Interesting article, Mr. Stross. I think it's great to see so many people hungry for the next new thing, out hustling and working hard to try to make it happen.
As awareness of startup culture grows, it is necessarily going to attract some goofiness. That's OK. Not every idea is a good one, and not every good idea is going to work. We need these stories to make the successes stand out so much brighter.
You may be right, but I hope you're not. I see things like Pebble's success on Kickstarter, Amanda Palmer bringing more attention to the idea of crowdsourcing funding for something that is every bit today's poetry, and see the spread of the paradigm shift we all already value (or else we wouldn't be here). I think it's right to be nervous, but I am cautiously optimistic that hacker/maker/startup culture is an attractive alternative to the existing production model.
I always appreciate your thoughts, but nowhere near as much as I would appreciate a new Laundry novel. Thanks for the good times.
I was in the web/dotcom 1.0 biz from early 1995 through late 2001.
I am reading the news these days with a strong sense of deja vu for late 1999.
Kickstarter and crowdsourced funding is great news for artists, but I don't see it scaling much bigger than AFP and "Iron Sky" without attracting fraudsters. Again: hacker/maker culture is great, it has brought us great things in the past, and I expect great things to come of it in future, but it's not delivering huge new industries on the scale of a Google or Facebook or Apple. (Making stuff with atoms instead of bits is intrinsically slow, energy and matter intensive, and hard to scale up exponentially.)
But this isn't about artists making a living. If this guy was talking about crowdsourcing to fund his next book of poetry I'd be all in favour. But instead, he's talking about building some kind of bullshit hosting/purchasing storefront with the idea of raking off a percentage of gross from a market that died of natural causes three quarters of a century ago.
Thinking you can set yourself up to rake off a chunk of the value in each exchange in a particular field is the sort of wishful thinking that gave us the Feb 2000 bust.
I appreciate how your experience in the late 90s has given you a heuristic for picking up on the signals and leading indicators of a bubble, but I question how relevant it is in this case.
The poetry blog post is just one bad idea that a couple guys had in an attempt to gain a small amount of funding from a notable startup indicator. That's not to say that there aren't more small teams with laughable ideas out there, but I think it's important to note that nobody gave them money. I suspect they went home empty handed because the folks who manage VC funds did learn from the mistakes of the 90s, even if a new generation of wantrepeneurs have no clue.
Which brings me to my point. The niche based thinking expressed by the poetry disruptors and many others is an expression of the realization that individual programmers have the ability to work alone to create products and businesses that are capable of supporting them financially in much the same way that a sole proprietorship would in the physical world.
I'm fairly certain that this wasn't possible in the 90s without outside help, but I think that it explains a lot of the misguided enthusiasm from people who want to build lifestyle businesses, but don't realize that venture capital is not the way to go about it.
Not only is poetry dead as a market, it's arguably even deader as a form. The profession of poetry is all about making the connections you need to get a book published, at which point you can work (for pennies) at a community college teaching poetry, and have as good a right as anyone to introduce yourself to chicks as "a poet." You can't be utterly illiterate, though, unless you're a protected minority.
But "Poetry," capital P, is an entirely different and quite solid business. I wouldn't at all count this startup out. It's called a vanity press, honey! The profession of fleecing people who want to be Poets may not be the oldest, but it's got to be at least fourth or fifth.
(It's also worth noting that before, I don't know, 1850 or so, the distinction between a vanity press and a real one was by no means clear. Plenty of reputable authors invested in the production costs of their early works. It was almost embarrassingly easy for a good writer to acquire a reputation based on one work - Dr. Johnson went from nobody to lion after one 300-line poem, his imitation of Juvenal's Third Satire. Of course, the tennis court had a net then.)
Unfortunately I'm starting to agree with the bubble 2.0.
Last year I didn't believe it that much, but this year I'm starting to see crazy company evaluations, highly inflated that don't generate any revenue at all, so I don't know how can they be worth billions of dollars, but I know math and little about economics.
But if bursts, it's a good thing. It brings perspective, a thing that's missing a lot these days, where every social app or thingy that's the hottie of the week is evaluated on > $400M.
Seems to me like each of these overblown evaluations is a bubble onto itself. Perhaps there is a general trend but such a thing cant lead to a crash. What would a crash involve?
Investors realizing that they can't make their money back. Right now even if they pay $10 billion for a photo app, they're still expecting other investors will buy their shares at a $20 billion valuation or more later on. All investments are made on speculation right now, rather than based on true value and potential for making money.
But if that doesn't come true, and everyone realizes this, then there will be a crash. Valuations will fall, and the initial investors won't be able to make their money back because those photo apps weren't making any revenue, let alone profits.
That doesn't seem like a crash though; I'd wager the investor class and the general populace are quite disjoint sets, e.g. there's not a mass of pension funds involved in IT venture capital. What we might see is a "return to senses" and a shortfall of capital for a while, but not a crash.
I've been expecting that for a while. Too many startups have crazy valuations, but too many seem to make good money for me to think all the investment will dry up for 5 years or anything like it.
What happens in a crash is a rapid collapse of a single market (say the social segment of online businesses) then then the markets supported by that market follow suit until the momentum threatens the economy as a whole. Financial markets can react fast to this causing a "crash."
We're 12 years past the .com bubble. A large portion of the people who're creating and moving money today are in their twenties, they didn't experience 1999 in an economic point of view so there are no signals for them.
Having said that, let's not forget that a lot of the uncharted terrain from 1999 is now thoroughly explored with a microscope. If you're talking about a bubble, don't forget to mention which subset of the internet you're referring to. Yes, social thingies are the new buzz but they are such a small part of the online ecosystem. A lot of the social stuff was created as an add-on to existing stuff - take it out of the equation and very little value is lost.
