This is insightful when you look at something like Facebook's financials. So $200B valuation on $12B of gross revenue but profit varies around zero and last quarter was 1/2B aka almost exactly 1% annualized rate of return. Better than my local credit union savings account, but riskier. Probably a reasonable valuation.
Governments will collapse if interest rates ever return to normal, so they probably won't. But its interesting to see how cheap capital or "value" is when interest rates approach zero. If interest rates were 20% like 1980 and you needed 25% to get investors to even sniff, that would drop facebooks valuation from $200B to about $4B to maintain that 25% return. That's quite a haircut.
Low interest rates result in a margin-like whip when revenues drop. Say revenue dropped a billion at FB. That would drop profit by half and if interest rates remain constant, risk constant etc, that would collapse the price by half. And thats a less than 10% decline in revenue. Ouch. So one effect of low interest rates is making valuation/price very sensitive to small revenue changes. This will make things exciting.
"For one, if everything goes sour, the folks taking a hit can very much afford it."
Really. Where do people think this private capital is coming from? I guess the investment banks and fund managers who are dumping hundreds of millions into late-stage companies are doing that exclusively with the investments of wealthy people?
The fact that people aren't investing in Uber via E-Trade accounts doesn't mean that it won't hurt regular folks when the bubble pops. When this all goes south, we're going to find out that grandma's pension was tied up in it, just like last time. It's just a bit better hidden in 2015.
We both zeroed in on this same point in this article. You could be right. Have we identified a new class of suckers (which I see as a necessary condition)?
Anyone have any data to support or refute this hypothesis?
Generally, limited partners like pension funds diversify their asset allocation. I found this interesting presentation that shows 57% of US pension funds is in the "equities" asset class, but I would expect most of that to be public blue-chip stocks, with a small fraction dedicated to higher-risk growth capital.
In another interesting note, this shows that pension funds in the US grew at over 6% annually between 2003-2013. The recent horror stories you're thinking of are less about pension funds, and more about grandma's savings being tied up in her own house.
Pension funds, especially public pension funds, have been given unrealistic growth targets by employers that want to cheap out on contributions. The only way to even have a chance to hit those growth targets is by taking on risk. So pension manager can't just stick to AAA rated bonds and blue chip stocks.
For example, CALPERS targets an overall 7.5% annualized rate of return in its investment portfolio.
Fortunately (</sarcasm>) for CalPERS, this late-stage capital isn't considered VC! Many of these late-stage, insane-valuation rounds are euphemistically called "growth capital", and it's being driven by big banks and hedge funds, not VC firms.
I'm not sure there is a good case to be made that the CalPERS target is an unrealistic long-term annualized rate of return target. IIRC, they have been making that much over most long and short term windows (they had a horrible -- -27% or something like it -- year in 2008 and so their performance over a 10-year window is still under 7.5%, in the neighborhood of 6.5% I think, but over both shorter and longer windows they are at or significantly above the 7.5% target.)
I've wondered this myself. We've already seen how easy it is to privatize the gains here - it's just a matter of how the losses will be socialized this time that's got me stumped.
If there are major losers in this game, it'll be young people who moved to the Bay Area, threw 90 hours per week into an overfunded startup for a 0.05% slice, got "fired for performance" by a company trying to dodge the press of an honest layoff, realized that they learned no useful skills munching on Scrum tickets and fixing someone else's ball of shitty deadline code, and lost their prime savings years due to Bay Area rent and job instability.
If the bubble pops in a way that reduces their earning potential permanently, it's a catastrophe. More likely, it's a blip. Valuations are inflated but salaries aren't. This period, in the VC-funded Valley, will be remembered bitterly but I think the damage will be minimal.
Still, I find it jarring that no one wants to speak for the real risk-takers: the engineers actually building the products, who (unlike investors) don't get to diversify and are the first to get hit when things go bad, but get such a small percentage of the upside.
