that are successful are successful in a big enough way to make up for all of the losses.
But the fact that a bunch of "billion dollar" companies are going to go belly up doesn't mean that everyone's acting irrationally. They're just going to subsidize the failure of the many with the success of the few.
A bubble bursting happens if on average the investors lose so badly that their LPs start to put money into something other than startups. Not if some "unicorns" fail.
And by the way, there are a lot more variables than even the success of the startups. Interest rates, success of other types of investments, etc. probably play more of a role in startup valuations than the success of most startups. Right now interest rates are essentially zero, and as a result people are throwing money at almost anything that has a vague promise of a return.
That being said, the entire VC slice of the economy is laughably small compared to other aspects. It's basically rounding error.
Most people seem to agree the bubble (if it exists) is in privately held venture backed startup companies. Does the popping of that bubble have significant ramifications across the economy as a whole?
1. Last time they were all public companies, including the big ones like intel,msft, being wildly overvalued. Everyone lost money, not just VC's
2. It will certainly be harder to do a startup, but I suspect all these engineers won't be unemployed. They will go and work for AppGoogBook. AppGoogBook will welcome them with open arms.
To recap, at least I think/hope, VC's and founders are the only one's losing money compared to everyone who might be invested in S&P 500 (read everyone) and there shouldn't be any kind of major unemployment causing extra problems
Is this a reasonable view?
The irresponsible valuations and investing will hurt everyone.
I feel like I made reasonable assumptions as to why those things wouldn't happen. If you think that's not the case, at least provide an argument as to why they would, as opposed to stating it as fact.
Recessions are never isolated. The entire point of a bubble is that investment capital chases gains. In the 90s it was tech. In the 2000s it was housing. Now we're back to tech again.
When the bubble pops, all those invested in the space are hurt. That means hedge funds, pension funds, etc, and the effects will absolutely ripple through the economy. I doubt it'll be anything like 2008 (which was greatly exacerbated by derivatives trading and so forth), but it will be felt well beyond the valley.
are there really a lot of pension funds investing in 0-revenue startups in SV? That seems like a place I really don't want my pension.
EDIT: [1] I lost a lot of money on my house that I bought in 2008 and sold in 2014. It sucked. I can't imagine my next house losing money because snapchat goes out of business....
But that's not what we're talking about. We're talking about a bubble bursting. That's a lot of value going out of the economy, and a lot of people losing money. That makes investors in general pull their money back. It creates an economy wide recession.
1) What makes you think there is room at AppGoogBook for those unemployed startup engineers? If the bubble bursts, it'll be because of a reality-check in the growth potential for consumer technology and advertising. AppGoogBook are chasing a lot of those same areas.
2) A lot of service industries in the bay area are being propped up by the software industry. All those new restaurants popping up in SF--how much of their revenues comes from VCs and software engineers whose salaries are paid by VCs?
3) Real estate values and rents in the bay area will plummet of there is a readjustment in the technology sector.
2. I do not think that Apple, Google, and Facebook are significantly competing against many of these startups. Facebook maybe to an extent, by not Apple and Google. None of them are major phone manufacturers or search engines. The only reason a bubble bursting is a problem is for companies without revenue relying solely on VC money to run. Apple is not in fact relying on VC money to run. Apple alone can afford to employ every startup worked in SF (not that they would, but they could)
>3) Real estate values and rents in the bay area will plummet of there is a readjustment in the technology sector.
I can't imagine that as being anything but good news long term. certainly sad for those owners now though, i agree. Yet, still not everyone in america.
I don't think this is from a bubble, but how new technology can let companies grow very quickly (AWS for hosting, social networks for word of mouth, etc.)
[1] http://www.dailymail.co.uk/news/article-2127343/Facebook-buy...
[2] http://pando.com/2014/02/24/whatsapp-bought-for-19-billion-w...
[3] http://www.bloomberg.com/bw/articles/2013-05-22/what-tumblrs...
It seems the majority of people, inside and out of tech, see it as a bubble. This is what makes me think that it won't "pop" but instead deflate slowly and painfully.
Which is one of the main points of the article... many in the tech industry (and many here on HN) are too young to remember what a tech bubble looks like, or how painful it is when it pops...
If that's the best evidence you can come up with, it's not a bubble, it's an overvalued market at best. Uber's valuation collapsing even to, say, 15B, is not a bubble popping in any meaningful sense, and nobody can deny that there's a business there.
In 2000, that we according to this mysterious CEO can't remember, companies with barely any customers, next to no revenue, massive deficits and not even a coherent business plan achieved billion-dollar valuations.
[Side note: F is paying ~4% dividends. Hm.]
Anyway, did you see the other evidence presented? Cherry picking:
* Interest rates
* Private valuations not matching public ones
* Tech startups offering stock at a discount (If that's more than a one-off idiocy, well, ew.)