So let's be clear about this: these kinds of startups are arbitrary containers for investment dollars. They could be corn, or property, or jelly futures. But as it happens, technology companies are where a lot of people are putting their money right now.
As a result, it's not the startups with the secure bottom line that are getting investment: it's shiny startups that happen to be very popular. Because those are the ones that look great in an investment portfolio, and which could potentially be sold elsewhere. It's not about dividends over time; it's about passing on a shiny valuable to someone else for a cash return.
Given that premise, it seems like two things need to happen for the bubble to burst:
- The odds of an investment going bad must increase (or the perceived odds) / the perceived value of shiny startups in general must decrease
- Another arbitrary, shiny container for investment must arise
Thanks to the banking crisis, we know that property and related investments are going to be tainted for a little while. What else out there could threaten the startup market today? How about in five years?
From what I understand, bubbles bursting in the past (e.g. Tulips, Dotcom) have been triggered by a specific event rather than a new, more exciting outlet for money.
In the Tulip bubble it was a failed auction in Haarlan, in the DotCom bubble it was the Fed raising interest rates, paired with the judgement in the US vs Microsoft trial.
So, its interesting to hypothesize what the 'trigger' event could be in this case. I doubt it will be the Facebook float, as I think we have a while to run yet.
Right - I think my first bullet is probably triggered by an event. Facebook could be it, but I think you're right: it'll probably be something further down the line. Wouldn't surprise me at all if it turned out to be SOPA-like legislation coupled with a ruling on sales tax.
It's hard to predict these things, but if I had to guess a trigger, it would be some kind of major negative news about internet advertising that causes at least a temporary stampede of advertising spend out of the sector (which could in turn trigger an even bigger investor reaction/overreaction).
Not sure what precise form that'd take. Anything from a major click-fraud-type scandal (would have to turn out to be significantly worse than the current assumptions about fraud, though) to a damning report about ROI from one of the more credible white-paper-issuing analysts, or one of the players themselves.
here's a scenario for you - end of 2012, and for some reason ad spending is down and consumer spending has not increased as much as was forecast. the major platforms that capture that ad money suffer hits to their stock. FaceBook will be public by then, and if they suffer a decline in profits, much less a decline in revenue, this early in their history, the luster will come right off, taking them from $100 to $30 in a few days.
the reverse halo effect of FB will cause optimism about the resale value of shiny startups to decrease. by this time next year, PG is blogging about "sanity and wisdom" and how he has seen it all before.
I think it's important to recognize that the Public can't easily invest into startups. It really is just a small group of investors who are in this market right now. This is an important difference between today and the late 90s.
Saying that something is going to happen is easy, as in astrology easy. The meat of any prediction is in the timeframe. If you know for sure that the bubble is gonna burst in n months, you should bet against it in the stock/future market.
I absolutely agree. I've been hearing predictions about the startup bubble for quite a while now, no doubt the market will fall at some point. Markets are cyclical so you can safely make a prediction once a year and eventually be right. What I want to see are people stating when the bubble will burst and even better, putting money on their predictions.
Am I missing something? The example of a "poetry startup" is obviously meant to be an extreme case, but doesn't prove anything about a bubble -- rejected from YC, miles from funding, no product, no customers. If this idea just closed a $500K seed round, it would be a different story. But people have been coming up with silly business plans forever... What makes this one a particularly convincing bellwether of the imminent pop of the 2.0 bubble?
Im 19 I've Spent $100 on Facebook ads, and when ads are mobile, i'll probably spend more, and if I had a disposable chunk of 100K I will definitely try to promote on Twitter Trending Topics, as the startup culture continues to grow, college students like me will be willing to throw money on Facebook,Twitter, and other sites rather than you know drugs and alcohol ;)
Says the guy who sells books. I suppose that's a few rungs up from shoe-shine boy, innit?
(Don't get me wrong, I love his books. But are we really looking to SF authors for market guidance now? Just because he cites one failed business model?)
Everything that might have been invented has been, because I haven't seen enough mind blowing stuff this week. Therefore, we are closing the patent office. Good day.
A startup bubble is the best thing that could possibly happen.
Look at it this way. There are plenty of talented engineers, designers, and entrepreneurs out there trying to build the next big thing. Due to the incredible scale and reach of the internet economy, those who succeed will become fabulously wealthy. But most will fail (or at least not reach that scale) due to various circumstances---a misstep in execution, a superior competitor, our simply bad luck. There are certainly many small successes, but success or failure can seem like an incredibly binary event.
Why should engineers shoulder that risk? That’s the raison d’etre of finance and investment. Let those with capital take on the risk, and give the engineers enough security so that a “failure” doesn’t put a talented person out of the game. If every startup that demonstrates that it execute on an idea and can clear some threshold of viability gets a reasonable exit, then the investors will still get enough Facebooks to generate a good return, and the startup teams are much less captive to chance and fortune with respect to whether they can pay the bills or not.
It's not about whether third party investment is a good idea, it's about whether the valuations third parties make are reasonable or based on hype.
The cost of bubbles is in talent misallocation - could talented people be producing other things of more enduring value?
I don't disagree, but I would suggest that if the "successes" are worth billions upon billions, then even "failures" are quite valuable as well, at whatever point in the processes they are still indistinguishable.
As hard as economic value is to quantify, "enduring value" is even harder. So I won't even attempt to make judgments on that front.
In a tech bubble, capital does not chase engineering talent; it chases whatever shiny thing resembles the last shiny thing that made headlines. And when the bubble bursts, the entire sector goes hungry for capital, even companies which, in a more sober market, would be recognized as good prospects for growth.
