The issue is we work in a field that has had a bubble in the past so until it inevitably happens again, the doubters will look for every sign that a bubble exists, contrary to the truth of the matter. In a similar manner to the housing market, technology will always be seen as "bubbly" and every high valuation just feeds the rhetoric. Ebbs and flows in economies is natural and known to anyone that studies macroeconomics even at the basic level, but truth doesn't sell: fear and doubt does unfortunately. It's annoying, but not quite as destructive as the other fear mongering happening with other news around the world.
Anybody know how Sam's Proposition 3 would have played out for prior years of YC? He's betting that net valuation of the entire YC W15 class will exceed $3B by 1st Jan 2020. That's roughly $30m per startup in 5 years. How many prior YC classes passed that bar?
You know, if there was a private ticker say BYC53 on sharespost, which mirrors sama's 3 bets with the 5 year expiry, then a lot of us can trade alongside & quantify the worth of those 3 propositions.
The big question I debate with a friend is, if it's a bubble what would it look like if it burst?
If the latest startups couldn't raise new funds (because of investor panic), then suddenly the market is flooded with developers, do salaries, real estate, etc, go down?
Is the startup economy entirely reliant on outside money? (Especially outside of SV money - money like pension funds and other institutional investors)
Or would the Googles and Facebooks of the world - huge profitable companies that they are - absorb the ones that failed, the downturn would be modest, and soon some of those developers would be right back out there starting new things?
I'm inclined to believe the latter.
People decry a bubble for other reasons than valuations, like San Francisco real estate and how high dev salaries are getting. Companies that don't have any revenue but can still raise lots of money.
I do wonder how high dev salaries can go - I think it is tied to how much value a developer can fundamentally produce. It may well be far higher than the current average salary (perhaps multiples of it), so I don't see anything wrong with that.
But you could also say developers are themselves in a bubble, and that the proliferation of app academies and their like will soon catch up with the demand.
Everything is connected. If there's a collapse in private equity funding, you could see consequences such as a decrease in advertising on major platforms such as Facebook, which would hurt their earning and market cap. I definitely think it would have some systemic consequences, but not at the magnitude of early 2000s unless it's triggered by a general equity market crash or some sort of global debt crisis.
While I agree student loan debt may be unsustainable and start defaulting, I don't think it's as disastrous as the subprime crash because (from my understanding) most of student loan debt is on the books of the Federal government, and is not being monetized in anywhere near the magnitude that subprime mortgages were being sold on a global market.
The student loan situation is bubble-y, but one big difference is that the loans can't be discharged in bankruptcy. That makes the situation fundamentally different from most bubbles.
I'm not saying you're wrong per se, because I think the way student loans are heading is almost bound to be problematic, I just can't picture that bubble "bursting" like we usually think of it.
A couple outcomes I could think of would be a law making student loans dischargeable in bankruptcy again, a government bailout type program, or a law greatly reducing the availability of student loan debt. Any of those would have drastic consequences, but I'm still not sure it'd be right to call any of them a bursting bubble (except maybe the first).
Ads are the one thing that folks focus too much on in quest of bubble quarry. I run a large boutique display ad platform, and I'm reasonably confident that advertisements change form, function, and price -- but advertising never goes away. Even the display ad markets in post-Great Recession 2008 were not too bad.
Worse, Facebook makes a lot of mobile advertising money from app install ads. If startup investors cut back the flow of money, that advertising revenue dries up. There will be a glut of unemployed developers just as Facebook starts reporting declining revenues. Facebook will need to start reducing costs, not hiring, and definitely no acquihires (startups with viable business models might be a different story).
Google might clean up with their pick of the best surviving startups and the best devs going cheap, because they have more diverse sources of advertising revenue, but they might also be under pressure to control costs if investors panic and flee tech.
That Facebook makes money from mobile advertising is a good point: In the dot com era, many dot coms made money very briefly selling ads or services to other dot coms, who were willing to pay way too much. Now many companies are valuable because other companies will pay too much for user acquisition. If they stopped, their would be repercussions for a lot of companies in the middle (not Facebook) who see their business model go away.
If the base of the value chain isn't making money (and I think honestly in the current case even the middle isn't) the whole ecosystem will probably contract.
Right now there is a scandal going on somewhere, we just don't know where. Maybe Facebook, maybe LinkedIn, maybe Yahoo, maybe even Google. Maybe someone else, who knows. It always starts with a scandal. WorldCom, Enron, Lehmans, AIG, etc.. When a company can no longer meet growth targets to stay competitive they start lying to keep the capital flowing. They build a bigger house around the main house, but it's built out of cards and eventually it crumbles. This is what no one wants to believe, but it always happens. "It's different this time.™" It's never different. There's always going to be that incentive to cheat, and multiple people will take that bet. Someone eventually gets caught.
Once one of the titans fall, investors get scared and pull back. Companies like Google and Apple, with huge cash positions, are okay. Everyone else runs out of capital in a few months. The fallen firm lets 10,000 people go. Everyone else either does layoffs or initiates a hiring freeze. Now you've got 10,000+ locals out of work who can't get jobs. Now you've got 10,000+ people who are a few months away from defaulting on a mortgage they could barely afford in the first place because it was so expensive to live in an area propped up by cheap money and heavy leverage.
People start defaulting, and things get even worse. You've got a bunch of people in San Francisco who got $200,000 no interest downpayment loans from the city. They can't pay them back and the city gets stuck with the debt. Now there's public crisis.
Everyone and everything attached to the real estate market starts to freak out that home prices might decline. More panic, more layoffs, more defaults.
The added difficulty over the (for instance) Enron scandal is that this time, we don't have a nice set of publicly available SEC documents to look through (obviously not talking about GOOG/FB/TWTR). But with so many firms growing huge on private capital, we don't have the same opportunities for investigation that were available with many of the previous scandals. Most of Enron's malfeasances were documented, everyone was just so exuberant they didn't bother to look that closely. Once people did (a key short seller and a few journalists), Enron collapsed in about six weeks.
Finding the scandal will be much harder this time, but I agree it's out there. Cash prize to the one who finds it.
Weren't there a lot of accounting irregularities at Groupon?
There was never a stock I wanted to short as bad as GPRN when it first floated, but my broker wouldn't let me, and it was too new for options. So frustrating.
It's not the failed IPOs like Groupon and Zynga you have to worry about. Those are actually good outcomes.
It's the ones that are "too big to fail" that you have to worry about. And it might not even be explicitly accounting this time.
I've had this strange suspicion for a while that a lot of the companies selling ads are doing some bogus stuff. I mean, we all know there's a lot of fraud happening in terms of ad serving/tracking and accountability, but I suspect that it's been institutionalized somewhere.
Or it could be any number of things. The amount of bullshit I've personally witnessed by startups to close a new round is staggering. The number of times I've seen people find creative solutions to adding an extra zero to "monthly active users" is just too damn high. Investors keep investing, established firms keep acquiring, and no one cares.
One of the most bubbly signs (to me) is I hear people I consider reasonably intelligent saying it's impossible for real estate to lose value, especially in SF. Now's the time to buy, since it's only going to go higher.
Well if you look at bay area real estate since 1984, if you buy 1 or 2 years before the peak, it never drops below the point 1 year before the peak occurred. Except on the 2007 US real estate bubble pop, which was 2 years.
Then you have places where I am from, like Vancouver, for which the past ~15 years has been rising quite a bit, and now staying at very high price levels. $1 million dollar houses are pretty average, and whats even worse is people don't make nearly enough income to live there.
So this recent rise is pretty worrying from my perspective. If I want to buy a place, my savings will be wiped out. I personally wish it didn't cost so much.
People keep using the word "never" and "always" to describe periods of time that are relatively short.
We wouldn't say "never" with a sample size of 5 in any other scenario, but with finance we seem to look at small samples and confidently say things like always and never.
I qualified my use of never with a specific time span. Within that period of time you never see X. Any other word I could think of would just be more complicated and thus harder to read.