A lot of Silicon Valley culture and counter-culture alike are built on having no empathy for engineers. The investors see them as useful workers, and the counter-culturalists see them as inhuman invaders. Nobody gives a flip, and when confronted the universal response is a dismissive "Oh, they'll be fine".
First Estate: investors and well-connected serial founders who can raise money on a drop and get injected at VP levels in tech giants on a phone call. They dominate SV culture.
Second Estate: true technologists. Programmers and designers and makers.
Third Estate: everyday people. Often pissed off (justifiably) about the arrogance of the Valley's tech barons. Tend to protest Google buses, making it hard for Second Estaters to get to work (while being slightly amusing to First Estate assholes). They're the "counter-culture" you describe, along with the regular people who are getting annoyed by tech's arrogance. A few of them are the anti-vax NIMBY assholes who are even more execrable than the tech barons, but most of them are just normal people.
Silicon Valley is dominated by the First Estate. The Second Estate is misled to think it's in charge by workplaces with ball pits, but has no real power or hope of advancement or financial upside except in extreme long-tail cases. So much of the narrative has been II vs. III. That's because the First Estate doesn't want the Second and Third Estate to get together and realize that they don't need the First.
See, the Second Estate has weak organizational and social skills, and has been systematically infantilized ("Agile"/Scrum) to keep it that way. We could learn a lot from Third Estaters (who are often just as smart as we are) in politics, government, law, labor activism, etc. But we've been told by the VC elite to reject such people as parasitic future-averse peons, and they've been told that we're a bunch of socially inept, prematurely affluent assholes. This artificial II/III cleavage works to their benefit, and it hurts us, by making us dependent on the First Estate for funding and approval.
I've been studying and listening to what you describe as the Third Estate. I'm honestly not convinced they have good lessons to teach about politics, law, or labor activism. They have excellent lessons to teach about how those things worked decades ago, but have failed to update. Their decline in power and affluence is in part a result of applying old models to poorly matched modern scenarios.
Some of the ideas are useful, though. But not the ones where you add pain the lives of people and expect it to engender sympathy towards you.
The First Estate has more value and utility than your typical Marxist eat-the-rich analysis would suggest. Further, the Second and Third don't have as much in common as a naive analysis might suggest.
This. Talented young engineers should probably never work for early-stage startups. It's unlikely for them to be able to effectively gauge the quality of an employer, they have little leverage to bargain for equity, and it's highly unusual that these companies provide an environment for young engineers to rapidly grow.
The first few years of an engineers career should be seen as apprenticeship. The best way to quickly grow is to go work for a well-regarded, established company that will compensate them well and provide an environment for them to learn and grow rapidly. Engineers right out of school make $200k/yr working for the likes of Google or Facebook. After a few years of that, they can go try to start a company or negotiate a decent amount of equity at an early-stage startup that they believe in, and they'll have had the opportunity to actually save some money to exercise those options when the time comes.
Of course, this advice doesn't apply to unicorns which, by definition, most people are not.
Engineers right out of school make $200k/yr working for the likes of Google or Facebook.
This is incredibly rare. Including equity and bonus, the numbers are closer to $140-170k, and that's for Stanford graduates. $200k+ comes later (although it can come quick if you're good at career planning). That's Staff Engineer territory at Google.
I agree with everything that you're saying. I just don't want misinformation to be out there.
I'd agree with these numbers in 2012 or maybe 2013, but engineering comp has gone bonkers in the Bay Area.
Uber has published comp for engineers[1] that put them starting at $110K/yr + $410K in equity. Presuming a 4-year cliff that's $212K/yr. The top end of that scale is $170K/yr in cash + $2M in equity, or $670K/yr. My guess is that Uber also pays decent-sized performance-based cash bonuses or has other cash-like benefits (401k matching?) that aren't included. Uber is also not some kind of iffy, fly-by-night startup.
Apple, Google, Facebook, and myriad other companies all have to compete in that market for the same talent.
