Bubble? I feel like people who are claiming that we are in a startup bubble weren't really around in the 90s. Guys were getting paid $100/hour to do HTML. Just HTML. Literally just HTML.
The excess was mind-boggling. In contrast, today it just seems like lots of investors have found a good way to pump money into a reasonable risk pool and extract value. Seems fairly sustainable.
In the 90s, companies were doing IPOs and their shares were skyrocketing from public investment. For the most part right now it's institutional investors who are a lot more qualified than John Q. Public.
It seems odd to me that people are seriously talking about a bubble coming as if it's never been talked about before. It seems to be once a month that there's another article on TechCrunch decrying Silicon Valley as a bubble after stumbling upon the party of some douchebag who watched The Social Network and decided to snort cocaine in Palo Alto. But I quote Peter Thiel's "Party like it's 1999" lecture: http://blakemasters.com/post/20582845717/peter-thiels-cs183-...
"Bubbles arise when there is (1) widespread, intense belief that’s (2) not true. But people don’t really believe in anything in our society anymore. You can’t have a bubble absent widespread, intense belief. The incredible narrative about a tech bubble comes from people who are looking for a bubble. That’s more overreaction to the pain of the ‘90s than it is good analysis."
In other words, if the majority of people believe there is a bubble, there is not, by definition, a bubble.
Valuations for seed-rounds are frothy because there are a lot of investors competing and looking for astronomical returns, but Series A is still hard to come by. Just a couple days ago there was an article on HN about "avoiding the Series A crunch," and today we have a "what to do in the bubble" article.
If anything is widespread, it's good old fashioned paranoia.
> people don’t really believe in anything in our society anymore
Should I believe that?
(And is this another way of say "This time is different"?)
Is it actually possible for people not to believe anything, in our society or any society?
> In other words, if the majority of people believe there is a bubble, there is not, by definition, a bubble.
Does this go beyond first-order consequences? Is it also true that the more people utilize the rationale to convince themselves that talk of/paranoia regarding a bubble is a sign of no bubble, the more likely there can be a bubble?
Also, there seems to be the assumption that when people realize there's a bubble, they'll immediately engage in attenuating behavior. I think there's evidence to the contrary -- that as long as people can see a way to continue to profit from it (say, a critical mass of people believing everyone else is the greater fool), a bubble can continue while being widely acknowledged.
"Is it actually possible for people not to believe anything, in our society or any society?"
"We are nihilists, Lebowski! We believe in nothing!"
Sorry, couldn't resist. :)
With all due respect to Peter Thiel, who is much smarter and more successful than I am, I'm really baffled by the statement that "people in our society don't really believe in anything anymore." And I am especially baffled by the implication that this putative, ubiquitous nihilo-cynicism -- even if we accept it to be true, which I don't -- necessarily precludes the formation of bubbles. Did people not believe in anything back in the mid-2000s housing bubble? It seems as if they believed in housing, for one thing. The belief was "widespread and intense" enough to cause a serious freakin' problem.
I'm going to give a guy like Peter Thiel the benefit of the doubt and assume that I'm missing a lot for lack of context. But that quote, at least out of its original context and so presented, is really strange.
> "We are nihilists, Lebowski! We believe in nothing!"
:)
> With all due respect to Peter Thiel, who is much smarter and more successful than I am
Remember, these two things sometimes go together.
Another guy who's more successful than many of us said “Success is a lousy teacher. It seduces smart people into thinking they can't lose.”
> I'm going to give a guy like Peter Thiel the benefit of the doubt and assume that I'm missing a lot for lack of context
I'm a little less generous; my guess is that what Thiel says is very smart indeed in the context of boosting certain business interests and/or political philosophies.
>>If anything is widespread, it's good old fashioned paranoia.
Well, you will see this as paranoia then: There were lots of people arguing like you that there were no bubble -- just until it burst.
For instance, this "everyone learn to code to earn money" thing imho indicates that it is highly likely that the programming profession will burst in a short while. Again. (The reason there is a lack of software people now is at least partly because everyone stopped studying computer science after the IT death.)
This is the part that I've been concerned about as well, "everyone learn to code". The truth of the matter is if you're about to head into college, it's very difficult to see any hope of getting a job in all but a few industries. Software is one of the bright spots in the economy right now, so we will absolutely see a huge influx of programmers in the coming years. I don't know how this will impact the current crop of developers going forward, but I do hope the industry gets bigger with things like more hardware to develop for (Google glass, car software like the dashboard in the model s, 3d printing, etc). If it doesn't, then the tides will definitely turn as I just don't think we need that many web/app developers.
HTML was a new thing then. Despite how simple it seems now, it was a black art then. I was also around for those times and this is pretty similar. The warning signs to me are when people "not in the industry" want to become involved. IE, in the 90s bubble, accountants were looking to become IT Professionals with MCSE certifications because the job market was so hot. Now people who had no interest in starting a business or technology are starting companies left and right. It will be a different type of bubble, but it's definitely a bubble.
The biggest difference I see is that while I know many non-developers wanting to get into software, only those that actually become strong developers make it.
In the 90s it wasn't just that HTML was new, anyone that was "good with computers" was able to land jobs that paid stupid amounts of money for the skill set. There's good money and a demand for developers now, but companies are still looking for good developers, not just bodies with the right buzzwords on a resume.
And also mentioned in the parent comment: there's nowhere near the zeal from the general public. I don't know anyone in the non-tech world that thought groupon or zynga was a good deal, and almost everyone is curious how exactly fb plans to make money in the long run. Compare this to the dotcom bubble or the real-estae bubble and it is very different (I remember many people telling me in 2007 that I was foolish not to buy a house).