And my timespan was 31 years. That is after several booms and busts. If the pattern holds for even a decade +, that is a pretty significant part of my life span and something I have to consider.
Also on a more personal note, my father was basically forced out of Vancouver due to not buying a house when he had the chance 10 years ago, so it's a very real possibility that I might be forced out too here.
So the reason why people use 'small' samples is because those timespans are not small for a human being!
Typically the thing to look for at the top is a falling marginal utility of capital. That is, capital can't find a place to invest itself so it starts chasing after dumber and dumber investments. The high production cost oil sector (e.g shale) is probably going to be the first thing to go.
There are now high speed internet, unix powered, quad-core pocket computers in the hands of billions. You can't understand the implications of that and think there's a bubble by any meaningful definition.
There should probably be 10000x more companies than there are. The 1+ million mobile apps that exist hint at the true scale.
Quad-core devices are probably in the 100s of millions for now, not billions, but I agree with the rest. :)
(Globally speaking, the most common type of smartphone today is probably a one-core 0.6-0.8 GHz Android device running Android 2.x. With a crappy 320x480 TN display and not nearly enough RAM.)
Things can be overpriced (and therefore in a bubble), while still adding value. The people saying we're in a bubble aren't claiming that the companies affected by the bubble are bad companies. They're saying that the price required to buy into them isn't commensurate with the future revenue those companies will generate.
Think about it this way. Wikipedia adds a tremendous amount of value to the world, but it can't capture any of that value, since people don't really want to pay for it, so if in some hypothetical world you could buy equity in Wikipedia valuing Wikipedia at say, $10b, then Wikipedia would be overvalued, even though it may in fact have generated many times more than $10b of value.
Of course, you could argue that if Wikipedia were for profit it would be able to find some way to capture that value. In effect, this is where the disagreement arises between those who say there is no bubble and those who say there is.
We had Internet "everywhere" in 2000, all these new doors were being opened! And yet we crashed. The investment has to remain in step with the economic returns, or else eventually a crash happens. The possibilities are one thing, the returns are something else.
Of course there are a lot more viable online/mobile businesses now than there were in 2000, so a bubble has that much more space to grow before crashing.
There were billions of internet-connected devices in peoples' hands in 1999 too. They were called personal computers. I'm not sure how being "unix powered, quad-core" turns devices into magical bubble protection.
Of course in the long term proliferation of communications technology will result in big changes, but that's a generational cycle, not a quarterly one. The market can (and probably will) boom and bust many times while that broader trend works itself out.
My only quibble with this is that Sam is assuming about 15% a year appreciation of market value for the established >= $10B companies between now and 2020. That seems unrealistic, given historical returns of US equity markets. I am sure those companies will innovate going forward, but given how large and established they are, this should be priced into their current valuations. But, I hope Sam wins the bet !
> That seems unrealistic, given historical returns of US equity markets.
Especially considering we've just had 5 years of pretty remarkable returns in the equity markets, so if anything you'd expect low returns over the next few years. US equity as a whole is valued pretty high relative to earnings at the moment, and the technology sector is in line with that.
Even if he is right about his bets, it does not prove that there was no bubble. A lot of times when bubbles burst, many small competitors are whipped out of the market, while the ones that have been successful up to that point have a better chance of surviving. Not only survive, but once the dust settles they are the few left to soak up any new investments.
Boom/bust cycles can be thought of as a redistribution of bad investments, which often time results in the demise of fresh competitors or, at best, the assimilation of "failed" capital (human, tech, infrastructure) of those ventures into the companies which successfully navigate the transition at a very low cost.
The bubble that different parties speak about when talking about the tech world has to do not so much with the amount of money flowing into that sector as an aggregate, but the near-exponential growth in new companies and the unfathomable valuations of some of them which are hard to justify.
>>> Of course, there could be a macro collapse in 2018 or 2019, which wouldn’t have time to recover by 2020. I think that’s the most likely way for me to lose.
Macro collapse = Bubble Bursting. The performance of YC's personal portfolio is irrelevant to the idea of bubble bursting if there are other investors running a pump and dump on the industry at large.
I took "macro collapse" to mean some tumultuous event independent of existing market valuations, such as
natural (or man-made) disasters, epidemics, war, etc.
I've never heard the term myself, so I am speculating.
Bubble bursts are generally large-scale psychological phenomena. Nothing can be done to avoid them, and boom bust cycles will continue in small sectors, larger sectors, and the entire economy for the foreseeable future. As investors slowly start struggling to find valuable places to put their money, an idea that it isn't worth while begins to circulate through the investment world.
The best advice is to always invest wisely. It makes no difference whether you are in a bubble or a contraction. Doing so will put you in a better position to succeed even when the bubble bursts.
You say larger companies survive crashes, but their valuations still take huge hits. Look at the last dot-com crash: MSFT crashed from $59 to $21, AAPL crashed from $4.90 to $1.00, CSCO crashed from $79 to $14, and so on. 1 of these companies (AAPL) took 5 years to recover and double its market cap peak of 2000, while the 2 other companies never even recovered their market cap peak. So betting on Sam's metric in 1998-1999 would have been a very reliable indicator of whether or not a bubble would follow these years.
Of course we are in a bubble, it's impossible to agree with the fact that Uber is truly valued at 41 billion and Google only at ~364 billion. It's hard to swallow that Uber is roughly 10% of Google in value.... That goes for all these companies many who still are not really profitable.
Of course SamA is going to say we are not in a bubble, when his company's only goal is to take 1 penny and turn it into 4 pennies based on valuation and further outside investment and growth.
The tech bubble will burst, but likely will not hurt society at large, but it will likely dent the VC ecosystem.
>only goal is to take 1 penny and turn it into 4 pennies
That reminds me of what he said about "the thing that feels least reasonable is some early-stage valuations." His interests lie in driving early stage valuations down and later stage values up. And that's exactly what he's saying here.
Well you have a lot of people chipping in for Uber to be valued at $41G. While that doesn't tell us much about each actor's rationality, it does indicates that some people think there's value in the company's future. I can personally imagine a world where I don't own a car and pay 300-500$ a month to a company such as Uber so that a robot comes drive me from A to B whenever I want.
$100k might be a big bet or a small bet for him, depending on what his net worth is. In any case, he's probably not betting his IRA on this, so I'm not sure the amount really matters beyond getting people to pay attention.
Always this talk about valuations. Never about revenues and profits. Reminds me of the dotcom days when people used every other metric when they couldn't talk about profitability. Like eyeballs, clicks, etc. There will be a few winners but a vast many will do down in smokes or get acquired for pennies on the dollar.
Business vs startup
When Twitter went public in 2013, it was valued at $24B — 12 times higher than Times market cap. Twitter was losing money while Times earned $133M the same year. Why do startups have such big valuations?
The answer is: cash flow. It is different between high-growth startups and low-growth businesses. Startups would usually be profitable in the future. Startup’s main metric is growth. [1]
I enjoyed (and mostly agreed with) the article but the dollar amount of the bet gave me pause. 10 years ago (aka before the bubble in long bets) that would have been $10k.
"House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."
-Ben Bernanke, circa 2005.
I couldn't help myself. I really admire Sam and the current tech bubble(if there is one) is nothing like the credit crisis. Funds existed in 2008 whose sole investment strategy was to buy the opposing side of credit default swaps just so the bears had something to buy. Just wanted to poke fun :P
Your example is actually quite good: Are there people who think they are better informed than the chairman of the Federal Reserve?
And to amplify: This was Ben Bernanke's assessment as late as March 28, 2007
> At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
Bear Sterns went to firesale less than a year later. To actually make money off of the market situation then (both on the long and short side), you had to also recognize the Keynesian wisdom: Markets can remain irrational longer than you can remain solvent.
I don't begrudge Sam for talking his book, but pretending to have knowledge about what constitutes "bubble valuations" is tricky at best.
"I am pretty paranoid about bubbles, but things still feel grounded in reason."
Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006. They have a self-interest to believe that the good times will keep going. During the dot-com bubble and the housing bubble, the rationalizations that were being spouted by those in the midst of it were incredible.
The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.
The only thing keeping the valuations high are because people delude themselves into believing that Google or Facebook will pay billions for customers. If Google and/or Facebook declared they would be doing no more acquisitions, valuations would plummet immediately.
The valuations given to companies with no real revenues, or profits to justify ridiculous valuations. But the rationalizations that get spouted to justify them are what is a big indicator of a bubble to me.
Yes, but wouldn't you agree that the high profile valuations are over way over the top? Facebook, Instagram, Twitter, WhatsApp, etc. were/are valued extremely highly, I would say unjustifiably so. If there was a mechanism to go long against them and I had money to gamble with, I would.
My go to example for this is Facebook's IPO. Their valuation was at the time at $50/user. Can they extract that much lifetime value out of every user they have? It seems rather high to me.
I don't believe there is an industry-wide bubble going on. But it seems to me that if you hit the right keywords (social, sharing, advertising), you will be valued at the top of the range, not the bottom. Moreover, I believe these particular valuations will get market corrected sooner or later.
Selling Facebook's stock short would indeed let you bet against the valuation of the Facebook platform, Instagram, and WhatsApp. Keep in mind that markets may be able to stay irrational longer than you can stay solvent.
What I'm talking about is holding a long term investment against FB. I don't think they'll go bust tomorrow, but I am willing to bet some amount of money their shares will go down sometime between 2-5 years from now.
There are exchange traded funds (ETFs) that short. You can probably find one for the technology sector. You'll probably have to short Intel along with Facebook, but that's the safest way to do it I can think of.
It's almost as if the markets are intentionally structured such that it's easy to place a long-term bet that asset prices will rise, but relatively more difficult to bet the converse :0
That's exactly what I mean by "relatively more difficult."
There is no premium if you buy and hold, in fact that's the baseline situation from which the premium is calculated. And buy-and-hold works for arbitrary timescales, while even long term puts come only in certain flavors.
That starts to seem a lot like structurally built-in upward pressure on prices.
For $12 you can buy a put at FB's current price ($85) for Jan 2017.
But FB has real profits, so you may not wanna bet too much against them. They're also locking up users' Internet access in many markets, making it literally impossible to run a competitor (without negotiating the same ISP access).
Perhaps look at Splunk, which does great not only in losing money, but accelerating those losses. (Er, I mean, they "focus on top-line growth".) But hey, maybe they can cut their costs by over 2 (eliminating all R&D wouldn't be enough) but keep the revenue coming in. Then they could be profitable before other systems and hardware catch up. They're only 12 years old, so it's still very early in their long-term story.
Not sure if you're still in the edit window, but there is a triple negative thing going on that makes this statement both confusing and less interesting (if there were no irrational valuations, no one would call it a bubble).
>"There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money."
More "did" than can. Something is worth what someone will pay. Why was FB willing to pay $19B? The answer is somewhere between what those users are worth to FB and the threat to FB's (very real) business that WhatsApp represented. This doesn't seem bubblish to me.
Another way to look at it is that FB is dying because simpler and more appealing competitors (Snapchat, Instagram, WhatsApp) are popping up that are threatening to grab FB's users' interest more. FB is faced with a quick death by losing a major share of its users over the course of 1-2 years, and the necessity to buy up the competition while it's still able to. I think that's actually a decent strategy: buy up these other apps and establish dominance in all the niche social networking corners. It'll last them maybe a decade I think. The problem is that these disruptive social networks don't make money. Acquiring them is just a way for FB to not lose money. So eventually FB's coffers dry out while more and more niche social networks pop up to steal its users.
My understanding is that social networks are a generational thing. Even if FB was perfect in every way, no market maven teenager (for social networks the market mavens are teenagers) wants to hang out with their aunt. The next generation will stop watching Yo Gabba Gabba, grab their iPhone 9's and want to get on a social network that's separate from their parents. Because of this, I don't see a general purpose social network surviving for longer than 10-12 years and maintaining market dominance.
What if, that social network was built by 5 people, college aged, and they decided to use FB login to save some time developing because they are trying to see if this thing is worth building. A very real probability.
FB won't be the powerhouse that it is today, but it's deeply entrenched in our internet that there is value in the social data, not the "blue room" product they offer for free now. (I hate FB, but I get it.)
I don't know much about Facebook's current offerings, but the answer to your question might depend on what other ubiquitous services they offer now or in the future. Maybe they'll become equally entrenched in the online payment market, or things of that nature. I don't and can't know if that will leave them at their 235B market cap, or if it will be lower or higher.
Funny. I can't recall where but a few days ago I overheard a teenage say something like, "I wanted to make a Tinder account but I didn't have a FAcebook, so I had to go make that first."
Mind you, it seems like a really low quality user for FB and not something I would want to hang a bubbilicious valuation on for them -- unless FB's able to track her activity off FB as well. And I think this is the case.
Actually I wonder how Facebook's user tracking is actually dealing with mobile users who only use their mobile app. It seems like they'd potentially lose a lot of tracking info unless they can track an app login through the mobile browser.
I wonder if this is part of the reasoning for their increasing centralization by offering a browser and supposedly actually hosting highly shared content.
I've never been to keen on that statement. It approximates something about fairness. It's expresses something about subjective worth. But, we're talking about something with a fairly objective, if ambiguous value.
The price of something may be what someone will pay. For the value of something... I don't think this holds true. The value of a stock is objective, it's the future incomes discounted or somesuch. If you pay more than that you over payed.
The value of a share of a stock for a typical investor is net present value of future cash flows, but the value of an entire company to one of its competitors can be something very different. As others in the thread have mentioned, the strategic value of removing a competitor can be significant.
The remainder was in FB stock. Personally I think the amount of stock they paid points to FB's acknowledgement that they are overvalued, i.e. part of a bubble.
Generating revenues is not the same as making profit. If their infrastructure costs more than $1 / user to maintain on an annual basis they could very well still be losing money. To compare their price to something you'd have to compare it to dividends to the parent company or net profits for the division if it is integrated.
Are you a user? If so, and you've been such for over a year - have you paid? I've never been charged, and to my knowledge nobody I know has either. I don't get if we should be getting charged but they just don't seem to bother. I get an annual notification saying I've been extended and no more information.
They do price testing, if they believe there is no better option for you, and you will pay, they will charge you.
They will not charge you if, for example, you're someone living in the USA. There is far too much free competition.
For their non smartphone market (don't have numbers but its large), there is very little if any at all competition, and people in places like india gladly pay the $1 fee for a years access on their dumbphone.
Has anyone ever actually paid $1 / year for WhatsApp? I know in several places they claim that is their business model, but I've never come across anyone that has paid for WhatsApp.
Part of that may be due to the fact that WhatsApp grows so fast that most users haven't been around for a year, but I'm under the impression that after a year, if you don't pay, the app continues to work and you never lose access.
Jan Koum actually stated at Startup School that whatsapp started monetizing to REDUCE load because they were acquiring users too fast and that it backfired, ultimately leading to profitability. From a strategic standpoint, whatsapp puts facebook in a great mobile position in a lot of emerging markets outside the US.
I believe Facebook reported in their financials though in their first quarterly earnings report after the acquisition that Whatsapp was losing $100mm+ annually. I'm not saying that won't change, but their business model still needs some tweaks.
take 25+ cents off for cc processing... 700m * .70 = 490 million. Not everyone will do it, but assuming most, maybe $350 million in recurring. Certainly nice, but does that justify $19B? That's something like a 2% return, if my calcs are close.
> Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006.
Except he's the person dictating the flow of money. It's more like a housing buyer saying there's good investments despite signs of a bubble.
But it isn't his money: VC funds raise money from other investors (aka limited partners). It's like asking a banker or hedge fund manager if there's a stock market bubble. They won't say yes because if investors pull their money out of equities, the banks and hedge funds are screwed.