The Poetry startup seems to be a very healthy idea. There is a large audience of poets; writing poetry is a very social process; and they use Internet extensively . Right now they are scattered thru a million of small resources and communities in social networks. But what if you can bring them all in one place? There might be a sufficiently large audience to monetize even if we forget about readers at all.
So his bubble sample has meaning and therefore his POV rests unproved.
I've been thinking for a while that someone (perhaps even me) should build a better steam engine. It's cool technology, and the current speed record has stood for over a century; surely we have better materials science now (and the recent success of Tornado, a replica A3 Pacific, shows that it's possible for enthusiasts to build a steam engine on a not implausibly huge budget). One for kickstarter?
I don't agree that poetry have no consumers.
It is an arguable pity that eyes have blinders.
Between simple taglines, among headlines.
Happily in advertising,
Poetry vines.
It is temerity to pass this prediction based on extremely small sample data.
Instagram, Colors, Zynga and others like that are still exceptions rather than a rule. Indeed media attention for these social apps/gaming companies tend to be high which might give the illusion that internet industry as a whole is moving towards valuations without any base underneath.
the only bubble I see is in social media (instagram and zynga, mentioned a lot already in this thread). it's funny that business models which from my point of view are far more sustainable and also much more beneficial for society get considerably lower valuations (or at least media attention). i mean startups like asana, heroku, fogbugz or duolingo - whose main use case goes beyond sharing/playing with friends.
With the exception of duolingo, these are all companies which make products for other businesses, so we should ask: What do their clients make? If their clients get popped in this (hypothetical) bubble, won't they?
good point, there's certainly some exposure to let's say rather overvalued companies. eg. if you looke at the featured clients list of asana. nonetheless in their case, I think the possible applications for their service go well beyond IT companies.
I hope in a way this bubble would burst, I'm getting thoroughly sick of all this web2.0 bullshit. Its nothing but social networks and photo/something sharing sites. Nothing really happening and we need smart Engineers and developers getting back into some worthwhile endeavors. I blame Facebook.
I have a theory about bubbles: It's relatively easy to spot that you're in one, but it's very hard to pinpoint what sort of bubble it is. I'll explain...
During the lead up the 2008 debt crisis I saw a lot of people talking about how house prices had been going up year on year and questioning whether we were in a property bubble. There was a debate though. Demand for housing was strong (partly due to population growth) and it appeared that globalisation had freed up the capital so banks had plenty of money to lend to people to buy houses. So the rising price of property, it was argued, looked like the natural effect of market forces. In hindsight it's easy to see that there was an oversupply of wholesale debt, but at the time I think people assumed that it was just a more efficient distribution of global capital that was opening things up.
Similarly, in the lead up to 1999 people seemed to know that there was too much money floating around. Everyone seemed to be investing in stocks or property and swapping stories of how much they had made. Yes, tech stocks were rising quickly, but so was everything else, and there seemed to be no shortage of investors coming up with money to fund these tech companies so what's the problem.
I think what happens is that people always look at current circumstances in the context of recent bubbles and try to look for patterns. When they don't quite fit, they argue over whether this really is another instance of a previous bubble. My theory is that the overpriced asset is rarely the same thing as in the last 3 or 4 bubbles.
So, back to the present day. We have lots of high valuations for tech companies. But we also have lots of tech companies actually making a profit, plus operating costs are a lot lower. So we're not about to see a burst in the sense that the funding will dry up and companies will run out of runway. Instagram was like, 12 people(?), if they couldn't have got that $50mil investment I'm sure they could have found a way to keep operating for another year or two.
The challenge is to think about where the bubble might actually be. Could it be in advertising revenue? Are advertisers burning though reserves trying to get attention? Could it be in mineral resources? Are server or bandwidth costs artificially low? Could it be a bubble in intellectual property? Is the exact implementation of Facebook not actually as valuable as the companies valuation suggests. I have no idea, but I don't think this a complete re-run of 1999.
TLDR; I don't think this is "[Tech] Bubble 2.0", this is probably "[Something else] Bubble 1.0".
Bubbles require huge flows of investment cash to grow. You can't miss that scale of growth. They don't sneak up on you. What's hard is determining the point at which the growth is legitimate and at which point it's fad investment/fraud.
It was easy to see huge flows of cash into tech in the dot com bubble. It was easy to see huge flows of cash into real estate and the financial sector in our most-recent bubble.
But the biggest problem right now, is a lack of growth. I simply don't see how you can have a bubble without massive investment and no-one's investing like that in anything.
Most investors are paying any stable sovereign nation with its own currency to hold onto their money for them (very low, and in some cases negative, real bond rates.)
It's actually relatively easy to see when it's become fad/fraud driven. The hard part is predicting when the music is going to stop, because that's controlled by the people investing. Some of the best times to invest in a bubble come during the final frenzy. Warren Buffett was absolutely correct that the dot com bubble was vapid, but he still lost money betting that way. People were predicting in 2003 that the housing market would crash by 2005, with detailed and accurate predictions about how the crash would happen, just two years too early. It is quite clear that the Australian (and, I've heard, the Canadian) housing market is in a bubble, but not so clear how long it's going to go on.
One person who seems to know how to think about these things is George Soros. His New Paradigm for Financial Markets is a good read on this question.
You're right about the Canadian housing market; There are those predicting it is in a bubble, the most vocal of whom is a former government MP blogging at http://greaterfool.ca .
The funny thing is that even after watching the carnage in the US housing market, people here don't believe it. I hear countless homeowners talking about housing is the best investment you can make, prices won't fall, it is different here, etc, etc.