Here's the other thing. If you're investing in a startup you're not putting your money in based on some current metric like 3x booked ARR and saying you expect it to throw off enough to cover your investment. The whole idea is that you think it can grow into the valuation you're putting your money in at, that's where the risk is.
If the market believes that Uber is going to grow into a $41B company then that's what it's going to get priced at right now, even if they're not currently "worth" that much based on some present value formula.
It's the same way that product announcements don't generally move stock values - those products were already priced in.
I don't see that happening. There are lots of companies with strong business models (Google/Apple/Amazon/Etc) which will be fine if all the revenueless startups suddenly go away. They'll probably be happy they get to hire up all the newly unemployed talent.
Remember.. just because a downward correction is coming, doesn't mean it's a bubble.
If you can just go to a bank branch deposit cash and get back 7% -- are you going to go and invest in Uber instead? Really? Because it has "great valuation" ?
Well, they're not. Interest rates are so extremely low right now that they don't even keep up with inflation. In several banks and several countries, the interest rate is actually less than zero. Or, in other words, banks charge you to store your money for you.
Given that, is investing in technology really that bad of an idea? You have to put your money somewhere.
VCs are mostly funded by large stashes of money - some of it among the oldest and most secure money in the world - called limited partners (LPs). Think endowment funds, that type of thing. Those funds will diversify their investments across multiple aspects of the economy. For simplicity sake, we'll say 50% real estate, 40% stock/bonds, and 10% into VC funds. VCs take a small chunk, and invest the rest in tech companies.
In that way, some of the most institutionalized money in the world will, yes, be invested in Uber. Really.
austenallred 1 day ago | parent
>> If interest rates are at 7% (savings account returns you 7% annually) who will invest in risky start-ups?
> Well, they're not.
Well, in 2000-2006 house prices weren't going down. Wait a sec! In 1800-2006 house prices in the US weren't going down. Sure thing, do nothing but invest in housing in the US in 2006! I love that type of logic.
Interest rates can change very soon. The interest rates will go up. Sooner than many think.
>Interest rates are so extremely low right now that they don't even keep up with inflation.
If you use the same formula to calculate inflation that was used in Reagan times we have had inflation in 5-10% year-to-year basis for the past few years now.
> In several banks and several countries, the interest rate is actually less than zero. Or, in other words, banks charge you to store your money for you.
Real interest rates are in negative territory: i.e. you can borrow at lower rate than the rate of inflation. That's the only logical reason behind investors buying into treasuries or swiss debt with negative return: because investors understand that we currently have real interest rates that are negative vs. cnbc and government propaganda of low inflation. The only reason they invest in these is because they know we live in high inflation times. In times of high inflation (like nowadays) it is extremely hard to find investment that beats inflation, so investors tend to invest in "anything", they just don't want cash. Cash is toxic. Investors are afraid of cash. They want anything but cash. Even taxi start-up with valuation higher than all taxi companies in the world - Uber - is better than Cash. Everything is better than cash in high inflation times. People invest in Uber because cash is worthless. Not because Uber is a good value stock. Are you trying to tell me people invest in $32B "worth" "business" like Uber because there is no inflation? Good joke.
> Given that, is investing in technology really that bad of an idea? You have to put your money somewhere.
"You have to put your money somewhere." you said it brother. Why I have to? If inflation is low as you claim? Why? Because even Uber is less risky than inflated USD. That's why. You have to put your money somewhere -- catch phrase heard often in high inflation times. Really. Not deflation times or even close to deflation. In deflation times you "dont have to put your money somewhere". Because your money gives you nice return without actually doing anything with it. If I can get the same amount of food, gas, housing, healthcare and vacation for the same amount as I did in 2010, why the hell I need to invest in risky taxi drivers start-up with $32B valuation? You don't make any sense brother! Apply some common sense here!
>VCs are mostly funded by large stashes of money - some of it among the oldest and most secure money in the world - called limited partners (LPs).
I'm tired of hearing about "the most secure money in the world". Heard enough of it when working for Capital Group back in 2007/08. They finally shut up when their "assets" (very secure, very) went from $2T to $500B.
> Think endowment funds, that type of thing. Those funds will diversify their investments across multiple aspects of the economy. For simplicity sake, we'll say 50% real estate, 40% stock/bonds, and 10% into VC funds. VCs take a small chunk, and invest the rest in tech companies.
Why? If inflation is so low? What for? Just keep it in the bank. With low inflation there is 0% logic in doing what you propose - investing in real estate, stock, bonds. Not to mention things that are start-ups with $32B valuation in taxi "niche". You'll see - we'll lough from this soon enough. You invest in Uber, because you recognize there is no return on cash (high inflation).
> In that way, some of the most inssttitutionalized money in the world will, yes, be invested in Uber. Really.
Till the day even idiots at Fed who believe in their own cooked inflation numbers open their eyes and see they need to stop the madness. Raises the interest rates. Then the bubble pops. Like it did every time before. Really.