The question about WhatsApp is not whether or not it was worth $19B, the question is whether or not it was worth 8% of Facebook. The bulk of that purchase was in FB shares, not cash. It just so happens Facebook is worth $235 billion dollars itself.
I can see an argument where the worlds most used mobile messaging app is worth at least 8% as much as the world's most used social network.
I thought that for a while, but the thing is that Facebook's actually pulling in revenue. Internet tells me they have a PE of 60, which is high (20 is normal for a mature company) but not order-of-magnitude insane. If Facebook is overvalued then advertising as a whole is, and that doesn't seem likely in this age of metrics and PPC competition.
During the '00 bubble people said Yahoo's valuation was inflated because all the bubble companies spent their money on Yahoo ads. But for my money Yahoo has turned out to be worth its bubble valuation. Even if most of its value has come from a few clever investments, well, sounds like Facebook's doing the same thing.
Probably. But if you put yourself in the shoes of the executive team at Facebook, buying WhatsApp killed off a potential threat , and it was worth 8% of market cap to do that. Everyone talking about how much WhatsApp is worth vs some other company is missing that point.
Yes, WhatsApp doesn't have any real revenues, but Sam doesn't mention them. YC alum's are not building WhatsApp.
Uber has customers, real revenue (in the billions). So does AirBnb. So does SpaceX. So does Palantir.
Just name dropping WhatsApp is pretty low brow. There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.
>There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.
The 2000 tech bubble also came and went without every single company going bankrupt. So the fact that some companies are doing great things means squat when it comes determining whether there is a bubble or not.
> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.
What if they're worried about an independent Whatsapp being a threat to FB's business model? As in, maybe Whatsapp isn't "worth" $19B (whatever that means) but it's a threat to destroy $50B of Facebook shareholder value? In that case it would be rational to buy them out to ensure that doesn't happen.
Saying that a product used by 500 Million people (that's ~7% of the population of planet Earth) earned its value by "simply existing" is a pretty hand-wavy.
This. Facebook did really throw startup valuation out of whack starting with the Instagram acquisition and following up to Whatsapp. They appear to have no idea what they're doing with their money, they're in a rather vulnerable spot with their core business, and their demented frenzied spending seems to have infected everyone around them.
Instagram has turned out to be an amazing acquisition for Facebook. Facebook make >$12 billion dollars in 2014. You're saying Instagram wasn't worth 1 months revenue for Facebook? It's a double digit percentage of all time people spend interacting with Facebook's app constellation.
Warren Buffett looks for investments with an economic moat around their economic castle. If a startup could get close to doing that much damage to Facebook, maybe Facebook's business isn't very defensible.
Successful social businesses have a big moat in the form of network effects. If it were any easier to cross the social-networking moat, Facebook would not have paid $19 billion for Whatsapp. Attracting and retaining users is hard.
The numbers needed to match Facebook are big. The fact that Whatsapp, Viber, Line, etc are even able to approach those numbers speaks volumes: they have succeeded in executing on their businesses, and there is demand in the market for solid messaging products that evidently the incumbents have not been able to fill. Buying out a (exceptionally successful) startup before it becomes a potential competitor makes total sense.
Successful social businesses have a big moat in the form of network effects. If it were any easier to cross the social-networking moat, Facebook would not have paid $19 billion for Whatsapp. Attracting and retaining users is hard.
I know of multiple ways of trying to estimate the magnitude of network effects. All come up with social networks creating O(n log(n)) value for users. If true, that result demonstrates that network effects are significant, but a better competitor does not have to have nearly the scale you'd think to be able to compete head on against the big giants.
That said, I wouldn't recommend going head to head versus FB for your next startup. But there will be no shortage of future companies posing a threat to FB like the one that FB posed to MySpace before it. And like MySpace posed to Friendster earlier on.
Let's be honest. FB has a lot of advantages here. They are the first mover, they have a ton of resources, and they have appropriate levels of paranoia about this issue. But still I'd give them substantially less than even odds of being the social king when, say, 2030 rolls around.
> I wouldn't recommend going head to head versus FB for your next startup.
Yep. The threat to FB or any similarly dominant company isn't head-on, but rather sideways, where peripheral businesses could eat into their core. So far, Facebook is doing a pretty good job of recognizing those risks.
An interesting exercise is to think of how companies have handled those risks and the effects of that. Eg, IBM's stance on software as they gave Microsoft exclusive licensing rights, only to backtrack with OS/2 and giving up. Microsoft dismissing the Internet, then playing "me-too" ever since with Bing, Windows Phone, Azure, etc etc. Google's social networking efforts with Orkut, Buzz and Plus.
> less than even odds of being the social king when, say, 2030 rolls around.
Agreed, when you're dominating a competitive industry, it's pretty hard to stay on top indefinitely. Nowhere to go but down.
Attracting and retaining users isn't hard. Attracting and retaining users that will pay you is hard. Give out free slices of cake to people on the street and you'll have lots and lots of users, and they'll probably come back. Selling marketers billboard space behind your free cake stand isn't very profitable unless the cake is very cheap - but if the cake is cheap then just about anyone can bake cakes.
Have you tried? It is hard, especially in a saturated market with plenty of choices. For mass media (TV, news, social), the scarcity relationship is reversed: you're effectively competing for the user's time and attention. Almost zero-sum, especially when considering the allocation of advertising dollars.
Additionally, the barrier of entry is low, since anyone can make a Twitter clone in 20 lines of Ruby on Rails. So you'd be trying to carve out a niche in social, fighting against network effects and the dozen other college dropouts working on the same idea, while hoping Facebook won't decide to implement your differentiating feature. That's not easy.
> Attracting and retaining users that will pay you is hard.
For purely discretionary purchases, yes. This is what makes the success of eg, Viber all the more remarkable. They made a $900 million business by selling electronic stickers. Anyone can sell stupid stickers, but it takes sheer execution to get $900 million for it. Not easy at all.
Since it's so difficult to get paying users in social, you can hedge by relying on a (slightly) less elastic source of revenue: selling those eyeballs and clicks to advertisers. But the traffic needs to be high and consistent for a scalable operation. And again, you're back to square one. Not so easy.
Facebook has a lot of business moats, but when it comes to the fleeting attention of the youth, and trends, there is no way to moat that. The second you moat a generation's trend, the next generation declares you old and busted and will do anything but use you.
I actually think this is awesome. This means a few motivated individuals can put together a niche social network and have a guaranteed buyout from Facebook. Basically, if you get big enough, they have to buy you.
I think the only option they really have is to spin off new social networks to cater to new generations and become just a holdings company for them. Sort of a YC of social networking. Their main advantage would be the ready source of funding vs a random college student thinking up the next Whatsapp or Instagram.
> maybe Whatsapp isn't "worth" $19B (whatever that means)
It means it'll give an appropriate ROI for 19B
> but it's a threat to destroy $50B of Facebook shareholder value
If you think the destroyed 50B is greater than the expected value of the next best option for those 19B, then I suppose it's justified.
But then again, that does mean that it's relatively easy to poke at Facebook's empire. I think it implies there's not a very efficient market. It means these things can keep happening over and over, draining Facebook's bank account, until it's no longer worth it for them to keep buying. (This may be what the other poster was alluding to by saying that the 50B isn't actually worth much.)
Benedict Evans has made strong points about how mobile and the open address book has changed Facebook's position significantly. Well worth reading or listening to some of the a16z podcasts about the topic.
I think it is a very positive thing for the current ecosystem that there are many mobile apps with which we can communicate and share content. Contrast this with Google's dominance of search for the past decade.
The bigger question to me isn't if Facebook wins or loses but what control Google and Apple are able to exert on communications platforms in the future. (Possibly none)
I can see why Facebook would pay top dollar for a company that can monetise its user base, but why buy a company that will always lose money and can only take eyeballs away from your profitable platform?