I'll add that if we have to make some kinda of parallel, the best we can do is put the cut-off at low-level frontend development. That includes taking PSDs and slicing them, maybe hook up some jquery. Anything beyond that such as complex html5/js web and mobile development, native apps, and backend work all take a significant investment of time. I don't think one can just jump into it.
I don't think salary has much to with it. Then again, how much are some devs getting paid who have less than 3 years of experience and are scarcely more than experts at "rails scaffold"?
It's not even IPOs or stock price. It's more VC funding and big exits.
As for John Q. Public, that's about to get WAY more interesting, since general solicitation is now a thing.
> As for John Q. Public, that's about to get WAY more interesting, since general solicitation is now a thing.
It may not be as entertaining as the .com bubble, but there's potential here.
I mean, just look at http://www.wefunder.com/terrafugia. If that's too over the top, even http://www.wefunder.com/casetext is mind-boggling. 2% interest, an $8 million valuation cap and no discount on a $1.3 million convertible note for a startup that says it can't start acquiring paid customers until its "enterprise software is ready to the security standards that firms demand -- likely in six months"?
FWIW, DropBox took a helluva lot longer than 6 months to get to the "security standards enterprise firms expect" (they still had major security incidents several years after public launch), and look where they got to.
Casetext seems eminently reasonable. They have founders with solid domain knowledge, are solving a very painful problem for an industry with deep-pocketed players, seem to have an easy-to-use product, and have demonstrated measurable traction. I'm tempted to invest once I do a bit more due diligence on both WeFunder and CaseText.
1. The median valuation for pre-revenue startups that raised angel investment in 2012 was south of $3 million, so an $8 million cap is quite generous based on where Casetext is at in terms of meaningful traction.
2. Historically, it has not been uncommon to see convertible note interest rates as high as 10%. Not surprisingly, rates have come down in recent years (I believe the median rate was 5.5% a couple of years ago), but 2% is really low.
Based on my knowledge of the legal market, I don't necessarily agree that Casetext presents a compelling investment, but even if you do, the reality is that successful angel investments are based on two things: a) investing in good startups and b) investing at the right price and on the right terms.
Finding the former without being able to do the latter is sort of like picking next week's winning lottery numbers this week. You'll have a great story to tell your friends but no money to show for your troubles.
I'd argue that successful angel investment is based almost entirely on a.) and negligibly on b.). These are not the public markets, where a startup has been growing for 5-10 years and largely tapped out its markets. These are very speculative markets where the vast majority of startups end up earning nothing and the one big hit can represent a 1000x return on your investment. Valuation at that stage is the difference between ponying up $1000 and ponying up $2000 for a seat at the table.
When you're investing at $100M rather than $8M the equation changes substantially. That's where we were during the last dot-com boom; we're pretty far from there, unless you're a Facebook investor.
> ... one big hit can represent a 1000x return on your investment.
Sounds great! There's only one problem: your $1,000 investment in Next Big Thing Inc. is not going to be worth $1 million. The data is very clear: most individual angel investments lose money, and overall, the type of returns angel investors see on their overall portfolios all but rules out the idea that there are 1000 baggers out there.[1]
In short, it sounds like you're looking to hit a Major League home run with a tee ball bat. If you're searching for massive returns, you need to look at markets in which you can make much more highly leveraged bets. Many of these, like CDS, are inaccessible unless you have tens of millions of dollars to play with, and that's at an absolute minimum.
By the way, regarding public markets: if you had invested in the right equities over the past five years, you could have produced better returns than most angel investors without taking on anywhere near the risk. Obviously, picking the right equities to invest in is easier in hindsight, but so is picking the right early-stage startups to invest in.
I'm not disagreeing with the main point but in fairness html was a new technology at the time and coding websites was something few people knew how to do.
Seems easy now but we've go tools, tutorials and people to learn from now.
Really? I recall my personal roadkill website I had back in 1996 as a 6th grader. Picked up an HTML manual at the library when they still had card catalogs. Nothing too hard about it at all and Dreamweaver and Photoshop made it a snap if you were ignorant of markup.
It was a bubble. Too bad I was learning about Earth Science while people were making frivolous dollars.
DreamWeaver 1.0 wasn't released until December of '97 [1] and in November '96 Photoshop just released 4.0 [2], the first version with Layers, it still only had 1 undo, and text was rasterized (you couldn't edit it). FrontPage wasn't even released until around '96.
Most of the websites I remember from that period had a lot of cut and paste graphics (Photoshop was expensive, has a learning curve, and harder to use than today) so I'm sure custom graphics were expensive and people charged a high rate (with lower productivity). I can't remember any popular WYSIWYG authoring software prior to DreamWeaver/FrontPage. I would guess most were hand-written--which, as you know isn't hard, but the tools were a lot less refined and harder to find out about back then.
No, no it wasn't. HomeSite existed as a separate product well into the 2000s, although stagnant as all get-out as the competition trounced it: http://www.adobe.com/products/homesite/
I still remember owning Dreamweaver 1.0 and HomeSite simultaneously back in late '97.
I actually made money in the mid 90s making websites for people and I was born in 1989. I made websites for local teachers and the middle school. I had lots of walking around money as a kid in high school because I had a recurring payment from work that had begun in 2001 at the height of the dotcom era.
Ten years later:
>> "Guys were being paid $100/hour to get CRUD working through a web framework."
People weren't being paid to write HTML. They were being paid to publish information on the Internet for the first time ever. Like, before W3 schools and NodeJS. Like, back when you got your morning news from the paperboy.
If typesetters were paid a dime back in the 1700s, anyone who could design a webpage in the 90s was certainly worth their weight in gold.
And with time, one day your job will also be super unflattering to talk about.