Those numbers assume that you believe in Uber's valuation. It's a winner's curse. Obviously, the equity is worth something, but $41B for a company that has pissed off regulators all over the globe and an unlikeable founder seems high. Then you have the uncertainty around vesting, weird acquisition terms, preferences, whether you believe the valuation, etc. It's impossible to come up a fair value for the equity without knowing a lot of things that average engineers will never have access to.
$170k + $500k of paper as valued by VCs (who have a different risk profile, and get the bonus of being able to inject their buddies into executive roles) is not the same thing as $670k. Also, Uber is a company that everyone hates and it has to pay an "asshole tax" to be able to hire anyone.
There aren't very many large tech companies that publish compensation information in job postings, so I used Uber's job posting. Equity requires belief in any company's valuation. I'm not here to argue about Uber's valuation, I'm just using them as an example. It's also not really fair to call Uber's equity "paper" -- there are liquidation vehicles for average employees.
As far as the asshole tax, I don't think Uber's reputation is all that much worse than Facebook or Google, do you?
> As far as the asshole tax, I don't think Uber's reputation is all that much worse than Facebook or Google, do you?
Absolutely yes. I wouldn't work for Uber for less than a million dollars. Google (and to a lesser extent, Facebook) is seen as a cool company that does (mostly) positive things. Uber are seen as a bunch of libertarian assholes who actively break the law, dodge liability, screw over their ~~employees~~ independent contractors and price-gouge their customers.
I'm generally with the naysayers and the skeptics, but this point makes sense to me:
This though, is why concern one — the lack of access for retail investors — is arguably a firewall against this truly being a bubble.
This seemed to me one of the key necessary factors to the dotcom bubble and the housing bubble after it: online brokers allowed people who previously didn't have a lot of experience to buy stocks and even daytrade. (Count me in!)
Similarly, ARMs and the various other exotic mortgage tools opened up the housing market to lots of people who traditionally wouldn't have had access. (Thankfully learned my lesson with the NASDAQ bubble.)
Nobody said it was 'a great deal'. It could be that it is simply priced right. In which case a savy investor might be able to find investments elsewhere. And don't forget that just because the three you mentioned didn't jump at the investement (maybe because only one of them is actually a professional investor), it doesn't mean that nobody else did. Obviously somebody did.
There was also arguably much more connection between the tech industry as a whole and the dot-com bubble. When all the startups and web companies went down, they dragged companies like Cisco, Sun, and EMC--indeed just about everyone--down with them. (Admittedly those companies had profited handsomely by selling to all the free-spending dot-coms and had also over-invested in overhyped technologies as well.)
But if all the snapchats and instagrams--heck, even Facebook--come crashing to earth, it's not clear to me there's a huge amount of collateral damage outside of the companies directly involved and their (mostly non-retail) investors. Not zero of course. But a lot less than post-2000.
If it isn't a bubble now, what criteria would make it a bubble?
The opening paragraph creates an infallible criteria. It's true that many people thought instagram wasn't worth $1billion. Does that mean $35 billion is less indicative of a bubble, or more? Simply saying 'hah! Bubble predictions were wrong in 2012 because valuations are still rising, so they must be wrong now too.' This sort of thinking would never predict a bubble.
Paraphrasing David Einhorn "thirty-five times a silly price is not thirty-five times as silly; it’s still just silly". It's hard to predict the turning point. Or maybe this time it's different...
Do people remember 1999? 24% of people in the developed world and 5% worldwide had internet access. No one had mobile broadband (remember WAP?), and wired broadband was just starting. Virtually none of the public .com companies made a profit.
However, the NASDAQ was basically where it is now. Many people I knew were getting multiple job offers with incentives like a Boxster S or a 4-day workweek thrown in.
We may or may not be in a bubble now, but the excessiveness of that time really felt like a different level to me.
Yeah, I remember thinking in 1999 that the Internet was going to be huge, but it wasn't going to be huge yet, and there would be a helluva reckoning for dot-com investors when the inflated expectations didn't pan out.