The valuations are crazy because investors get paid out first. So if I invest 1 billion for 10% of company x it gets a 10 billion valuation but we only have to sell for 1 billion or more to break even. Banning preferred stock for startups will result in more accurate valuations.
> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.
But isn't that the most important metric? I would argue there is also no metric by which a Coach purse is worth thousands of dollars but people seem to keep buying them.
None of the six companies he mentions (Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX) are publicly traded.
So, one reading of the tea leaves is that something like 100B (of non-existent money) is locked up out of the hands of the people who could benefit from trading it. This, at a time when wealth disparity is not far from the Gilded Age.
There's a bubble, all right--just probably not the one the author is thinking of.
Whatsapp is a poor example to use to argue that there is a bubble. I haven't heard anyone try and justify that price beyond that Facebook was desperate and had the money. It's an outlier.
> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.
I hate to pick on you, but anyone who says WhatsApp is not worth $19 bil has not seen the Chinese version of WhatsApp, WeChat. WeChat is a combination of WhatsApp and Facebook. Everyone in China uses WeChat as messenger and as a pseudo-Facebook. The risk of WhatsApp becoming the WeChat for the rest of the world was a HUGE risk for Facebook. It has a very strong hold in the middle east and was gaining a ton of traction every where else. WeChat is a less-invasive version of Facebook that many people would gladly flock to.
> There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money.
Let's observe that WhatsApp besides just being a popular app, is a scalable and high performance messaging app, meaning to emphasize that you can't hit this level without some amazing engineering feats [1]. I think that we can also agree that a company that can build something of this sort might be valuable in itself without generating any sort of revenue. If it can make Facebook more productive/efficient over the coming years, it very well might be worth its weight in bitcoin.
It's very likely a bubble when suddenly huge portion of people you knew are leaving their jobs to do startups en mass. Lot of these people hardly have anything significant on table and still get funded anyway. This is very similar to mortgage crisis where large number of people who don't qualify can easily get mortgages anyway. Accelerators have mushroomed all over places doing dozens of meetups and networking events powered by "luminaries" that no one knows because they are literally now running out of even Class-C startup celebrities.
I believe it is well know that economic condition have been very unique last few years in that there is lot of investor money in market trying to find its home. Even if returns on VC is subpar many investors wants to give it a try because returns elsewhere sucked anyway and also there is a chance of winning the lottery. As the stock market and real estate continues to gain momentum and confidence, money would start start migrating back.
My prediction is that in next 5 years, investors are going to realize that it was a good try, VC returns sucks compared to S&P/real estate and they start pulling out. This will first cause shutdown of recently mushroomed accelerators/startup schools. That would then further spook VCs causing chain reaction eventually leading to meltdown. I think more prudent VCs such as Y and Sequoia would continue as usual but many other will simply shutdown because of lack of funds. This is not to contradict Sam's predictions. Lot of the companies in his list can go big and easily double the value but in 5 years that would have much less effect on how much investment money VCs aquire.
To be fair, speculation of a "new tech bubble" has been rampant since a few years after the dotcom bust, and there hasn't been a major tech-specific crash yet. At some point the guys talking about a bubble will probably eventually become correct, but that doesn't mean they're correct now.
You have a large amount of workers who are paid to invest. They can't put it in the bank, and count on the interest. In order to keep their job they need to invest. They will invest until it crashes? (When it does crash, I hope the haves will take pity on the have-nots; just a little, and not just to the obvious ones.)
I think its laudable to back firmly held beliefs with a large bet. One of the nice things about making a bet is that you need to be precise about the terms, in this case what everyone means by "bubble".
The terms in this bet imply that it would not be a bubble if most of the companies went to zero but 1-2 dramatically increased in value.
That makes sense if you are an investor in all of these companies, like YC (nearly) is. But most VCs hold only 1-2, so if there is a wide variance in outcomes (which is characteristic for startups) and the rest of the VC's portfolio are not quite as great as the listed companies (i.e. much more likely to go to zero) then there is a big risk of large drawdowns in VC funds. I think that is a reasonably likely scenario, which many people would call a bubble, but which wouldn't be reflected in the bet.
Put another way, the bet is like saying YC's portfolio (or at least the synthetic portfolio described in the bet) is undervalued in aggregate, not that many specific companies are.
> This bet is open to the first VC who would like to take it (though it is not clear to me anyone who wants to take the other side should be investing in startups.)
That sentence misses a 'why' I believe.
As for the subject matter: bubble or not, who cares? Those that will not invest for fear of being in a bubble would do better to keep their money anyway, and those that look at individual companies rather than the market as a whole will always have a huge edge over the investors that simply follow the herd. It's the followers that really get burned by bubbles, not the originals, they'll survive one way or another on their own merits rather than on endless capital being poured into their corporate coffers.
Bubbles are bad, corrections are good news for the real movers. In a bubble you can find yourself with a whole slew of competitors trying to go after the same market polluting pricing and models by using investor money to prop up their essentially broken propositions. Right after a bubble pops is when the real fortunes are made, that's when all the nonsense goes away for a couple of years.
It's a saw-tooth like curve and even though we're not technically in what I'd call a bubble we're definitely no longer on the ground floor either. It's not a binary thing.
Successful examples don't change the fact that how much money is wasted unnecessarily. I see startups spending lots of money on fancy offices with massage rooms, when you can't find anyone around if you try to find donation for a village in Cambodia where people living with 5 dollars monthly budget. Some startups do good things exceptionally but how do people feel good about hundred thousand dollars monthly office expense for a startup that doesn't generate any revenue ? I don't know much about bubble and stocks etc since it's kinda not my focus in general, but when I see something like Yo valued as 10 million... There is something wrong with this culture because you know this planet we're living on, I can point you hundreds of cities where the currency is a package of baby food. Millions of people struggle accessing water and food but here we see 300 million dollars are thrown to the table for a dating site. I don't know what exactly bubble refers to but as an engineer honestly I feel bad about being a part of this culture and I'm waiting for the first chance to quit this industry completely.
this is a weird argument. It amounts to saying that since things are bad in many places, it would be good if things were also bad in places where they are currently good.
That's what you understood. in fact, I'm talking about the big amount of money wasted bountifully for luxury offices with massage rooms, startups with no revenue but hundred thousand dollars monthly office expenses. Of course I'm happy that there is wealthy countries in the world, as well. But I do know one thing too, we owe this wealth to those who struggle and accept working for 2$ per day. And Uber or Snapchat doesn't have any impact in their lives. When people who make those jeans that we buy from the fancy stores here, many of work in underground textile factories starting in very young age like 11, and they die at twenties suffering from Silicosis disease. Just one example. You can ignore all the world and talk about Uber, Snapchat every day for sure. I'm not saying startups shouldn't be invested, or I'm not against venture capitalism. Try to get my point without arriving to that kind of conclusions.
Fallacy of relative privation. [1] Just because things are bad in Cambodia doesn't mean a startup can't spend its money how it likes, for good or ill. If a startup chooses to spend money on a fancy office with massage rooms, they are probably doing so out of a belief that this will help them attract and retain higher-quality employees, thus produce a better product, thus become profitable (or do so faster). They may be wrong in this, and in fact, quite likely are; most startups fail, after all. But if startups had to take the conditions in Cambodia into consideration before deciding where and how to spend their money, it's not likely we'd have any startups at all.
Where do you work? I encourage you to put your money where your mouth is and take half or a quarter of your salary at a nonprofit. There are a lot of charities who would benefit from a mobile app or some server side logic and might be able to pay you 30k. I'm sure this is what you are doing right now, since you are so full of moral outrage?
Let's try to convert all this navel-gazing into something usable by your average HN reader. How can the average dev best exploit the current market conditions, whether these are considered "bubblicious" or not?
Should we all high-tail it out to the Valley and get funded now so that we can cash out with billions for something very airy and non-substantive that we "made" with VC money? What kind of self-marketing and self-promotion needs to be done to ensure that we are seen as something hip like Whatsapp and bought at a massively unreasonable price?