This comment is hilariously unaware of the actual history. Remember, I was around for the whole thing. Those guys writing HTML were writing static pages. Not guys that were writing Perl scripts, not guys that were deploying the websites—those guys were getting payed a LOT more.
The pay was out of whack because public money was flowing into tech stocks and companies were doing IPOs with little to no due diligence. You had do-nothing companies with ten to fifty times the capital that a typical well-funded company would have today. Large companies were buying things left and right out of sheer terror and misunderstanding of what the web meant to commerce.
I'm not too familiar with the landscape but I'm seeing some IPOs valued at $3-4b from companies that are generating about $100m in revenues. 5 years ago those same companies would be a <$1b acquisition.
I've lived in SF since the early 90s and have been through several business cycles. It feels like 1999 all over again, maybe 1998. A couple months ago I saw an ad on the NY subway for a company that delivers dog food and pet supplies to your door (deja vu anyone).
Property prices and rents in SF have spiked 30-40%, in some cases doubled, in less than a year. Same pattern as with the NASDAQ in 1999-2000. This is predictably driving the cost of doing business up, especially for companies that need to pony up for an actual office, payroll, etc.
Of course the details are different from 1999, but it feels a lot like that time. As Mark Twain said "History doesn't repeat itself, but it does rhyme."
> The greatest of modern economists, the late Joseph A. Schumpeter, labored mightily for twenty-five years to find the “cycle.” But at best, his “business cycle” is the result of so many different cyclical movements that it can only be analyzed in retrospect. And a business-cycle analysis that only tells where the cycle has been but not where it will go, is of little use in managing a business.
Basically, let's all stop laboring over whether there is a bubble or not, no one can predict it.
It's quite clear that the extraordinary actions of the major central banks over the past several years has inflated numerous bubbles. The question is not whether they exist, but how big they can get, how long they can last and how they will pop or deflate.
In other words, precisely timing a bubble's demise and accurately estimating the magnitude of a correction so as to benefit from the correction may be damn near impossible for most of us (markets can remain irrational for longer than men can remain solvent, and all that) but it's quite possible to recognize growing risk that a market isn't pricing in, and adjust your behavior accordingly so that you're less exposed to the risk.
As I said, precisely timing a bubble's demise and accurately estimating the magnitude of a correction so as to benefit from the correction may be damn near impossible for most of us. And even if you do time the market well and have a good sense of the size of a correction, you probably don't have access to the investment instruments that will allow you to reap the greatest rewards.
> I'm genuinely curious if you know anyone who has the ability to do this? If you know someone, I'm putting all of my stock in their company.
What do you mean?
Right now in the Bay Area, you have lots of folks in tech who refuse to recognize that today's hot market is in large part fueled by monetary policy. They assume that they have job security and will always be able to jump to another six-figure job with a phone call or two. As a result, many fail to save. And many spend a very large portion of what they make in unproductive ways because they believe their risk of loss of income is close to zero even though it is actually much, much higher. This[1] is a good example of the mentality that is particularly prevalent amongst younger engineers and entrepreneurs here.
You don't have to be a hedge fund manager to see the froth in the market today, and even if the fun could potentially carry on for years more, any individual in tech in the Bay Area can reduce his or her risk exposure by a) avoiding certain types of employers (even if they pay handsomely today) and/or b) taking the opportunity to save while compensation levels are so high.
I feel like we're talking about two different things here...
You stated:
> it's quite possible to recognize growing risk that a market isn't pricing in
How is this possible? What data, metrics, tools, do you have that shows an increase in risk other than a basic "intuition"? That's my point - if such a tool did exist to the common person (as you suggest, the techie in SV who isn't saving), financial institutions would be all over that. They aren't (but they claim to be)
The blog post you reference, is just one data point. Just because one person feels that way, doesn't mean the whole culture is that way.
> They assume that they have job security and will always be able to jump to another six-figure job with a phone call or two. As a result, many fail to save.
I'm not disagreeing with this sentiment, but we'd both be drawing fairly baseless conclusions. Counter-point - Are there not loads of people who survived the 90's .com boom and making a killing today in SV? (i.e. PG is one example) So why would savings matter then?
> How is this possible? What data, metrics, tools, do you have that shows an increase in risk other than a basic "intuition"? That's my point - if such a tool did exist to the common person (as you suggest, the techie in SV who isn't saving), financial institutions would be all over that. They aren't (but they claim to be).
The challenge is not finding data; the challenge is identifying which data is truly important and allowing yourself to make objective decisions based on the data.
I'll give you a simple example: I am currently short JC Penney through options. Before I took my positions, one of the things I noted was a divergence between what the equities market was saying about the company's prospects and what the credit market was saying about the company's prospects. The credit market was notably more pessimistic about the company's position at the time (obviously measured by the risk of JC Penney defaulting on its debt), and now you see the equities market catching up.
From what I can tell, a lot of folks in Silicon Valley don't even want to look at data. Startups with little to no revenue raising million-plus convertible notes with $5-15 million caps and sub-5% interest rates? And some of them have already raised capital? That's a data point that makes junk bonds yielding 7% look good by comparison.
> A couple months ago I saw an ad on the NY subway for a company that delivers dog food and pet supplies to your door (deja vu anyone).
To be fair, this is a lot more feasible now than it was back then. I'm not sure what's making it so. Higher volume of willing-and-able-to-internet customers? Better routing? But I cite as evidence the number of established players who are dipping their toes into the same-day-service market.
Delivery costs have plummeted because of the enormous amount of machine intelligence being used by courier companies. Better routing algorithms reduce fuel and staffing costs, better machine vision technology allows package labels to be read and sorted at high speed. Mail-order companies and delivery services have formed a symbiotic virtuous circle of business development - greater volumes of mail reduce per-unit costs, which encourages an increase in volume. Amazon are the prime (no pun intended) example of this, with their progressive diversification into selling bulkier and lower-value items.
