The presentation from a16z comes to mind which had much more specific numbers comparing previous tech bubble to the current one. For example, the U.S. total funding in tech as % of GDP was 10.8% in 1999 vs. 2.6% in 2014 (slide 14).
http://a16z.com/2015/06/15/u-s-tech-funding-whats-going-on/
I would suggest that you are missing the true meaning of "shitting the bed"
The entire of finance is linked. Those trading in the normal world of finance typically trade in more than one market. (bitcoin isn't normal, well not until recently, however the total daily trades are tiny)
If the entire angel market were to collapse as described it would cause a "contagion" that would whirl around the world.
Take for example uber with its stupidly large valuation. Real banks have invested real money into that company. Currently its horrendously over valued. Its a taxi company with an app. The only reason they are successful is that they have enough cash to under cut the world. They also have an obnoxiously selfish culture that generates PR via controversy.
If their credit ability were to be hampered, they would not be able to expand. This means they'd not be able to defy gravity and be forced to make a profit on the existing markets they have. cue massive implosion, all taxi services start to consolidate.
Once that happens it;ll start to affect other tech stocks and private investment.
once one or two unicorns fail because their underlying buisness model fails, it will lead to a total re-evaluation of credit for the entire tech industry.
This then filters into general stock. Add that to the wobbles from china, brazil, low price of oil and commodities and you have a nice crash.
The key thing here is that everything is interconnected. Like a open office if someone gets the plague, it spreads like wild fire.
I keep seeing the claim that Uber subsidizes the rides, but where is the evidence of that? Every time I see actual numbers, I never see riders making more than what customers pay; from what I can tell, Uber gets a decent commission per ride.
I'm a little confused about the way the article is using numbers.
They say their generous worst case calculation of losses is $550 billion, based off of the number of angel investors, throwing out a 1 million number against each, and then valuing companies at $327 billion.
They then compare that to the losses in NASDAQ of 5 trillion. That is based on the peak of 6.7 to the low of 1.6.
Why does the chart in the article only show a peak of about 5 trillion, which would cut the losses from about 5 trillion to to about 3.4 trillion?
Isn't it wrong to compare the estimate of angel investors and valuations against NASDAQ? Why not compare NASDAQ against NASDAQ? To use their style of comparing against extremes, back in 2009 we hit a low of 1.29. In July we hit a high of about 5.2. If those gains were erased, wouldn't we take a loss of about 3.91 trillion, which is a little larger than their chart showed for the dotcom crash?
Am I missing something, or is this article making a misleading comparison?
EDIT: Reading about the NASDAQ composite index on Wikipedia, it says that the index was changed in 2014, and the composition is very different then it was in 2000. So, even NASDAQ to NASDAQ may not work as a comparison, unless it can be recalculated the same way, and even then, other factors such as inflation should probably be factored in, since it was substantial. (The CPI shows $1 from 2000 is worth $1.39 in 2015 dollars.)
EDIT #2: After researching a bit, I think the difference between their chart showing a loss of 3.91 and them saying 5 might be because the 5 trillion is in terms of market cap. On August 18th we were at 9.15 billion, but I don't have a good source for historical market cap data. From the look of things, I'm guessing the losses off our recent peaks to the 2009 lows would be larger than the dotcom losses, but I'd love to hear from anyone who better understands these things.
I also am not very confident in the math from this post.
$327B - all unicorn companies
$225B - all angel investment
$???B - all A,B,C,D..n companies that don't fit into the unicorn category.
I think the potential for losses is ostensibly much larger in the proposed "worst" case scenario; That being said, I don't think it's a very plausible outcome.
Yahoo bought broadcast.com for about 6 billion. Groupon is worth about 2, so is twitter and yahoo bought tumblr for 800 million. Aol had a market cap around 200 billion.