With this bubble, I'm bearish not because I don't think that the general investment thesis of tech disrupting existing markets is wrong, but because I don't think these particular companies will be the ones left standing when the dust settles. Basically, I'm betting that technological progress will be more dramatic than we expect, and that these are early market leaders that will then fade away into obscurity as future technology changes the assumptions they're built upon. Uber and Lyft, for example, are dead as soon as self-driving cars become viable. DropBox is vulnerable to the end of the file; in recent devices, the filesystem is quite hidden and peoples' workflows just don't involve creating files, they involve inputting information in some specialized cloud service provider. AirBnB may end up being eaten by itself: as it becomes more viable economically, you'll see more purpose-built construction being built to be listed straight on AirBnB, and at some point it becomes worth it to ignore the consumer sellers entirely and just act as a broker between commercial property owners and travelers.
It's not difficult to predict the future with 100% accuracy if you don't have to provide a deadline for your predictions. Every product or service will eventually become obsolete, but the question is when? Will Uber make enough money for its investors to make the investements worthwile, before its service becomes obsolete by self driving vehicles? Will DropBox find an alternative business model before the "end of file" occurs?
> Uber and Lyft, for example, are dead as soon as self-driving cars become viable
True, if they're not nimble enough to adapt. But think about that statement applied to Netflix 10 years ago. "Netflix is dead as soon as video streaming becomes viable" (i.e. They were a DVD rental business).
I could see Uber and Lyft adding a fleet of self-driving cars for people to call on-demand. Or even closer to their current model: maybe they sign up owners of those cards to sublet them in the middle of the day while they're at the office.
I don't think most of us—me included—can fully appreciate the massive shift that will come if and when cars are fully autonomous, driving about with no occupants.
It changes the value chain in ways that destroy their competitive position. Short term, it's pretty likely that they'll adapt. Long term, they're dead.
A good example is the IBM PC. When it came out, everyone was saying "Of course, IBM will now dominate the new personal computer market, because they have the sales & marketing apparatus to reach into every business that will want to buy one. Nobody ever got fired for buying IBM, after all, and now that they own the technology to make a personal computer, their offering is clearly superior."
But that's not what happened. Instead, they did dominate the PC market - for approximately 5 years. But the PC had reduced prices so that it was now targeting a market that was cost-sensitive, and it had created a secondary market of applications that let it reach into many areas that had previously required custom software direct from the manufacturer. IBM did not own the critical matchmaking components of this, the instruction set, operating system, and BIOS. Intel and Microsoft did, and then Compaq reverse-engineered the BIOS. As a result, clones flooded in, IBM's sales & marketing prowess counted for nothing, and they found their market commoditized.
Uber's critical value proposition is serving as a market-maker in a two-sided market. That's the part that's really difficult for a startup to clone. You can make the Uber ride-sharing software trivially, and many people have [1]. But even if you do, riders won't use your service because you don't have the same number of drivers available that Uber does, and drivers won't join because they won't make as much in fares.
When self-driving cars come out, that two-sided marketplace becomes a one-sided marketplace. We've yet to see how Google will market the technology, but the most strategically advantageous approach for them is to contract out manufacture of the cars, own the hardware, put their own software on it (and not license it out), and then sell a service to riders, undercutting Ubers' prices. Under this model, Uber's competitive advantage counts for nothing - their supply chain costs more than the competition, in a price-sensitive one-sided market.
Google could then use a number of different tactics to lock Uber out. The most likely one is regulatory; in the interest of public safety, they could argue that all self-driving cars need to pass a very stringent safety test, consisting of real-world driving for X00,000 miles. Google's got a 10-year head start on Uber for developing this software, and once a critical mass of cars on the road are Google self-drivers, they have accurate position information on everybody else, a key factor in making this safer.
> Uber and Lyft, for example, are dead as soon as self-driving cars become viable.