Normally yes, but NYC is sort of the Big Exception in the US - it's the only city in the country where the density is so insanely high that I can imagine niche delivery businesses surviving.
We've seen this with eBay Now - the economics are sustained by limiting service to only zip codes with sufficient density.
I agree. The main problem with the original idea, IIRC, is that the product is cheap and heavy-- low margins and high shipping costs. The consumer was simply better off getting it at the store.
Yea--I've noticed a pattern too, but it seems like I'm wrong
so many times--especially with the stock market. The first
crash was easy to spot, but this one seems different. I know so many people still living off the bubble money they
made in 2000. I see a lot of people struggling. I've seen
wages go down, but the average american tries to keep up
appearances. I sometimes wonder if Obama secretly knows
how bad the economy is going to be in a few years? I think
he knows the minimum wage will be very important to
so many people in the future? I've noticed that divide
between the rich and poor is really getting bigger.
The basic problem isn't so much having a standard distribution of rich and poor (a large bump in the middle with tails on either side), what's happening now is we are trending towards having a big pile of poor people, relatively speaking who are wage slaves and can't afford basics like rent and health care, and another much smaller pile of rich people who could give fuck all about everyone else. Our system works pretty well when the rich are slightly have mores (slightly better house, car, etc) but when they just cleave off of the rest of society, there isn't a good outcome to be had there.
I was still a kid then but in 1998/1999 was there active talk of a bubbles like there is now?
I feel like we have had varying levels of bubble phobia for at least a year now. It's starting to feel like it would be more surprising if there wasn't a bubble then if there was.
And isn't the whole point of a bubble that people are bidding something up unaware that it's value is fictitious? Which seems difficult if everyones constantly talking about a bubble, no?
"I was still a kid then but in 1998/1999 was there active talk of a bubbles like there is now?"
Yes, and the prevailing counterargument at the time was, "But this time it's different! The fundamentals of everything have changed, because...internet!"
If you look at historical bubbles, and particularly at historical technology bubbles -- the South Sea Bubble, the Mississippi Bubble, the 1920s Bubble, the bubbles of the mid to late 1800s -- "This time it's different!" has been a pretty consistent pattern of denial. Typically there's a rational basis for the exuberance at first, but this onto this basis is piled a whole lot of speculative investment and fervor, wildly inflating valuations beyond the boundaries of plausible expected return.
Some of that mass irrationality has to do with easy access to capital, and some of it has to do with easy openings to capital markets. The latter is usually required to really kick a bubble into high gear. [So the operative question in this case is: what effect will the opening of private startups to public investment have?]
Are we currently in a bubble? Really, really hard to say. I don't feel qualified to make that judgment. But to answer your question, yes, most bubbles have at least a few naysayers who are bearish on the situation. But their voices tend to get drowned out, especially by those with interests in keeping the bubble going.
Nit: "Stock prices have reached what looks like a permanently high plateau." Profesor Irving Fisher of Yale, autumn, 1929, 3 days before the great crash.
Quoted on page 70 of J.K. Gailbraith's The Great Crash 1929 which I very strongly recommend to anyone.
was there active talk of a bubbles like there is now
Yes. Most surreal immediately prior to the crash. NASDAQ peaked in March of 2000, many start-ups continued, though increasingly desperate for funding (which generally never came) through early 2001, by which time many finally gave up the ghost.
I remember distinctly looking around especially at the younger workers (often just out of college, early 20s, now in their mid to late 30s) wondering what they'd do when the music stopped. For most it was back to mom & dad.
In 1999, I think there was a lot more effort going into the stories explaining "Why This Time Is Different."
There were a few cautionary stories back then, but most of the tech press and most of the mainstream press was full of hype. There was a cottage industry back then creating stories explaining how the Internet was going to let the economy grow and grow and make us all rich. I still see those stories, but it seems like many more people want to be The Guy Who Spotted the Bubble rather than the Pied Piper
There was a lot of talk about why things were different because we had entered a "new economic era". Some attributed this to the Internet. Others to Alan Greenspan.
"... a significant uptick in the number of parties, hot girls roaming bars trying to chat with any guy that looks like he might be an engineer and looking for a job..."
Is anyone else noticing this phenomenon? Apparently I'm not invited to the right parties...
Even if you aren't noticing it, you're not missing out.
To reuse a great Mel Brooks line, the girls have an opening they're looking for you to fill, but it's not the interesting kind: at best a Sr Software Engineer at some massive company writing Java on a team that "is just like a small startup in a big company".
That's my favorite line. It lets me know to run the other way. Often, when people use that line on me, I ask about the equity I'll get as part of the deal. Usually, it turns out that they want founder-level enthusiasm without the pay.
"I was here in the Valley for the original Bubble, and the situation now is nothing like that was. Back then people were saying there was a "new economy" driven by the Internet, and that productivity was going to go up like a step function, which justified higher p/e ratios for any company that could claim to be a participant. If you had money to invest you felt like you had to have most of it in the stock market, because money parked in bonds would miss out on all this growth that was coming.
Back in the 90s I was sure there was a bubble happening, and was notorious for telling everyone to sell. And yet I remember that even I thought it was dangerous to have money sitting in bonds. I don't think that now, and I don't think anyone else does either.
What's happening now is a lot more localized. A few professional investors are paying higher valuations for startups than they were a few years ago. But the number of participants and the amounts of money moving around are both very small compared to the 90s. Plus the companies are better. In the 90s, it was the dumb leading the dumb: smooth-talking MBAs were raising money from hapless LPs and investing it in startups run by other smooth-talking MBAs. Now it's Yuri Milner investing in a company run by Mark Zuckerberg."