Oh god. I'm in Australia and if you tell me I can get a house for $500k I'll say it's cheap. The apartment I'm living in is worth $550k. The only houses as cheap as $500k are over an hour from the CBD. Where I am living (half hour away), houses start from $800k up to $1.5m.
The average (house+apartment) price is still below $600k, though.
Does Australian housing also have a huge influx of Chinese buyers? I wonder to what degree their purchasing overseas is fueling that growth, not unlike Japanese purchasing in the 80s.
Anecdotally, they seem to be heavily involved in Canada's situation.
Anecdotally that is one of the factors driving up prices. The other main factor is the slowness in which the government opens up new land for building. Also new buildings on new land are taxed more heavily.
I'll admit I don't know the first thing about the degree of suburban sprawl, or whether greenfield development taxes are sane or not in Australia.
But as an American having grown up and multiply paid for the problems caused by sprawl, I'm definitely on the side of the concept of high greenfield development taxes.
No building is an island and there are very real and very steep costs in maintaining and growing infrastructure to handle sprawl. It's crucial to ensure those costs are accounted for in prices.
I still think the cut-over from legitimate growth to fad/fraud-driven is murky, but you're absolutely right that it's trivial to identify fad/fraud long before the bust.
That said, my feeling is that betting against the bubble is ultimately as bad as betting with it. Either approach can reap enormous gains, if you get the timing right. Which shakes out to: broad bets are little different from gambling.
And I think investment shouldn't be gambling. As such, the 'best' (in my terms) approach to a bubble would be to hold onto your money while it grows. Then, when it bursts, pounce on the depressed prices of the good investments.
It appears to me that Buffet learned that lesson after the dot-com bust and has been executing that plan on grand scale since 2008.
The prudent approach to fad investments is to ignore them, instead find things which are overlooked in the fad, hence undervalued, and put your money in them. I'd be surprised if Buffet was doing anything much different. And, by definition, no one can 'get the timing right' in bubbles, some are lucky, most aren't.
Maybe it's not a bubble per se, maybe it's just overinvestment? The world economy really sucks right now, and people are seeking havens for their cash. The tech industry is one of the few bright spots in the world economy, and there's an evergreen hope of some runaway hit. So it could be possible for there to be overinvestment even in the face of widespread skepticism.
We also have a lot of supercool mobile electronics platforms being made by China now, and the companies and workers over there are just not getting a fair share of the value they are creating. Just look at Apple's balance sheet. Labor costs are rising, but given how things work in China...? So maybe it's the Chinese Oppression Bubble.
Overinvestment in hope of exceptional returns is what a financial bubble is. Excess liquidity in the economy is one of the things that can lead to a bubble, as people look for places to put the money to use. If this is the case now, we should be seeing the same thing in other business sectors that promise the potential of well above average returns.
I agree wholeheartedly and would point people towards Chris Dixon's article on the topic.[0]
Specifically, I think we're witnessing early-stage overinvestment. This has been anecdotally validated by Dixon and Fred Wilson, who state that companies are struggling to follow up blowout seed rounds. "Anecdotes" and all that, but this fits with Neil's idea above (not the one on a Chinese Oppression Bubble, though :P).
Too many people are throwing around the "people are just seeking a place to park their cash because the economy sucks" misguided idea.
Startups offer investors exactly the opposite of what a capital preservation strategy seeks: high risk with low possibility of considerable returns.
Even if the world economy were in recession (its not [1]) most asset managers would recommend dozens of other asset classes before recommending investing in a startup for capital preservation, specially when inflation is low as is the case in most of the world at the moment [2].
Investment in a single startup is very risky, but if you were supplying the capital for a venture capital firm, I would imagine the investment would be much more consistent. I haven't done any real research, but I strongly suspect that a lot of VC firms are making good returns across their portfolios.
Yes, portfolio diversification is investing 101 (kinda curious how most of us here, when working on a new startup, will invest close to 100% of our awake time for months with no diversification)
Your post is somewhat related to what I said. The point I was making was that saying that startups are getting funded because there are no better assets for capital preservation are misguided. You are talking about "making good returns across their portfolios", that's not the goal of capital preservation, that's the goal of capital appreciation.
TLDR; I don't think this is "[Tech] Bubble 2.0", this is probably "[Something else] Bubble 1.0".
It's a 'social, generate zero or near zero revenue bubble.' It's certainly not a tech bubble in general. There are lots of small tech companies making plenty of money right now. Some happen to be acquired so not, but even the ones that are not continue to generate profits and carve out their niche.
The other thing, is that when this bubble bursts it will mainly effect investors and the tech worker who happens to bounce from social app X to social app Y in SV. Those tech workers who are running their small profitable startup will keep on running it. Those working in BigCorp won't even know what happened other than not seeing Instagram like news anymore.
And as an aside, so what if funding dries up. The barrier to entry on the software side really has reached what Carmack mentioned years ago. A lone developer with some motivation, a computer, and a fridge of diet cokes can make a successful startup/piece of software. No rounds of financing needed.
"It's a 'social, generate zero or near zero revenue bubble.'"
Can you point to a few high profile examples of this besides Instagram? There are SO MANY new ways to make money now and new low-friction ways to get distribution.
We'll always have the next hot social thing (Instagram, Twitter, Facebook, Turntable.fm, FormSpring). But Zynga? Groupon? Social games in general? PaaS plays like Parse and Heroku? Fab.com? Zulily? Gumroad? Twilio? Many startups might have inflated valuations/outcomes, but they certainly can't be described as "zero or near zero revenue".
Can you point to a few high profile examples of this besides Instagram? There are SO MANY new ways to make money now and new low-friction ways to get distribution.
I agree and it's why I think if there is a bubble it's a very narrow one and not a total tech bubble. There are lots of companies making good money right now as you point out.