As I see it, Uber and Lyft have built systems that would be very useful for managing a fleet of self-driving cars to provide on-demand service, and one or both of them are likely to either buy such fleets, adapt their services slightly to be the middleman between such fleets and consumers, or be purchased at a premium price by the operators of such fleets once self-driving cars are viable.
Now, sure, driving for Uber and Lyft as a profit-making job is dead fairly quickly once self-driving cars become viable, but that doesn't mean Uber or Lyft is.
> AirBnB may end up being eaten by itself: as it becomes more viable economically, you'll see more purpose-built construction being built to be listed straight on AirBnB, and at some point it becomes worth it to ignore the consumer sellers entirely and just act as a broker between commercial property owners and travelers.
Again, that's not really a great threat to AirBnB in the absence of someone else whose built just as strong a relation with travelers and also has better connections with commercial property owners. But, most likely the transition of the suppliers offering via AirBnB from casual to commercial will be gradual -- and its already been happening from day one -- and AirBnB, as long as it maintains an advantage as the traveler destination, will be ideally positioned to continue that dominance as the property "sharing" market is less consumer sharing and more commercial rentals that are outsourcing much of the traveler-facing side of operations (and exploiting whatever rules are adopted for "property sharing" distinct from hotel operation.)
The article makes an interesting point about whether the later IPOs are leaving private capital bearing the risk rather than retail investors. It's basically correct about the beauty of SaaS, except for the obvious counter that high-margin businesses are a magnet for competition in the long run.
But it starts off with it's very worst argument, the ultimate '99 argument even: analysts suggesting Instagram's value increased 35-fold since acquisition based on the assumption that if it "fully monetized" it could contribute $2bn revenue (ie. at zero costs and zero discount rate you're still looking at a 17 year time horizon to get $35bn from Instagram, which is about three lifetimes for youth-oriented media properties) It suggests that's quite reasonable with reference to the stock price of yet-to-turn-a-profit Twitter.
It doesn't get any better when it suggests the "unicorns" are different because they're competing with non-tech-enabled businesses. That could have been a slide from the WebVan pitch deck. Plus it's very, very wrong in the case of AirBnB: Sabre et al sewed up a large chunk of the profitable end of the distribution market by solving the technical problems of filling hotel rooms, and locking themselves into the infrastructure, before the internet. AirBnB has a flair for consumer marketing, but does that really make it worth more?
The argument that the '99 companies failed because the mass of consumers didn't exist and the infrastructure wasn't ready is true, but for any self-respecting bear that's an indication of exactly why it could be worse than 99 when investors get cynical about companies peaking at hundreds of millions of users whilst still being unable to squeeze a respectable profit to justify their valuation.
The only frustrating part to be is that, since apparently the IPO rate is rubbish, my hopes as an early engineer of getting fuck-you money are now worse than they were in '99.
So, all of us doing the hard and annoying work of building the companies are getting screwed.
The fact that Instagram is now valued at $35 billion suggests the 2012 doomsayers were just a bit off.
Is that really a fact? Clicking through to that article and reading it (which I don't recommend) shows that that valuation is based on the whims of a group of analysts at Citigroup.
From the article:
“While Instagram is still early in monetizing its audience and data assets and its financial contribution to FB is minimal today, we believe that it is quickly gaining monetization traction and would contribute more than $2bn in high margin revenue at current user and engagement levels if fully monetized,” they wrote.
It's a bit ironic that the initial premise of the article is that commentators on the Apple/Microsoft battle of the 80's had their facts wrong.
The whole "debt / insurance derivatives" issue was never fixed from 2008.
Whether businesses making use of emerging technologies and the internet are worth one million vs twenty billion seems to pale in comparison in the realm of economic balance and bubbles.
Yes! Of course, those who blew the bubble 16 years ago learned their lesson and built a basket this time. A few items may fall out of the basket as the supermarket gets busy, which makes me think Uber will fall on the wrong side of legislation (and AirBnb will not) based purely on Peter Thiel's name comment in that recent interview. That being said, my gut tells me the opposite. Ideally, they both thrive!