> And yet I remember that even I thought it was dangerous to have money sitting in bonds. I don't think that now, and I don't think anyone else does either.
I know PG's comment was posted 950 days ago but I'd be interested to know how he feels about bonds now.
When you are writing about the beginning of a bubble, you are likely midway through it.
When people are starting to think a bubble might pop, likely it already has.
This is my third bubble I find they have more opportunity than downside with one major exception: VC's in their blind hype turn fundraising into a wicked market where silly unsustainable ideas are highly valued and solid business opportunities are shoved to the side as boring.
The real driver of a bubble is the idea of a "get rich quick" investment mechanism that pulls in rewards out of proportion to risk, which inflates the capital within that investment, which inflates the bubble. Are we there yet? I don't see it.
When I think "bubble", I think of two - the old dotcom bubble, and the housing bubble. The housing bubble was driven by those nasty CDOs, which produced abnormal rates of return on AA/AAA securities, while leaving their value vulnerable to problems with the sub-prime market. Money pours into the housing market thanks to excessive returns, which both drives up housing prices and drives demand for more mortgages, which reduces proper risk management... a vicious cycle, til the subprimes start defaulting and the prices drop and then the bubble pops.
The old dotcom bubble was driven by IPO money from unsophisticated investors, so there was a massive push to get companies public as soon as possible, well before they had solid business models. This drew institutional money into the venture capital market, and again, things got all out of wack, and capital supply was driving startup demand, and weak businesses were getting funding they didn't deserve.
So the real marker for a bubble now, imho, isn't whether prices for early stage startups are going up, but rather whether a lot of bad startups are getting funded. Is that really happening? An increase in price suggests otherwise. Supply and demand, people. Sure, demand may be up, but either that increases price, or the market responds by increasing supply. And since the number of quality startups is basically fixed, supply increase means introducing bad startups.
And this doesn't even bring in other factors, like pg's marvelous observations about how startups need less Series A money these days generally, and the rise of super-angels, angel syndicates, and online tools like AngelList and Gust.
> The old dotcom bubble was driven by IPO money from unsophisticated investors
Curious how the advent of companies like WeFund et al. will change this. As much as people like the "feel-good" aspect of the common man being able to invest in start-ups, I'm interested in seeing how this turns out. It's been said a thousand times, but for every Facebook / Google startup there are many, many more that crash & burn that simply don't make headlines.
When I saw WeFund, I thought "Kickstarter for penny stocks!" Ugh. If this is being done in a way that hordes of non-qualified investors are actually getting stock, it could well handicap any startups that go that route, because the professional investors they'll need in later, bigger rounds will consider them toxic.
Consider what this does to the cycle... startups good enough to get real angel money will probably be wise enough to not take on a bunch of high-risk unqualified capital, and so they won't be on WeFund at all. This leaves WeFund to the ones that are more idea than startup, not good enough to get in the real capital game. So the likelihood of hits is very low.
So, how much money can be poured into the system this way? Not enough to distort the entire market the way the dotcom boom did, I think. It would take a million thousand-dollar investors to just get a billion, which isn't enough to really kill anything - and $100M or less even less important in the big scheme of things.
Yeah, I'm pretty worried about what's going to happen there. I don't think that normal people have any sense of the level of risk involved, and it's probably a matter of time before companies start driving hard to get investment money from unsophisticated investors by highlighting the few massive successes.
I'm very happy to have the chance to invest in startups, I'm just not sure it's a good thing overall.
There will be pressure on them to perform and show some quality exits. Retail investors are a finicky bunch and generally do not expect their capital to be locked up for 5+ years even if repeatedly told so.
Demand is a linear function of Leverage, and today comes by the Fed. CDO and mortage backed securities; Public Investors; The Fed. Its not a difference in kind that matters. Bubbles are caused by excess liquidity.
Good point, but I still don't think it's a true bubble until it starts feeding on itself, responding to liquidity-driven demand in toxic ways. And I think the toxic way we'll see here is bad startups getting funded.
Another possibility we'll see is startups getting overfunded and drowning in their own capital (another thing that happened in the old dotcom era). But the true quality startups shouldn't allow themselves to get overfunded anyway.
I also think we should see a drive to IPO to drag unsophisticated money in, like back in the day. We're not, I don't think. Exits these days seem to be primarily M&A driven, and how vulnerable is that to liquidity surplus?
A bubble occurs when prices are driven by view on the future that are implausible or inconsistent. It seems that current high prices are mostly driven by "investment" competition - meaning that startups can raise prices at early stage because there are too many investors.
This doesn't seem to be happening at later stages (B rounds) or public companies.
What this means is that returns for initial investors is going to be lower - but it still might be sustainable. Companies usually will grow past +$15M when they do well.
If there is a bubble, it's most certainly not starting, it's ending. With the Fed tapering imminent, and interest rates starting to rise, there's no way that a bubble will be starting at this point. If anything, it will pop a bunch of near-bubbles, like Bay Area real estate, rent prices, stock market, etc.
There is no Fed tapering imminent. They just voted last week to keep the $85 BLN/month flowing on a 9-1 vote.
During dot.com bubble, the short term interest rate was 5%+ in 1998 and 1999, and that didn't stop that bubble. The Fed only belatedly raised rates to 6% in 2000 when the bubble went parabolic.
The Fed is always slow to raise rates, and rates are at 0%.
It could be years before we are at 2% rates with FOMC incrementing 0.25% every quarter or so, and 2% rates is still very stimulative. Right now, the Fed isn't even talking about raising interest rates. They have only been talking about reducing the $85 BLN/month $$ printing, but even that is on hold as of the last FOMC meeting where they voted 9 to 1 to not taper.