Of course who really knows if Groupon is in the zero revenue group or not since no one has any idea what their financials really look like ;)
The surprise announcement no doubt raised new alarm bells for investors and analysts. The company has already changed how it counts revenue and has a history of using unconventional accounting metrics to value its business.
But the latest accounting issues — which reflect how the company failed to set aside enough money for customer refunds — occur as the company is trying to gain trust and confidence from investors and analysts.
Using your template: I think it will be 'Facebook bubble 1.0' or 'social bubble 1.0'.
In an Internet 1.0 world "Facebook", would have happened via a 'social' protocol on the Internet just like SMTP, and Zuckerberg would have been a hacker icon just like a Tim Berners Lee.
In this Internet 2.0 world its heading for a 100 billion dollar IPO. I think, its a bad movement of capital. As Facebook was more lucky - timing wise it happened just when broadband Internet was getting prevalent in developing countries of Asia, and many other things.
And unfortunately, it has got no real competition. The only people who are trying to compete (atleast visible to most, discounting efforts like status.net) are Google. Who are just building another Facebook like walled Garden in Google+.
How I would have loved to see a concerted effort from hackers to liberate 'social' to what it should always have been - a protocol!
PS: If mails had happened in Internet 2.0 world. We would have gmail users only mailing to other gmail users and hotmail users only mailing to other hotmail users ... but actually gmail would not have happened as Sabeer Bhatia or Microsoft would have been still ruling the mail world ;-) ... But thankfully it did not turn out that way, as there was already a protocol called SMTP!
I thought one of the characteristics of a bubble -- almost a pre-requisite -- was for the money of the general public to be flowing in.
If things like this poetry IPO idea haven't happened and garnered piles of cash from unwitting investors throwing money into a market they don't understand in a herd mentality ... how exactly is it a sign of anything other than a goofy idea?
a bubble in the sense of the dotcom bubble doesnt require the involvment of the public at all - it's simply an overvaluation of companies. as mentioned before, bubbles may be limited to very small sectors (eg. social media) and don't need to take down whole economies (like the housing bubble did) once they pop.
But it's a chronic or widespread overvaluation of something, right?
I guess I just don't see how professional investors could be snowed on a grand scale. Even if there is a bit of a trend in, say, social media - that doesn't mean an incubator is going to be taken in by a nonsense pitch, does it?
I would think you would need a lot more money from less educated or indirect sources to start passing off unquestionably weak companies, due the heat of the sector. (e.g. people trusting their long term money to money-managers with conflicting short-term incentives who are willing to gamble on known-bad goods on the assumption that they can find a bigger idiot to sell to before the music stops. Which essentially describes the entirety of the IPO and CDO nonsense in the last two bubbles.)
"I thought one of the characteristics of a bubble -- almost a pre-requisite -- was for the money of the general public to be flowing in."
The recent US "JOBS" bill included "Loosening regulations on small businesses that wish to raise capital, including through crowdfunding, while retaining investor protections." aimed at getting more of the general public's money flowing into early-stage ventures.
Given its timing, it likely hasn't played a role in the bubble to date, but it's clear that those behind that language in the bill want to inflate a bubble.
Bubble 1.0 created an asset class that the public could get irrationally excited about and invest into. Calling this Bubble 2.0 is misleading. The tech bubble in the late 90s could characterized by companies going public with sky-high valuations without revenue. It seems obvious the major difference is that there are still very few companies going public. And the companies that do all have meaningful revenue/profit.
What I think we are seeing now is the Venture Capital bubble. Lots of funds have shitloads of money they MUST put to work. If they don't put money to work most firms can't raise another fund and at some point the LPs can back out of their commitment. For a while now there is a market where the only way to put large amounts of money to work is to make much larger investments at a high valuation, expecting a lower return.
9 and 10 figure valuations are being driven by too many large funds chasing too few good companies. The LPs will get burned, funds will close, but there is going to be no collapse of the venture/seed market.
If you see this Bubble "burst" it will slowly over the next 5-10 years when second tier funds can't raise more money. VC is turning to a winner-take-all game where only the top 3-5 players make sizeable returns, because their brands are the only ones who afford them access to deals.
definitely this time it is less of a bubble, nowadays investors have more tech experience and knowledge the late 90s. just need to watch specific startups and what they are doing.
>"What I think we are seeing now is the Venture Capital bubble. Lots of funds have shitloads of money they MUST put to work."
I agree. The fallacy of some who don't believe we're in any sort of bubble often lies in the fact that they believe it will play out like 2000. If you read some of the anti-bubble VC chatter, that's the spiel you'll often hear, "I lived through the first tech bubble, and this ain't it."
But no two bubbles are alike. I don't expect the Nasdaq to blow up, crushing people's savings. But I do expect to hear a large sucking sound as VC money dries up. I do expect that the crazy demand for engineers we are seeing will soften, drastically. I do expect to see far few incubators and poetry startups. All of this amid an ongoing global recession.
There's a lot of money, billions, that is sloshing around the system. When that disappears, the resulting effect is never nothing.
I'm not an expert here, but is the real problem that there is no way to short a startup? You pretty much have to wait until a startup IPOs to bet against it. (Or is there some equivalent of shorting in secondary markets?)
Would it be fair to say that, until the IPO, every player in the system has an incentive to inflate the price?
And in our little world even the press doesn't usually see itself as having a critical role. Quite the contrary as with Arrington & Calcanis and their ilk.
Would it be fair to say that, until the IPO, every player
in the system has an incentive to inflate the price?
If you had unlimited money to invest, this would be true. But every player invests out of a fixed size fund. The more money out of your fund you bid, the lower your return.