While there's enough arguments and data to claim we're not in a tech bubble, the amount of doubt/negativism/uncertainty is a strong display of market sentiment and I'd mainly use it as a leverage.
The distinction made at the end of the article between a "valuation bubble" and a "risk bubble" seems entirely false to me.
"much of the media has adopted Gurley as the apostle of the “here we go it’s 1999 all over again” mantra, but that was a valuation bubble. Companies simply weren’t worth what they were priced at. Gurley is arguing that the private market with its limited information and oversight is producing something very different: investors putting too much money in companies without enough information or enough potential upside to justify the risk."
To me "investors putting too much money in companies without enough information or enough potential upside to justify the risk" == valuation bubble.
Agreed. At the end of the day investors are doing the following formula:
(Projected Revenue * %Risk of Ruin) = Valuation
If you overestimate the projected revenues, or underestimate the risk , you're still arriving at the wrong valuation, and if investors are doing this systematically, we get a bubble.
As a poker player, I recognize that you can be ruined both by making plays with a negative expected value (= valuation) or by making plays with positive expected value but which you are not adequately bankrolled for (= risk). Doyle Brunson wrote in his tome Super System from the seventies that he would gladly bet his entire net worth on a 51% chance of success. Even though this is technically a bet with an expected positive outcome, its clearly very risky. Modern gamblers recognize this and pay attention borh to the expected value and the variance.
I'm no economist, but it seems to me that we're just experiencing society slowly learning how to deal with this new 'software' thing. Before the introduction of computers into the workplace, things were fundamentally different. Productivity inched up incrementally year after year, and we dealt with that very well. We understood it, and we structured things to function smoothly with it. Between 1950 and 1980, average worker productivity grew by 76% and the average compensation of the lower 90% of the economy rose by 75%.
Then computers showed up. Instead of worker productivity inching up slowly, it started multiplying. Your secretary didn't go from being able to answer 25 letters a day to 27, she went from being able to answer 25 letters a day to 150. No one knew how to deal with this. Keeping worker compensation in line with the value being created would require annual raises to get much larger. Companies would need fewer workers every year to reach the same levels of productivity. Entirely new products and services became possible all at the same time. Companies needed thinkers, not laborers. So many things changed so fast. And societies and economies don't really 'do' fast. 1980 was yesterday as far as social change is concerned. Analysts are still looking at companies and industries through lenses shaped by the Industrial Revolution - and most companies are operating in the same old ways too.
We haven't adapted to the computer age yet, and it will probably be a long time before we do. Until then, 'Are we crashing or soaring?' is probably going to be a constant topic of debate.
I don't know whether we're in a repeat of 1999 or not, but I know that this article is not very convincing.
"In short — and I’m not the first to say this — it’s less that valuations are unnaturally high than it is the fact that there is a completely new capital market — the growth market."
No, you're not the first to say this. Down through the ages it is usually phrased as follows: "this time is different."
I'm not yet convinced that we're in a bubble, but a few more articles like this and I will be.
(And as others have pointed out, the attempt to draw a distinction between a "risk bubble" and a "valuation" bubble is hand-waving nonsense.)
Can you elaborate on why? "If it bleeds it leads" and the potential of another bursting bubble is making the media wet themselves. And when the media starts getting orgasmic about something its only natural that bloggers are want to follow.
But them constantly writing about a bubble doesn't make it true any more than them constantly writing about Ebola wiping out civilization (at least that was the implication).
Bubbles are macroeconomic phenomena. If you're discussing the likelihood of a bubble without addressing the unique macroeconomic situation the world is in—widespread quantitative easing to deal with a deleveraging crisis—you're probably missing something.
Yes. I would say watch what happens when the Fed definitively decides to raise rates. If there is no pullback in the big social companies then I'll be converted to the "This time is different" camp
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[ 2.0 ms ] story [ 130 ms ] threadThe Swiss just auctioned 10 year debt at a negative yield.