There would be other opportunities in an economy that will yield more than 7 percent, if the bank is offering 7 percent. Additionally, the inflation rate would be higher, so not investing your money, is losing it to inflation.
Interest rates will rise in response to inflation.
In 1999 you could get a billion dollar valuation with not much more than a domain name and an idea. Most of those never ended up making any money at all.
Now, OK, valuations may be high, but at least there is cold hard cash involved. There are hundreds of success stories involving cold hard cash, where in 1999 everything evaporated because the whole damn thing was based on smoke and mirrors.
In other words, even if a company earning $10m/year in profit isn't worth $500M, at least they're worth something. Last time they weren't worth anything.
Well, kind of. Having been there, the biggest problem I remember is not that these companies didn't have any revenue, it's that they didn't have any profit. Webvan, Kozmo, Pets.com, etc. had customers. They just lost money on every sale. The problem came when investors stopped funding them to do so, and many of them went out of business literally overnight (like Chuck's comment elsewhere in this thread mentioned.)
I would be more worried if Uber, Airbnb, etc. lost money on every sale. It is relatively easier to turn the marketing knob down to $0 spent, if your customers will still continue using your service at that point. I think the fundamentals are better this time around, though I still strongly feel Valley VC's overweight "getting 100% of the available market" and underweight "making money on each sale."
If you have no revenue and a high burn rate, then when your valuation drops you get no investors and can't pay your employees and the company folds.
That said, I'm not sure I buy the idea that this boom is marked by a massive increase in companies with (significant) revenues. I mean, yes, Uber has revenues. Instagram didn't, Snapchat doesn't, Whatsapp had laughable revenues, etc. Uber is the most massive outlier of this particular boom. It is definitionally not typical.
Any way you look at it, there are still more "real" companies than in 1999. And the rest, well it's not that surprising when startups fail. It's a thing that happens all the time. It's much different than tons and tons of public companies going out of business.
Also, these are private companies. If the S&P loses 25-50% overnight it literally effects everyone in the world. If privately held tech companies lose 25-50% it definitely sucks, but it doesn't effect everyone. It just effects rich people in SV, who are all incredibly employable at other companies not in said bubble.
Of course, if you have revenue but with negative gross margins, as I suspect a lot of current startups(especially delivery oriented) have, then your revenue is an illusion as well.
The stock market has a positive return on average. Which means that on average stocks (not just tech stocks) are at an all-time high all the time, no?
"Margin compression": A lot of tech businesses sell things, and because the market is good there isn't much price competition. My unicorn sees a lot of companies that appear to be dependent on customers paying what they're told to pay. These companies have yet to experience, or survive, a price war with their rivals.
All the other ones are BS.
> Entire generation of entrepreneurs under age 30 have no memory of 2000 or 2008.
Lol wut? I'm 29. I remember both in vivid detail. I worked in tech in 1999. Sure I was young, but I had been seriously programming for already 4 years. Let alone 2008, that was the year I graduated university. I remember barely landing a job just as things went sideways.
Gen Y knows things can go wrong. Maybe some current 17 or 18 year olds don't.
> Interest rates: Central banks currently have interest rates [...]
Find me a bank that will lend me money so that I can invest in startups. It's impossible. Interest rates going up will depress assets prices that are frequently purchased with debt: Housing and Education.
> Valuations. [Specifically Uber]
If Uber wins it wins logistics as a whole. This is like talking about Amazon. Back then Amazon realized that books were the only thing that made sense to sell online because of the markups and the fact that customers don't need to touch a book to want to buy it. Then once customers got used to buying stuff online and Amazon worked out their distribution model they expanded to more and more things. Read "ecommerce is a bear".
For other companies, sure there are some winners and some losers. But Facebook, for example, has data on every person on earth that has real spending power. Super, super valuable.
In the 90s only us nerds were online. Today tweens sext. Completely different markets.
> Private valuations not matching public ones
1. Sarbanes Oxley. 2. Investors dump stocks that have no real growth left in them onto the public. The only exception was Tesla, and that was out of desperation, and look how well they are doing.
> Tech startups offering stock at a discount
This doesn't usually materially effect the valuations of a stock. 20% discount, 50% tops.
> Burn rates
If you aren't burning money then it is a huge red flag to investors. There is a very real risk that your money machine doesn't scale or that you can't recruit talent in the same numbers as before.
> Too many business models are dependent on "one thing not happening"
This would be a factor if there actually were a bubble about to pop. There isn't, so this will naturally work its way out. Also, it isn't like 1999 where all money flowed through Yahoo or Microsoft. The world has more real world businesses like arms contractors, that don't overlap business cycles.
I've been saying that there isn't a bubble for over 7 years. There still isn't a bubble. There will be one that starts to form soon when crowd investing starts to get underway world wide, but until retail investors invest in startups in a large and meaningful way, there isn't a bubble.