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[ 5.5 ms ] story [ 170 ms ] threadAs awareness of startup culture grows, it is necessarily going to attract some goofiness. That's OK. Not every idea is a good one, and not every good idea is going to work. We need these stories to make the successes stand out so much brighter.
You may be right, but I hope you're not. I see things like Pebble's success on Kickstarter, Amanda Palmer bringing more attention to the idea of crowdsourcing funding for something that is every bit today's poetry, and see the spread of the paradigm shift we all already value (or else we wouldn't be here). I think it's right to be nervous, but I am cautiously optimistic that hacker/maker/startup culture is an attractive alternative to the existing production model.
I always appreciate your thoughts, but nowhere near as much as I would appreciate a new Laundry novel. Thanks for the good times.
So very soon, July last time I looked on Amazon.
I am reading the news these days with a strong sense of deja vu for late 1999.
Kickstarter and crowdsourced funding is great news for artists, but I don't see it scaling much bigger than AFP and "Iron Sky" without attracting fraudsters. Again: hacker/maker culture is great, it has brought us great things in the past, and I expect great things to come of it in future, but it's not delivering huge new industries on the scale of a Google or Facebook or Apple. (Making stuff with atoms instead of bits is intrinsically slow, energy and matter intensive, and hard to scale up exponentially.)
But this isn't about artists making a living. If this guy was talking about crowdsourcing to fund his next book of poetry I'd be all in favour. But instead, he's talking about building some kind of bullshit hosting/purchasing storefront with the idea of raking off a percentage of gross from a market that died of natural causes three quarters of a century ago.
Thinking you can set yourself up to rake off a chunk of the value in each exchange in a particular field is the sort of wishful thinking that gave us the Feb 2000 bust.
The poetry blog post is just one bad idea that a couple guys had in an attempt to gain a small amount of funding from a notable startup indicator. That's not to say that there aren't more small teams with laughable ideas out there, but I think it's important to note that nobody gave them money. I suspect they went home empty handed because the folks who manage VC funds did learn from the mistakes of the 90s, even if a new generation of wantrepeneurs have no clue.
Which brings me to my point. The niche based thinking expressed by the poetry disruptors and many others is an expression of the realization that individual programmers have the ability to work alone to create products and businesses that are capable of supporting them financially in much the same way that a sole proprietorship would in the physical world.
I'm fairly certain that this wasn't possible in the 90s without outside help, but I think that it explains a lot of the misguided enthusiasm from people who want to build lifestyle businesses, but don't realize that venture capital is not the way to go about it.
But "Poetry," capital P, is an entirely different and quite solid business. I wouldn't at all count this startup out. It's called a vanity press, honey! The profession of fleecing people who want to be Poets may not be the oldest, but it's got to be at least fourth or fifth.
(It's also worth noting that before, I don't know, 1850 or so, the distinction between a vanity press and a real one was by no means clear. Plenty of reputable authors invested in the production costs of their early works. It was almost embarrassingly easy for a good writer to acquire a reputation based on one work - Dr. Johnson went from nobody to lion after one 300-line poem, his imitation of Juvenal's Third Satire. Of course, the tennis court had a net then.)
Last year I didn't believe it that much, but this year I'm starting to see crazy company evaluations, highly inflated that don't generate any revenue at all, so I don't know how can they be worth billions of dollars, but I know math and little about economics.
But if bursts, it's a good thing. It brings perspective, a thing that's missing a lot these days, where every social app or thingy that's the hottie of the week is evaluated on > $400M.
But if that doesn't come true, and everyone realizes this, then there will be a crash. Valuations will fall, and the initial investors won't be able to make their money back because those photo apps weren't making any revenue, let alone profits.
Having said that, let's not forget that a lot of the uncharted terrain from 1999 is now thoroughly explored with a microscope. If you're talking about a bubble, don't forget to mention which subset of the internet you're referring to. Yes, social thingies are the new buzz but they are such a small part of the online ecosystem. A lot of the social stuff was created as an add-on to existing stuff - take it out of the equation and very little value is lost.
As a result, it's not the startups with the secure bottom line that are getting investment: it's shiny startups that happen to be very popular. Because those are the ones that look great in an investment portfolio, and which could potentially be sold elsewhere. It's not about dividends over time; it's about passing on a shiny valuable to someone else for a cash return.
Given that premise, it seems like two things need to happen for the bubble to burst:
- The odds of an investment going bad must increase (or the perceived odds) / the perceived value of shiny startups in general must decrease
- Another arbitrary, shiny container for investment must arise
Thanks to the banking crisis, we know that property and related investments are going to be tainted for a little while. What else out there could threaten the startup market today? How about in five years?
In the Tulip bubble it was a failed auction in Haarlan, in the DotCom bubble it was the Fed raising interest rates, paired with the judgement in the US vs Microsoft trial.
So, its interesting to hypothesize what the 'trigger' event could be in this case. I doubt it will be the Facebook float, as I think we have a while to run yet.
Not sure what precise form that'd take. Anything from a major click-fraud-type scandal (would have to turn out to be significantly worse than the current assumptions about fraud, though) to a damning report about ROI from one of the more credible white-paper-issuing analysts, or one of the players themselves.
* LinkedIn busts
* Zynga busts
* Google sees a dip
Happen.
shoe-shine boys offering stock tips - Happens in all markets, even in really bad ones.
(Don't get me wrong, I love his books. But are we really looking to SF authors for market guidance now? Just because he cites one failed business model?)
Look at it this way. There are plenty of talented engineers, designers, and entrepreneurs out there trying to build the next big thing. Due to the incredible scale and reach of the internet economy, those who succeed will become fabulously wealthy. But most will fail (or at least not reach that scale) due to various circumstances---a misstep in execution, a superior competitor, our simply bad luck. There are certainly many small successes, but success or failure can seem like an incredibly binary event.