The Fed still has the pedal to the metal, and have publicly stated they do not see a bubble anywhere (just like they said there was no housing bubble back in 2006-2007). Don't get shaken out of the market just because the Fed talks about tapering its $$ printing from $85BLN/month to $75BLN/month. The current environment is still very stimulative for stocks.
If there is a bubble, it won't pop because of the Fed. It will pop after the momentum is exhausted and it collapses from its own weight.
According to Trulia's research, it will be cheaper to rent than buy in the Bay Area when interest rates hit 5.5%. For most of the rest of the country the rates would have to hit over 10% (!!!) for that to be true.
So it should prove interesting what happens then. That said, my wife and I are in the middle of (trying) buying a house here. So far, there is intense competition amongst buyers. One home we put an offer on had 19 offers total. We offered 21.5% over asking and at least 3 offers came in ahead of us.
Thinking back to about 2007, I remember the frothy fervor surrounding all of the new "web 2.0" companies that were coming on the scene back then. I thought for sure that the tech industry was about to see another apocalyptic event as the web 2.0 bubble popped. Thankfully, that bubble never popped (although another one did in '08).
I think it's healthy for people to be paranoid of another bubble forming ... it helps potentially keep it at bay. At least, that's what I tell myself :P
I believe the "web 2.0" bubble did pop in 2008. However, we saw the rise of the "app economy" at the same time. Anyone failing in the web 2.0 sector could easily, and often transparently, pivot to the sudden demand for mobile applications.
Whether that is a sign of the software industry maturing, or if it was just plain good luck, remains to be seen.
I think the rise in startup valuations, even at the early stage, while a bit frothy (and definitely more so in the bay area) is driven by some structural changes (i.e., the leverage allowed by the new tools which make development cheaper/faster) and access to much bigger markets (mobile, anyone?).
"Hot girls" at the bar looking for a job are probably doing so because tech is one of the few non-sucky sectors for young people.
Founders investing their capital in other startups doesn't strike me as so weird, given how Angel List and Funders Club, etc. are making it ridiculously easy to put a bit of money to work. Founders with disposable income used to invest in public equities and bonds if they wanted to. Now, startups.
There are trillions of dollars still sitting on the sidelines chasing growth. Not even a tiny fraction of that has been deployed to VC (mostly because the returns, in aggregate, are still pretty bad). Should that happen, I might begin to be a little apprehensive.
I think "hot girl" phenomenon he is referring to is girls recruiting engineers. I've definitely noticed that happening among startups both in the bay area and elsewhere. I know of one trendy startup that most definitely employs one very attractive young lady in an "admin" role, but her primary function is most definitely social recruiting.
This is why I firmly believe in living within ones means and not taking other people's money. The only times I've seriously worried about money is when I was deeply in debt. As soon as the debt was gone, I... became a much more difficult person to work with... to put it one way.
Bubbles are usually preceded by some regulatory or legislative change(s) that fuels them. This legislation usually has good intentions but falls victim of unintended consequences. For example, you can trace the housing bubble to the easing of lending standards through the modifications of the Community Reinvestment Act in the late 90s [1].
Legislation that creates new investments opportunities, coupled with cheap capital is a dangerous combination. I would not be surprised if the new JOBS Act [2] provides the spark and the Fed's loose monetary policy provides the fuel that creates a startup bubble (quickly).
Companies like Angel List [3] and Wefunder [4] have been quick to recognize this and take advantage of the new demand pockets the JOBS Act creates. Just check out their home pages.
As Sam mentions, there may be some time before it bursts, but it's very tough to figure out when it will be...and early stage company shares are not liquid.
I guess I should have been more explicit. I didn't mean to strike a partisan nerve.
I didn't mean to say that the CRA was the only cause for the housing bubble. There were a lot of factors that lead to the housing bubble.
My point was that the CRA was the beginning of a decade long non-partisan policy shift that signaled to regulators, Wall Street, etc. that owning a home was an unqualified good thing and looser standards for lending against homes should be encouraged.
Once the government and regulators signal to Wall Street other investors that they are encouraging the deployment of capital to a new, loosely regulated asset class it creates a dangerous environment.
Those do not extensively debunk the CRA's influence. At best, they split hairs and show that CRA is not completely at fault and that we should blame Wall Street. I'm on board with blaming Wall Street for a lot of the problems (they went much further beyond rationally using the CRA's policies and instead went whole hog into "lend to everyone!"), but this strikes of "Sure, the legislation created perverse incentives and encouraged risky lending practices (which unsurprisingly spiraled much further out of control than the CRA intended into non-CRA covered loans), but the real problem is the people who acted on these perverse incentives!"
If you assume that every single CRA loan defaulted, and that every failed loan in the entire housing market was a CRA loan (both assertions are far from true), then the CRA would be responsible for a multiple billion dollar problem. Maybe. Might be well under 1b when you consider that the homes are re-sellable after foreclosure unless they burned without insurance.
On Wall St, we wound up with a multiple trillion dollar problem. That's tr-, not b-, as in 1,000X bigger.
The CRA thing is ideological bullshit. I seriously do not understand how anyone who passed 3rd grade arithmetic could buy into it.
Note also that it's a perfectly fine position to have to think the CRA is a bad idea while also recognizing how ridiculous the idea is that it caused the bubble.
IIRC in ... 96 there was a change in stock holding rules for new stock issues - IPO holders could cash out much faster than before, leading to more turnover and investments. It's a bit hazy, and I'm not a stock guy, but that's my recollection.
Great post. It was last year that there was a lot of chatter from everyone, worrying that we were in a bubble. Since then the talk of bubble has apparently decreased but the real signs of a bubble have accelerated, in particular, crazy living costs.
Very worried to read that this is still happening:
"Companies raising money at $15MM+ plus valuations with no traction and no real vision..."