What are the less invasive ways for Joe Developer to take an appreciable slice of the pie, meaning getting something more than long-shot lottery tickets as options and/or kind-of OK salaries? How can a developer make $1 million for himself/herself this year without founding a company? Surely that lowly sum is attainable by the humble developer what with the current valuations being "grounded in reason" and VCs going gangbusters.
Yeah, if I'm going to live in a culturally dessicated Bay Area I'd at least like to be getting a piece of the pie. Other reasons for living here are getting chased out at an accelerating clip.
Sam shows a great attitude that's quite different from many VCs and entrepreneurs.
Some are quite dogmatic and won't even discuss the possibility of a bubble. If you ever question it, you're taken as old-fashioned, ignorant and heretic.
The main differentiator being that he wants companies to grow to be great (and valuation is a measure of that success), whereas traditional VC's and even entrepreneurs are looking for high valuation/exits as success, whether the company is truly great being irrelevant.
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[ 3.0 ms ] story [ 231 ms ] threadAnybody know how Sam's Proposition 3 would have played out for prior years of YC? He's betting that net valuation of the entire YC W15 class will exceed $3B by 1st Jan 2020. That's roughly $30m per startup in 5 years. How many prior YC classes passed that bar?
If the latest startups couldn't raise new funds (because of investor panic), then suddenly the market is flooded with developers, do salaries, real estate, etc, go down?
Is the startup economy entirely reliant on outside money? (Especially outside of SV money - money like pension funds and other institutional investors)
Or would the Googles and Facebooks of the world - huge profitable companies that they are - absorb the ones that failed, the downturn would be modest, and soon some of those developers would be right back out there starting new things?
I'm inclined to believe the latter.
People decry a bubble for other reasons than valuations, like San Francisco real estate and how high dev salaries are getting. Companies that don't have any revenue but can still raise lots of money.
I do wonder how high dev salaries can go - I think it is tied to how much value a developer can fundamentally produce. It may well be far higher than the current average salary (perhaps multiples of it), so I don't see anything wrong with that.
But you could also say developers are themselves in a bubble, and that the proliferation of app academies and their like will soon catch up with the demand.
I'm not saying you're wrong per se, because I think the way student loans are heading is almost bound to be problematic, I just can't picture that bubble "bursting" like we usually think of it.
A couple outcomes I could think of would be a law making student loans dischargeable in bankruptcy again, a government bailout type program, or a law greatly reducing the availability of student loan debt. Any of those would have drastic consequences, but I'm still not sure it'd be right to call any of them a bursting bubble (except maybe the first).
Google might clean up with their pick of the best surviving startups and the best devs going cheap, because they have more diverse sources of advertising revenue, but they might also be under pressure to control costs if investors panic and flee tech.
If the base of the value chain isn't making money (and I think honestly in the current case even the middle isn't) the whole ecosystem will probably contract.
Once one of the titans fall, investors get scared and pull back. Companies like Google and Apple, with huge cash positions, are okay. Everyone else runs out of capital in a few months. The fallen firm lets 10,000 people go. Everyone else either does layoffs or initiates a hiring freeze. Now you've got 10,000+ locals out of work who can't get jobs. Now you've got 10,000+ people who are a few months away from defaulting on a mortgage they could barely afford in the first place because it was so expensive to live in an area propped up by cheap money and heavy leverage.
People start defaulting, and things get even worse. You've got a bunch of people in San Francisco who got $200,000 no interest downpayment loans from the city. They can't pay them back and the city gets stuck with the debt. Now there's public crisis.
Everyone and everything attached to the real estate market starts to freak out that home prices might decline. More panic, more layoffs, more defaults.
The dust settles and we start over.
Finding the scandal will be much harder this time, but I agree it's out there. Cash prize to the one who finds it.
There was never a stock I wanted to short as bad as GPRN when it first floated, but my broker wouldn't let me, and it was too new for options. So frustrating.
It's the ones that are "too big to fail" that you have to worry about. And it might not even be explicitly accounting this time.
I've had this strange suspicion for a while that a lot of the companies selling ads are doing some bogus stuff. I mean, we all know there's a lot of fraud happening in terms of ad serving/tracking and accountability, but I suspect that it's been institutionalized somewhere.
Or it could be any number of things. The amount of bullshit I've personally witnessed by startups to close a new round is staggering. The number of times I've seen people find creative solutions to adding an extra zero to "monthly active users" is just too damn high. Investors keep investing, established firms keep acquiring, and no one cares.
Of course I heard the same lines in 2006....
Then you have places where I am from, like Vancouver, for which the past ~15 years has been rising quite a bit, and now staying at very high price levels. $1 million dollar houses are pretty average, and whats even worse is people don't make nearly enough income to live there.
So this recent rise is pretty worrying from my perspective. If I want to buy a place, my savings will be wiped out. I personally wish it didn't cost so much.
We wouldn't say "never" with a sample size of 5 in any other scenario, but with finance we seem to look at small samples and confidently say things like always and never.
How does this make any sense?
And my timespan was 31 years. That is after several booms and busts. If the pattern holds for even a decade +, that is a pretty significant part of my life span and something I have to consider.
Also on a more personal note, my father was basically forced out of Vancouver due to not buying a house when he had the chance 10 years ago, so it's a very real possibility that I might be forced out too here.
So the reason why people use 'small' samples is because those timespans are not small for a human being!
There should probably be 10000x more companies than there are. The 1+ million mobile apps that exist hint at the true scale.
(Globally speaking, the most common type of smartphone today is probably a one-core 0.6-0.8 GHz Android device running Android 2.x. With a crappy 320x480 TN display and not nearly enough RAM.)
Think about it this way. Wikipedia adds a tremendous amount of value to the world, but it can't capture any of that value, since people don't really want to pay for it, so if in some hypothetical world you could buy equity in Wikipedia valuing Wikipedia at say, $10b, then Wikipedia would be overvalued, even though it may in fact have generated many times more than $10b of value.
Of course, you could argue that if Wikipedia were for profit it would be able to find some way to capture that value. In effect, this is where the disagreement arises between those who say there is no bubble and those who say there is.
Of course there are a lot more viable online/mobile businesses now than there were in 2000, so a bubble has that much more space to grow before crashing.
If there's a bubble.
Of course in the long term proliferation of communications technology will result in big changes, but that's a generational cycle, not a quarterly one. The market can (and probably will) boom and bust many times while that broader trend works itself out.
Uber is anticipating the self driving taxi though [1].
[1] http://techcrunch.com/2015/02/02/uber-opening-robotics-resea...
Especially considering we've just had 5 years of pretty remarkable returns in the equity markets, so if anything you'd expect low returns over the next few years. US equity as a whole is valued pretty high relative to earnings at the moment, and the technology sector is in line with that.
http://avc.com/2013/02/venture-capital-returns/
Boom/bust cycles can be thought of as a redistribution of bad investments, which often time results in the demise of fresh competitors or, at best, the assimilation of "failed" capital (human, tech, infrastructure) of those ventures into the companies which successfully navigate the transition at a very low cost.
The bubble that different parties speak about when talking about the tech world has to do not so much with the amount of money flowing into that sector as an aggregate, but the near-exponential growth in new companies and the unfathomable valuations of some of them which are hard to justify.
Macro collapse = Bubble Bursting. The performance of YC's personal portfolio is irrelevant to the idea of bubble bursting if there are other investors running a pump and dump on the industry at large.
I've never heard the term myself, so I am speculating.
The best advice is to always invest wisely. It makes no difference whether you are in a bubble or a contraction. Doing so will put you in a better position to succeed even when the bubble bursts.
https://twitter.com/sacca/status/579731109753159680
Of course SamA is going to say we are not in a bubble, when his company's only goal is to take 1 penny and turn it into 4 pennies based on valuation and further outside investment and growth.
The tech bubble will burst, but likely will not hurt society at large, but it will likely dent the VC ecosystem.