Why should engineers shoulder that risk? That’s the raison d’etre of finance and investment. Let those with capital take on the risk, and give the engineers enough security so that a “failure” doesn’t put a talented person out of the game. If every startup that demonstrates that it execute on an idea and can clear some threshold of viability gets a reasonable exit, then the investors will still get enough Facebooks to generate a good return, and the startup teams are much less captive to chance and fortune with respect to whether they can pay the bills or not.
As hard as economic value is to quantify, "enduring value" is even harder. So I won't even attempt to make judgments on that front.
So his bubble sample has meaning and therefore his POV rests unproved.
It does not have to be big for seed funding. Might as well pay dividents.
Instagram, Colors, Zynga and others like that are still exceptions rather than a rule. Indeed media attention for these social apps/gaming companies tend to be high which might give the illusion that internet industry as a whole is moving towards valuations without any base underneath.
Head down. Innovate.
Like what?
During the lead up the 2008 debt crisis I saw a lot of people talking about how house prices had been going up year on year and questioning whether we were in a property bubble. There was a debate though. Demand for housing was strong (partly due to population growth) and it appeared that globalisation had freed up the capital so banks had plenty of money to lend to people to buy houses. So the rising price of property, it was argued, looked like the natural effect of market forces. In hindsight it's easy to see that there was an oversupply of wholesale debt, but at the time I think people assumed that it was just a more efficient distribution of global capital that was opening things up.
Similarly, in the lead up to 1999 people seemed to know that there was too much money floating around. Everyone seemed to be investing in stocks or property and swapping stories of how much they had made. Yes, tech stocks were rising quickly, but so was everything else, and there seemed to be no shortage of investors coming up with money to fund these tech companies so what's the problem.
I think what happens is that people always look at current circumstances in the context of recent bubbles and try to look for patterns. When they don't quite fit, they argue over whether this really is another instance of a previous bubble. My theory is that the overpriced asset is rarely the same thing as in the last 3 or 4 bubbles.
So, back to the present day. We have lots of high valuations for tech companies. But we also have lots of tech companies actually making a profit, plus operating costs are a lot lower. So we're not about to see a burst in the sense that the funding will dry up and companies will run out of runway. Instagram was like, 12 people(?), if they couldn't have got that $50mil investment I'm sure they could have found a way to keep operating for another year or two.
The challenge is to think about where the bubble might actually be. Could it be in advertising revenue? Are advertisers burning though reserves trying to get attention? Could it be in mineral resources? Are server or bandwidth costs artificially low? Could it be a bubble in intellectual property? Is the exact implementation of Facebook not actually as valuable as the companies valuation suggests. I have no idea, but I don't think this a complete re-run of 1999.
TLDR; I don't think this is "[Tech] Bubble 2.0", this is probably "[Something else] Bubble 1.0".
It was easy to see huge flows of cash into tech in the dot com bubble. It was easy to see huge flows of cash into real estate and the financial sector in our most-recent bubble.
But the biggest problem right now, is a lack of growth. I simply don't see how you can have a bubble without massive investment and no-one's investing like that in anything.
Most investors are paying any stable sovereign nation with its own currency to hold onto their money for them (very low, and in some cases negative, real bond rates.)
One person who seems to know how to think about these things is George Soros. His New Paradigm for Financial Markets is a good read on this question.
The funny thing is that even after watching the carnage in the US housing market, people here don't believe it. I hear countless homeowners talking about housing is the best investment you can make, prices won't fall, it is different here, etc, etc.
The average (house+apartment) price is still below $600k, though.
Anecdotally, they seem to be heavily involved in Canada's situation.
But as an American having grown up and multiply paid for the problems caused by sprawl, I'm definitely on the side of the concept of high greenfield development taxes.
No building is an island and there are very real and very steep costs in maintaining and growing infrastructure to handle sprawl. It's crucial to ensure those costs are accounted for in prices.
But I digress.
That said, my feeling is that betting against the bubble is ultimately as bad as betting with it. Either approach can reap enormous gains, if you get the timing right. Which shakes out to: broad bets are little different from gambling.
And I think investment shouldn't be gambling. As such, the 'best' (in my terms) approach to a bubble would be to hold onto your money while it grows. Then, when it bursts, pounce on the depressed prices of the good investments.
It appears to me that Buffet learned that lesson after the dot-com bust and has been executing that plan on grand scale since 2008.
We also have a lot of supercool mobile electronics platforms being made by China now, and the companies and workers over there are just not getting a fair share of the value they are creating. Just look at Apple's balance sheet. Labor costs are rising, but given how things work in China...? So maybe it's the Chinese Oppression Bubble.
Specifically, I think we're witnessing early-stage overinvestment. This has been anecdotally validated by Dixon and Fred Wilson, who state that companies are struggling to follow up blowout seed rounds. "Anecdotes" and all that, but this fits with Neil's idea above (not the one on a Chinese Oppression Bubble, though :P).
[0] http://cdixon.org/2012/04/29/is-it-a-tech-bubble/
Startups offer investors exactly the opposite of what a capital preservation strategy seeks: high risk with low possibility of considerable returns.
Even if the world economy were in recession (its not [1]) most asset managers would recommend dozens of other asset classes before recommending investing in a startup for capital preservation, specially when inflation is low as is the case in most of the world at the moment [2].
[1] http://en.wikipedia.org/wiki/Global_recession http://www.economy.com/dismal/map/default.asp
[2] http://www.indexmundi.com/world/inflation_rate_(consumer_pri...