I think it's a bubble in terms of the people, many big egos. In these times you should how to not have an no ego at all, if you don't have an ego, no one can leverage that to make you do things.
The actual founder-founders, the inventors of the ideas however, are totally aware of that situation and let the startup people with the big egos do the CEO jobs while pulling the strings in the background.
It's not a bubble in terms of the actual startups, because it's all based on users that actually use the apps a lot. The more usage an app has, the harder it is to kill.
After the whole solomo, photo sharing hype, investors have become very cautious, so I don't actually believe money is cheap now.
However, it's an ego bubble right now, startups get press before being ready, pursue vanity metrics that actually will kill the company, their own startups are growing over their heads.
So it's maybe a people/ego bubble right now, which could turn into a full bubble, but time will show.
There are articles talking about the possible bubble and they are easy to be found. I would like to add just one thing: we are still in the biggest recession and fiat money is printed like crazy. There has to be some places those money flows into. And given the quickly shifting age, industries seem to be broken in one way or another sooner than before. I agree with the author that bubble is here. However, it might take longer than expected to burst. As long as what we do actually delivers better value to customers, I believe we can still survive.
If you are a young/new engineer in a bubble you should recognize that excess salary is a function of the bubble, not your actual value. To that end bank as much excess salary as you can, (keep your personal burn rate low) and don't set your internal 'value meter' by a company that so desperately needed engineers they over paid for them.
I saw several engineers in the dot-com crush, graduate, work for a year at some BigCorp, then go to work for a startup as "Chief Architect" or some other vaulted title, lose their job when the crash hit, and then found themselves unemployable at some really vaulted title and salary because they really only had 3 - 4 years experience and it wasn't all that broad. That was sad to watch. Don't be that engineer if this is another bubble.
FYI, I've been seeing a variety of title inflation - lots of "Senior" styled people without the 7-12 years of industry experience to back it up. This seems particularly prevalent in the startup sector.
In my experience, YMMV, etc, etc. Just something I noticed in my looking for work 1H2013.
I was successfully freelancing and doing quite well in 1999 and 2000, and it was pretty interesting watching the wheels all come off in 2001. Here's a very subjective idea of what it felt like to me:
- The bubble "burst" over about 9 months in the greater Boston area, give or take.
- For about 3 months, it was nearly impossible to get hired no matter how good you were. Everyone was laying off solid senior engineers with tons of in-house knowledge, so why would they hire?
- The area immediately around Boston recovered slowly, because there were just too many unemployed engineers.
- My ~23yo friend who held $250,000 of stock watched it drop to almost nothing during his post-IPO handcuff period.
- Any company which sold to startups, or which sold to companies which sold to startups, etc., pretty much died horribly. Huge, successful, awesome companies just evaporated.
I was young and single, so I simply skipped out of the "blast zone" around Boston, waited a few months, and started applying to cool, small shops in second or third-tier cities that didn't have a huge number of unemployed programmers. Got a good job, had fun, got a bunch of raises, etc.
The financial advice in the other comments is good. Make sure you have a year's cushion if you can. If you're good, you love programming, and you can relocate, you can ride out a lot. Plenty of interesting small companies are unable to hire in this market, and most will be around post-crash. Take a salary cut, get an interesting job, and help somebody make some money.
As an employee you have fairly little to lose if you play your cards right. That's the benefit of the employer-employee relationship and being compensated primarily in wages.
So my advice is to ride the bubble because the inflated salaries and other compensation are good for you, but be mindful of what might happen if the bubble pops. If it's bad enough, you might be left unemployed with very few job prospects for a period of time. Don't inflate your lifestyle, and use the opportunity to build up a large savings account. If the bubble pops, that'll tide you over for a long period of unemployment until the job market recovers or give you breathing room where you can pivot your career.
If all this talk about bubbles turns out to be just fear-mongering and it doesn't pop in the end, it's still money in your pocket you can use to bootstrap your own company or eventually retire on.
The worst things to do are to spend all the money you have, or invest it in bubbled assets that might evaporate.
There's an easy heuristic here. Look at a segment of the industry which is unambiguously not in a bubble and ask yourself whether you could get hired there doing similar work with a similar salary.
There's one hitch here: if the entire startup scene were to bust, there'd be a massive excess of developers vying for the traditional stable jobs at traditional profitable companies. This would significantly raise the bar for getting hired while potentially lowering salaries.
Basically, if it is a bubble then you can expect that your salary will go down or you will suffer a period of unemployment or both. Don't take on extra debt now (like buying an extra fancy house on a giant mortgage) that will trap you later.
Very interesting to read his advice to be wary of hiring the day after his post on the importance of hiring. These two posts aren't contradictory at all, but those who read his piece yesterday and responded well to it should definitely read this as well.
I thought his hiring post was incredibly useful despite a couple disagreements I had. This one on the other hand seems much less useful. The fact is a bubble is only obviously in retrospect, and the forces that led to the dotcom bubble (completely unknown potential of "The Internet" combined with a deluge of dumb money due to easy IPOs and accompanying hype cycle) are no longer present, and thus any future bubble will look completely different and the conventional wisdom won't spot it coming.
I think I agree. I think this post works in complement to the hiring one (mainly the treat your cash like the last you'll raise and the warning that people are a huge expense).
It seems to me to be a bubble of sorts, although a strange one. It mostly seems to be centered around AngelList in general and the seed stage universe in particular, where valuations of very early stage startups with cool videos are totally out of whack with where they should be in my opinion. But because the amount of money moving around at this stage is still pretty small - it is early stage after all, so each deal is still tiny in absolute terms - there is less of a bubble effect than one would expect. Reality might be harsh for those startups when they come to long for bigger rounds in future though.