2. Even if I won the bet (impossible because I'm not a VC), I would not gain anything financially. So what's in it for me?
3. If he changes the terms to $100 a pop and winner gets to keep loser's $100 then I'm game.
That reminds me of what he said about "the thing that feels least reasonable is some early-stage valuations." His interests lie in driving early stage valuations down and later stage values up. And that's exactly what he's saying here.
The answer is: cash flow. It is different between high-growth startups and low-growth businesses. Startups would usually be profitable in the future. Startup’s main metric is growth. [1]
[1]https://medium.com/@paulmillr/zero-to-one-summary-8dbda22e15...
-Ben Bernanke, circa 2005.
I couldn't help myself. I really admire Sam and the current tech bubble(if there is one) is nothing like the credit crisis. Funds existed in 2008 whose sole investment strategy was to buy the opposing side of credit default swaps just so the bears had something to buy. Just wanted to poke fun :P
And to amplify: This was Ben Bernanke's assessment as late as March 28, 2007
> At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
http://www.federalreserve.gov/newsevents/testimony/bernanke2...
Bear Sterns went to firesale less than a year later. To actually make money off of the market situation then (both on the long and short side), you had to also recognize the Keynesian wisdom: Markets can remain irrational longer than you can remain solvent.
I don't begrudge Sam for talking his book, but pretending to have knowledge about what constitutes "bubble valuations" is tricky at best.
Asking a VC to determine whether or not there is a VC bubble is like asking a mortgage broker or real estate agent whether or not there was a housing bubble during 2006. They have a self-interest to believe that the good times will keep going. During the dot-com bubble and the housing bubble, the rationalizations that were being spouted by those in the midst of it were incredible.
The same goes for now. There is no metric by which Whatsapp is worth 19B, except for the fact that Facebook can spend that much money. Any attempt to monetize those users will result in decreased users.
The only thing keeping the valuations high are because people delude themselves into believing that Google or Facebook will pay billions for customers. If Google and/or Facebook declared they would be doing no more acquisitions, valuations would plummet immediately.
The valuations given to companies with no real revenues, or profits to justify ridiculous valuations. But the rationalizations that get spouted to justify them are what is a big indicator of a bubble to me.
My go to example for this is Facebook's IPO. Their valuation was at the time at $50/user. Can they extract that much lifetime value out of every user they have? It seems rather high to me.
I don't believe there is an industry-wide bubble going on. But it seems to me that if you hit the right keywords (social, sharing, advertising), you will be valued at the top of the range, not the bottom. Moreover, I believe these particular valuations will get market corrected sooner or later.
There is no premium if you buy and hold, in fact that's the baseline situation from which the premium is calculated. And buy-and-hold works for arbitrary timescales, while even long term puts come only in certain flavors.
That starts to seem a lot like structurally built-in upward pressure on prices.
But FB has real profits, so you may not wanna bet too much against them. They're also locking up users' Internet access in many markets, making it literally impossible to run a competitor (without negotiating the same ISP access).
Perhaps look at Splunk, which does great not only in losing money, but accelerating those losses. (Er, I mean, they "focus on top-line growth".) But hey, maybe they can cut their costs by over 2 (eliminating all R&D wouldn't be enough) but keep the revenue coming in. Then they could be profitable before other systems and hardware catch up. They're only 12 years old, so it's still very early in their long-term story.
More "did" than can. Something is worth what someone will pay. Why was FB willing to pay $19B? The answer is somewhere between what those users are worth to FB and the threat to FB's (very real) business that WhatsApp represented. This doesn't seem bubblish to me.
My understanding is that social networks are a generational thing. Even if FB was perfect in every way, no market maven teenager (for social networks the market mavens are teenagers) wants to hang out with their aunt. The next generation will stop watching Yo Gabba Gabba, grab their iPhone 9's and want to get on a social network that's separate from their parents. Because of this, I don't see a general purpose social network surviving for longer than 10-12 years and maintaining market dominance.
FB won't be the powerhouse that it is today, but it's deeply entrenched in our internet that there is value in the social data, not the "blue room" product they offer for free now. (I hate FB, but I get it.)
Mind you, it seems like a really low quality user for FB and not something I would want to hang a bubbilicious valuation on for them -- unless FB's able to track her activity off FB as well. And I think this is the case.
I wonder if this is part of the reasoning for their increasing centralization by offering a browser and supposedly actually hosting highly shared content.
I've never been to keen on that statement. It approximates something about fairness. It's expresses something about subjective worth. But, we're talking about something with a fairly objective, if ambiguous value.
The price of something may be what someone will pay. For the value of something... I don't think this holds true. The value of a stock is objective, it's the future incomes discounted or somesuch. If you pay more than that you over payed.
[0] http://en.wikipedia.org/wiki/Upton_Sinclair
with 700m active users, they potentially could be generating ~ 3.6% of their sale price in annual revenue.
Revenues don't mean a thing.
They will not charge you if, for example, you're someone living in the USA. There is far too much free competition.
For their non smartphone market (don't have numbers but its large), there is very little if any at all competition, and people in places like india gladly pay the $1 fee for a years access on their dumbphone.
I am in India and I have never been charged for Whatsapp. Every year, whatsapp decides to add more free months.
Also, there is significant competition in the messaging space in India, and Indians are not comfortable paying for anything other than their phones.
Part of that may be due to the fact that WhatsApp grows so fast that most users haven't been around for a year, but I'm under the impression that after a year, if you don't pay, the app continues to work and you never lose access.
On what planet can the act of becoming profitable be considered a "backfire"?
Except he's the person dictating the flow of money. It's more like a housing buyer saying there's good investments despite signs of a bubble.
I can see an argument where the worlds most used mobile messaging app is worth at least 8% as much as the world's most used social network.
During the '00 bubble people said Yahoo's valuation was inflated because all the bubble companies spent their money on Yahoo ads. But for my money Yahoo has turned out to be worth its bubble valuation. Even if most of its value has come from a few clever investments, well, sounds like Facebook's doing the same thing.
So a PE of 60 means the market is expecting very approximately 60% year on year growth.
Uber has customers, real revenue (in the billions). So does AirBnb. So does SpaceX. So does Palantir.
Just name dropping WhatsApp is pretty low brow. There are alot of people doing incredible things (Sam's point I might add) and focusing on the Bubble makes you miss out on companies generating real revenues.
The 2000 tech bubble also came and went without every single company going bankrupt. So the fact that some companies are doing great things means squat when it comes determining whether there is a bubble or not.
What if they're worried about an independent Whatsapp being a threat to FB's business model? As in, maybe Whatsapp isn't "worth" $19B (whatever that means) but it's a threat to destroy $50B of Facebook shareholder value? In that case it would be rational to buy them out to ensure that doesn't happen.
That's incredibly difficult to do.
The numbers needed to match Facebook are big. The fact that Whatsapp, Viber, Line, etc are even able to approach those numbers speaks volumes: they have succeeded in executing on their businesses, and there is demand in the market for solid messaging products that evidently the incumbents have not been able to fill. Buying out a (exceptionally successful) startup before it becomes a potential competitor makes total sense.
I know of multiple ways of trying to estimate the magnitude of network effects. All come up with social networks creating O(n log(n)) value for users. If true, that result demonstrates that network effects are significant, but a better competitor does not have to have nearly the scale you'd think to be able to compete head on against the big giants.
That said, I wouldn't recommend going head to head versus FB for your next startup. But there will be no shortage of future companies posing a threat to FB like the one that FB posed to MySpace before it. And like MySpace posed to Friendster earlier on.
Let's be honest. FB has a lot of advantages here. They are the first mover, they have a ton of resources, and they have appropriate levels of paranoia about this issue. But still I'd give them substantially less than even odds of being the social king when, say, 2030 rolls around.
Yep. The threat to FB or any similarly dominant company isn't head-on, but rather sideways, where peripheral businesses could eat into their core. So far, Facebook is doing a pretty good job of recognizing those risks.