Your post is somewhat related to what I said. The point I was making was that saying that startups are getting funded because there are no better assets for capital preservation are misguided. You are talking about "making good returns across their portfolios", that's not the goal of capital preservation, that's the goal of capital appreciation.
It's a 'social, generate zero or near zero revenue bubble.' It's certainly not a tech bubble in general. There are lots of small tech companies making plenty of money right now. Some happen to be acquired so not, but even the ones that are not continue to generate profits and carve out their niche.
The other thing, is that when this bubble bursts it will mainly effect investors and the tech worker who happens to bounce from social app X to social app Y in SV. Those tech workers who are running their small profitable startup will keep on running it. Those working in BigCorp won't even know what happened other than not seeing Instagram like news anymore.
And as an aside, so what if funding dries up. The barrier to entry on the software side really has reached what Carmack mentioned years ago. A lone developer with some motivation, a computer, and a fridge of diet cokes can make a successful startup/piece of software. No rounds of financing needed.
Can you point to a few high profile examples of this besides Instagram? There are SO MANY new ways to make money now and new low-friction ways to get distribution.
We'll always have the next hot social thing (Instagram, Twitter, Facebook, Turntable.fm, FormSpring). But Zynga? Groupon? Social games in general? PaaS plays like Parse and Heroku? Fab.com? Zulily? Gumroad? Twilio? Many startups might have inflated valuations/outcomes, but they certainly can't be described as "zero or near zero revenue".
I agree and it's why I think if there is a bubble it's a very narrow one and not a total tech bubble. There are lots of companies making good money right now as you point out.
Of course who really knows if Groupon is in the zero revenue group or not since no one has any idea what their financials really look like ;)
I'm guessing the SEC has a good idea. http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...
http://blogs.wsj.com/marketbeat/2012/04/02/groupon-ouch/
From the article:
The surprise announcement no doubt raised new alarm bells for investors and analysts. The company has already changed how it counts revenue and has a history of using unconventional accounting metrics to value its business.
But the latest accounting issues — which reflect how the company failed to set aside enough money for customer refunds — occur as the company is trying to gain trust and confidence from investors and analysts.
In an Internet 1.0 world "Facebook", would have happened via a 'social' protocol on the Internet just like SMTP, and Zuckerberg would have been a hacker icon just like a Tim Berners Lee.
In this Internet 2.0 world its heading for a 100 billion dollar IPO. I think, its a bad movement of capital. As Facebook was more lucky - timing wise it happened just when broadband Internet was getting prevalent in developing countries of Asia, and many other things.
And unfortunately, it has got no real competition. The only people who are trying to compete (atleast visible to most, discounting efforts like status.net) are Google. Who are just building another Facebook like walled Garden in Google+.
How I would have loved to see a concerted effort from hackers to liberate 'social' to what it should always have been - a protocol!
PS: If mails had happened in Internet 2.0 world. We would have gmail users only mailing to other gmail users and hotmail users only mailing to other hotmail users ... but actually gmail would not have happened as Sabeer Bhatia or Microsoft would have been still ruling the mail world ;-) ... But thankfully it did not turn out that way, as there was already a protocol called SMTP!
If things like this poetry IPO idea haven't happened and garnered piles of cash from unwitting investors throwing money into a market they don't understand in a herd mentality ... how exactly is it a sign of anything other than a goofy idea?
I guess I just don't see how professional investors could be snowed on a grand scale. Even if there is a bit of a trend in, say, social media - that doesn't mean an incubator is going to be taken in by a nonsense pitch, does it?
I would think you would need a lot more money from less educated or indirect sources to start passing off unquestionably weak companies, due the heat of the sector. (e.g. people trusting their long term money to money-managers with conflicting short-term incentives who are willing to gamble on known-bad goods on the assumption that they can find a bigger idiot to sell to before the music stops. Which essentially describes the entirety of the IPO and CDO nonsense in the last two bubbles.)
The recent US "JOBS" bill included "Loosening regulations on small businesses that wish to raise capital, including through crowdfunding, while retaining investor protections." aimed at getting more of the general public's money flowing into early-stage ventures.
Given its timing, it likely hasn't played a role in the bubble to date, but it's clear that those behind that language in the bill want to inflate a bubble.
What I think we are seeing now is the Venture Capital bubble. Lots of funds have shitloads of money they MUST put to work. If they don't put money to work most firms can't raise another fund and at some point the LPs can back out of their commitment. For a while now there is a market where the only way to put large amounts of money to work is to make much larger investments at a high valuation, expecting a lower return.
9 and 10 figure valuations are being driven by too many large funds chasing too few good companies. The LPs will get burned, funds will close, but there is going to be no collapse of the venture/seed market.
If you see this Bubble "burst" it will slowly over the next 5-10 years when second tier funds can't raise more money. VC is turning to a winner-take-all game where only the top 3-5 players make sizeable returns, because their brands are the only ones who afford them access to deals.
I agree. The fallacy of some who don't believe we're in any sort of bubble often lies in the fact that they believe it will play out like 2000. If you read some of the anti-bubble VC chatter, that's the spiel you'll often hear, "I lived through the first tech bubble, and this ain't it."
But no two bubbles are alike. I don't expect the Nasdaq to blow up, crushing people's savings. But I do expect to hear a large sucking sound as VC money dries up. I do expect that the crazy demand for engineers we are seeing will soften, drastically. I do expect to see far few incubators and poetry startups. All of this amid an ongoing global recession.
There's a lot of money, billions, that is sloshing around the system. When that disappears, the resulting effect is never nothing.
Would it be fair to say that, until the IPO, every player in the system has an incentive to inflate the price?
And in our little world even the press doesn't usually see itself as having a critical role. Quite the contrary as with Arrington & Calcanis and their ilk.