"a significant uptick in the number of parties, hot girls roaming bars trying to chat with any guy that looks like he might be an engineer and looking for a job"
That is a pretty bad strategy to hire from founder's perspective. Will reasonably smart engineers like these strategies?
On a related note, a friend of mine was telling me that he saw someone (on OkCupid) mentioning about contacting her only if you are engineer since her startup is hiring engineers. Ha!
Oh man, I have these exact same concerns. There are people out there creating start ups with useless products that only have value because someone invested in them.
On the other hand, most of the start ups are expected to fail. The ones that succeed generally have a big enough pay off that all the failed ones can be shrugged off.
I think we are in transition where we could go either way. Investors know this and that is why money actually has been tighter.
A permanent, secular rise in the maturity of the tech startup ecosystem (and of "software eating everything") would exhibit many of the same signs of high growth, or the same collection of Verhulst growth curves in disparate indicators, as a bubble. Dev salaries, SoMa rents, and MBA hanger-on density are probably useless in distinguishing between the two.
Sure. Growth in value, as measured in users plus at least one of profits or strategic value. I see Tesla, SpaceX, Twitter, and Github and I do not see a bubble. Instagram and Tumblr are good examples of growth in strategic value being enough.
I don't actually see the separate and distinct economic value creation in Instagram, Twitter, or Tumblr, nor do I see the economic value capture in Github.
The economic value of GitHub is in making team collaboration and communication, the primary bottleneck in team development, that much more efficient. That is hugely valuable, as it increases the economic productivity of companies writing software, and allows teams to organically form (and dissolve) without much organizational overhead. It is a huge improvement from the days before SCMs (let alone SCM-based project management cloud-software), and even a large improvement over the days of CVS, SubVersion, and SourceForge.
Every bubble I believe gives opportunity to a selected few who can stand out in terms of competition and competence. Definitely there's a lot of people who will make a lot of money and get successful very fast..the billion dollar question is to identify those companies among a 100 others which will fail or do only meagrely well.
Would anyone mind elaborating on how the current bubble could compare to the DotCom bubble? I could see them being similar because they are both related to tech, but for some reason I don't feel too scared right now (the DotCom bubble popping was pretty bad, right?).
The tech bubble of the late 90's was a fascinating phenomenon. It was global and widespread. My grandmother had significant money in tech stocks at the time.
The overall amount of money we're talking about here is MUCH smaller than that. A couple of orders of magnitude at least. As such the effects of any bubble popping aren't going to have widespread consequences here.
A major pullback in funding will definitely affect engineers. Jobs will simply be a bit harder to find, but there are so many technology companies operating outside of the startup funding domain that I don't think it will be terribly impactful.
The worst case is we go back to like 2005, which isn't really too bad at all.
There is a saying: if the grocery's attendant is telling you which stock to buy, better run and sale everything.
In Spain I had big discussions with people about how expensive buying a home was (back in 2005), that it wasn't sustainable, and that prices will go down. People stared at me as If I were an idiot. Usually with all the atention and a good portion of the money is going in one direction, there is probably a bubble. I don't think there is one very big right now with startups, maybe a bit with mobile App(excess investments). But planets are aligning to allow a big one, now with the new law. We'll see..
While I'm cautious to call anything a 'bubble', right now tech is looking a bit over-valued, and the internet startup space is way too crowded... I'd personally avoid investing in anything tech related, with a few exceptions.
Create some fake startups which take in the cheap capital. Funnel it to a safe haven by making the fake startups buy overpriced services from safe-haven-company. Once the bubble busts the should be a lot of cash in the safe haven to buy now undervalued assets and maybe even work hire the now unemployed engineers.
That's one strategy. Plenty of liquidity means (literally) that you're rich. So your strategy is 1) be rich 2) buy undervalued assets post-crash.
Your strategy is okay. For those set of assumptions I suggest you remove the second step, which might significantly reduce your being rich. So, 1) Keep plenty of liquidty. Buy nothing pre- or post-crash.
This has a very high probability of keeping you rich.
Now on to us mere mortals. In bubble times did you know you can actually start a company with like a few hundred dollars, start delivering product and getting users, and get investment to accelerate the process?
That way, you can build a company with cheap capital even if you're not already "plenty liquid", as you might put it.
Exactly. People seem to think that you make money by riding a bubble to the top, then jumping off when the timing is right at its peak. Turns out that is a great way to lose money (nobody jumps off fast enough). The real money is made cleaning up after a disaster.
Shorting stocks during a bubble is a great way to learn about bounded upside and unbounded downside. I guess in some sense a valuable learning experience is "taking advantage."
EDIT: Let me rephrase. I think it's silly to call Facebook "old and mature" when it IPO'd 18 months ago. It makes it sound like you would have had a shorting strategy for it some time ago, perhaps 18 months ago - which might have failed miserably - but now would sweep that under the rug, pretending to have never had it.
Of course, we can all be clairvoyant if we sweep our losses (FB is up 27% versus IPO opening price) under the rug. Shorting as a strategy works wonders if you ignore when it doesn't.
> suddenly understanding the attraction of living in SF/SV
Don't get your hopes up. I've had drunken engineers come up to me in a bar (Bourbon & Branch, no less) -- slurring words -- times I was sure they wanted to hit on my girlfriend or start a fight for some reason, where after a few seconds of direct eye contact, they pull out their phone and say "heeey maan, want to try my app?"
The excess was mind-boggling. In contrast, today it just seems like lots of investors have found a good way to pump money into a reasonable risk pool and extract value. Seems fairly sustainable.
In the 90s, companies were doing IPOs and their shares were skyrocketing from public investment. For the most part right now it's institutional investors who are a lot more qualified than John Q. Public.