An interesting exercise is to think of how companies have handled those risks and the effects of that. Eg, IBM's stance on software as they gave Microsoft exclusive licensing rights, only to backtrack with OS/2 and giving up. Microsoft dismissing the Internet, then playing "me-too" ever since with Bing, Windows Phone, Azure, etc etc. Google's social networking efforts with Orkut, Buzz and Plus.
> less than even odds of being the social king when, say, 2030 rolls around.
Agreed, when you're dominating a competitive industry, it's pretty hard to stay on top indefinitely. Nowhere to go but down.
Have you tried? It is hard, especially in a saturated market with plenty of choices. For mass media (TV, news, social), the scarcity relationship is reversed: you're effectively competing for the user's time and attention. Almost zero-sum, especially when considering the allocation of advertising dollars.
Additionally, the barrier of entry is low, since anyone can make a Twitter clone in 20 lines of Ruby on Rails. So you'd be trying to carve out a niche in social, fighting against network effects and the dozen other college dropouts working on the same idea, while hoping Facebook won't decide to implement your differentiating feature. That's not easy.
> Attracting and retaining users that will pay you is hard.
For purely discretionary purchases, yes. This is what makes the success of eg, Viber all the more remarkable. They made a $900 million business by selling electronic stickers. Anyone can sell stupid stickers, but it takes sheer execution to get $900 million for it. Not easy at all.
Since it's so difficult to get paying users in social, you can hedge by relying on a (slightly) less elastic source of revenue: selling those eyeballs and clicks to advertisers. But the traffic needs to be high and consistent for a scalable operation. And again, you're back to square one. Not so easy.
Which is probably why Buffet doesn't invest in fads and social media: http://www.fool.com/investing/general/2014/01/27/why-warren-...
I think the only option they really have is to spin off new social networks to cater to new generations and become just a holdings company for them. Sort of a YC of social networking. Their main advantage would be the ready source of funding vs a random college student thinking up the next Whatsapp or Instagram.
It means it'll give an appropriate ROI for 19B
> but it's a threat to destroy $50B of Facebook shareholder value
If you think the destroyed 50B is greater than the expected value of the next best option for those 19B, then I suppose it's justified.
But then again, that does mean that it's relatively easy to poke at Facebook's empire. I think it implies there's not a very efficient market. It means these things can keep happening over and over, draining Facebook's bank account, until it's no longer worth it for them to keep buying. (This may be what the other poster was alluding to by saying that the 50B isn't actually worth much.)
I think it is a very positive thing for the current ecosystem that there are many mobile apps with which we can communicate and share content. Contrast this with Google's dominance of search for the past decade.
The bigger question to me isn't if Facebook wins or loses but what control Google and Apple are able to exert on communications platforms in the future. (Possibly none)
But isn't that the most important metric? I would argue there is also no metric by which a Coach purse is worth thousands of dollars but people seem to keep buying them.
So, one reading of the tea leaves is that something like 100B (of non-existent money) is locked up out of the hands of the people who could benefit from trading it. This, at a time when wealth disparity is not far from the Gilded Age.
There's a bubble, all right--just probably not the one the author is thinking of.
I hate to pick on you, but anyone who says WhatsApp is not worth $19 bil has not seen the Chinese version of WhatsApp, WeChat. WeChat is a combination of WhatsApp and Facebook. Everyone in China uses WeChat as messenger and as a pseudo-Facebook. The risk of WhatsApp becoming the WeChat for the rest of the world was a HUGE risk for Facebook. It has a very strong hold in the middle east and was gaining a ton of traction every where else. WeChat is a less-invasive version of Facebook that many people would gladly flock to.
Let's observe that WhatsApp besides just being a popular app, is a scalable and high performance messaging app, meaning to emphasize that you can't hit this level without some amazing engineering feats [1]. I think that we can also agree that a company that can build something of this sort might be valuable in itself without generating any sort of revenue. If it can make Facebook more productive/efficient over the coming years, it very well might be worth its weight in bitcoin.
[1] http://highscalability.com/blog/2014/2/26/the-whatsapp-archi...
I think it is just too easy to say things like this. Number one, how can anyone know this?
Number two, if not 19B then what? 18B? 5B? 500M? What? Was it overvalued by 2x or, like, 10x? If it was too much, then how much too much?
Secret raised $35m, including $6m of founder cashouts (one bought a ferrari.)
Is this a bubble? Dunno, but that's pretty frothy.
I believe it is well know that economic condition have been very unique last few years in that there is lot of investor money in market trying to find its home. Even if returns on VC is subpar many investors wants to give it a try because returns elsewhere sucked anyway and also there is a chance of winning the lottery. As the stock market and real estate continues to gain momentum and confidence, money would start start migrating back.
My prediction is that in next 5 years, investors are going to realize that it was a good try, VC returns sucks compared to S&P/real estate and they start pulling out. This will first cause shutdown of recently mushroomed accelerators/startup schools. That would then further spook VCs causing chain reaction eventually leading to meltdown. I think more prudent VCs such as Y and Sequoia would continue as usual but many other will simply shutdown because of lack of funds. This is not to contradict Sam's predictions. Lot of the companies in his list can go big and easily double the value but in 5 years that would have much less effect on how much investment money VCs aquire.
The only good metric to determine how much something is worth is how much someone is ready to pay for it.
Not to detract from the general point, but during the last bubble crash, we ended up being forced to invest via bailouts.
The terms in this bet imply that it would not be a bubble if most of the companies went to zero but 1-2 dramatically increased in value.
That makes sense if you are an investor in all of these companies, like YC (nearly) is. But most VCs hold only 1-2, so if there is a wide variance in outcomes (which is characteristic for startups) and the rest of the VC's portfolio are not quite as great as the listed companies (i.e. much more likely to go to zero) then there is a big risk of large drawdowns in VC funds. I think that is a reasonably likely scenario, which many people would call a bubble, but which wouldn't be reflected in the bet.
Put another way, the bet is like saying YC's portfolio (or at least the synthetic portfolio described in the bet) is undervalued in aggregate, not that many specific companies are.
That sentence misses a 'why' I believe.
As for the subject matter: bubble or not, who cares? Those that will not invest for fear of being in a bubble would do better to keep their money anyway, and those that look at individual companies rather than the market as a whole will always have a huge edge over the investors that simply follow the herd. It's the followers that really get burned by bubbles, not the originals, they'll survive one way or another on their own merits rather than on endless capital being poured into their corporate coffers.
Bubbles are bad, corrections are good news for the real movers. In a bubble you can find yourself with a whole slew of competitors trying to go after the same market polluting pricing and models by using investor money to prop up their essentially broken propositions. Right after a bubble pops is when the real fortunes are made, that's when all the nonsense goes away for a couple of years.
It's a saw-tooth like curve and even though we're not technically in what I'd call a bubble we're definitely no longer on the ground floor either. It's not a binary thing.
I think Sam intended "(though it is not clear to me [that] anyone who wants to .... should be ...)", with the word "that" elided.
Bubbles happen when everyone is excited, they all want in to the next pets.com no matter what, and the general consensus is "this time is different".
[1] http://en.wikipedia.org/wiki/Fallacy_of_relative_privation
yeah man... higher-quality employees... please take all that and move to another planet.
Should we all high-tail it out to the Valley and get funded now so that we can cash out with billions for something very airy and non-substantive that we "made" with VC money? What kind of self-marketing and self-promotion needs to be done to ensure that we are seen as something hip like Whatsapp and bought at a massively unreasonable price?
What are the less invasive ways for Joe Developer to take an appreciable slice of the pie, meaning getting something more than long-shot lottery tickets as options and/or kind-of OK salaries? How can a developer make $1 million for himself/herself this year without founding a company? Surely that lowly sum is attainable by the humble developer what with the current valuations being "grounded in reason" and VCs going gangbusters.
Some are quite dogmatic and won't even discuss the possibility of a bubble. If you ever question it, you're taken as old-fashioned, ignorant and heretic.