First, I was in China in 2011, and that felt like a bubble. First, we are not even close to that yet. Second the author doesn't really seem to understand how valuations work. When $5-trillion of value was wiped out, it doesn't really mean that $5-trillion was lost, that's just the aggregate change in valuation. Facebook is a $250b company, but people didn't put $250b into it, more like $25b. Similarly, If I go out and raise $100k at a $5M valuation, and the company goes bankrupt, yes there has been a $5M loss of wealth, but only $100k of real money was lost.
While I believe the author is correct, I think that the view is somewhat shortsighted. You cannot simply pull a half trillion dollars out of the economy and not expect a ripple effect into other industries. A economic multiplier of 10x brings you into the 5 trillion range, and oh, wait, there is the dot-com boom again. Edit: To clarify, I don't think that a 10x multiplier would be accurate - just trying to show the missing variables.
But "we're in a bubble" is seen as savvy while "we're not in a bubble" is seen as naive. Always take the side of pessimism if you want to seem cool and smart.
15 comments
[ 5.5 ms ] story [ 44.3 ms ] threadThe entire of finance is linked. Those trading in the normal world of finance typically trade in more than one market. (bitcoin isn't normal, well not until recently, however the total daily trades are tiny)
If the entire angel market were to collapse as described it would cause a "contagion" that would whirl around the world.
Take for example uber with its stupidly large valuation. Real banks have invested real money into that company. Currently its horrendously over valued. Its a taxi company with an app. The only reason they are successful is that they have enough cash to under cut the world. They also have an obnoxiously selfish culture that generates PR via controversy.
If their credit ability were to be hampered, they would not be able to expand. This means they'd not be able to defy gravity and be forced to make a profit on the existing markets they have. cue massive implosion, all taxi services start to consolidate.
Once that happens it;ll start to affect other tech stocks and private investment.
once one or two unicorns fail because their underlying buisness model fails, it will lead to a total re-evaluation of credit for the entire tech industry.
This then filters into general stock. Add that to the wobbles from china, brazil, low price of oil and commodities and you have a nice crash.
The key thing here is that everything is interconnected. Like a open office if someone gets the plague, it spreads like wild fire.
They say their generous worst case calculation of losses is $550 billion, based off of the number of angel investors, throwing out a 1 million number against each, and then valuing companies at $327 billion.
They then compare that to the losses in NASDAQ of 5 trillion. That is based on the peak of 6.7 to the low of 1.6.
Why does the chart in the article only show a peak of about 5 trillion, which would cut the losses from about 5 trillion to to about 3.4 trillion?
Isn't it wrong to compare the estimate of angel investors and valuations against NASDAQ? Why not compare NASDAQ against NASDAQ? To use their style of comparing against extremes, back in 2009 we hit a low of 1.29. In July we hit a high of about 5.2. If those gains were erased, wouldn't we take a loss of about 3.91 trillion, which is a little larger than their chart showed for the dotcom crash?
Am I missing something, or is this article making a misleading comparison?
EDIT: Reading about the NASDAQ composite index on Wikipedia, it says that the index was changed in 2014, and the composition is very different then it was in 2000. So, even NASDAQ to NASDAQ may not work as a comparison, unless it can be recalculated the same way, and even then, other factors such as inflation should probably be factored in, since it was substantial. (The CPI shows $1 from 2000 is worth $1.39 in 2015 dollars.)
EDIT #2: After researching a bit, I think the difference between their chart showing a loss of 3.91 and them saying 5 might be because the 5 trillion is in terms of market cap. On August 18th we were at 9.15 billion, but I don't have a good source for historical market cap data. From the look of things, I'm guessing the losses off our recent peaks to the 2009 lows would be larger than the dotcom losses, but I'd love to hear from anyone who better understands these things.
I think the potential for losses is ostensibly much larger in the proposed "worst" case scenario; That being said, I don't think it's a very plausible outcome.
1. When/If the unicorns kick the bucket they will take a lot of other companies with them.
2. There are dozens of smaller startups for every unicorn. These smaller numbers add up.
3. A lot of auxiliary services are based around the startups - advertising, infrastructure, etc. There will be a ripple effect if the bubble bursts.
Broadcast.com wasn't Uber. It wasn't even a Groupon