So, no, it's not 1999.
Governments will collapse if interest rates ever return to normal, so they probably won't. But its interesting to see how cheap capital or "value" is when interest rates approach zero. If interest rates were 20% like 1980 and you needed 25% to get investors to even sniff, that would drop facebooks valuation from $200B to about $4B to maintain that 25% return. That's quite a haircut.
Low interest rates result in a margin-like whip when revenues drop. Say revenue dropped a billion at FB. That would drop profit by half and if interest rates remain constant, risk constant etc, that would collapse the price by half. And thats a less than 10% decline in revenue. Ouch. So one effect of low interest rates is making valuation/price very sensitive to small revenue changes. This will make things exciting.
Really. Where do people think this private capital is coming from? I guess the investment banks and fund managers who are dumping hundreds of millions into late-stage companies are doing that exclusively with the investments of wealthy people?
The fact that people aren't investing in Uber via E-Trade accounts doesn't mean that it won't hurt regular folks when the bubble pops. When this all goes south, we're going to find out that grandma's pension was tied up in it, just like last time. It's just a bit better hidden in 2015.
Anyone have any data to support or refute this hypothesis?
http://conferences.pionline.com/assets/2014_GPAS_Study_Final...
In another interesting note, this shows that pension funds in the US grew at over 6% annually between 2003-2013. The recent horror stories you're thinking of are less about pension funds, and more about grandma's savings being tied up in her own house.
For example, CALPERS targets an overall 7.5% annualized rate of return in its investment portfolio.
The Money always finds a way.
If the bubble pops in a way that reduces their earning potential permanently, it's a catastrophe. More likely, it's a blip. Valuations are inflated but salaries aren't. This period, in the VC-funded Valley, will be remembered bitterly but I think the damage will be minimal.
Still, I find it jarring that no one wants to speak for the real risk-takers: the engineers actually building the products, who (unlike investors) don't get to diversify and are the first to get hit when things go bad, but get such a small percentage of the upside.
Second Estate: true technologists. Programmers and designers and makers.
Third Estate: everyday people. Often pissed off (justifiably) about the arrogance of the Valley's tech barons. Tend to protest Google buses, making it hard for Second Estaters to get to work (while being slightly amusing to First Estate assholes). They're the "counter-culture" you describe, along with the regular people who are getting annoyed by tech's arrogance. A few of them are the anti-vax NIMBY assholes who are even more execrable than the tech barons, but most of them are just normal people.
Silicon Valley is dominated by the First Estate. The Second Estate is misled to think it's in charge by workplaces with ball pits, but has no real power or hope of advancement or financial upside except in extreme long-tail cases. So much of the narrative has been II vs. III. That's because the First Estate doesn't want the Second and Third Estate to get together and realize that they don't need the First.
See, the Second Estate has weak organizational and social skills, and has been systematically infantilized ("Agile"/Scrum) to keep it that way. We could learn a lot from Third Estaters (who are often just as smart as we are) in politics, government, law, labor activism, etc. But we've been told by the VC elite to reject such people as parasitic future-averse peons, and they've been told that we're a bunch of socially inept, prematurely affluent assholes. This artificial II/III cleavage works to their benefit, and it hurts us, by making us dependent on the First Estate for funding and approval.
Some of the ideas are useful, though. But not the ones where you add pain the lives of people and expect it to engender sympathy towards you.
The First Estate has more value and utility than your typical Marxist eat-the-rich analysis would suggest. Further, the Second and Third don't have as much in common as a naive analysis might suggest.
The first few years of an engineers career should be seen as apprenticeship. The best way to quickly grow is to go work for a well-regarded, established company that will compensate them well and provide an environment for them to learn and grow rapidly. Engineers right out of school make $200k/yr working for the likes of Google or Facebook. After a few years of that, they can go try to start a company or negotiate a decent amount of equity at an early-stage startup that they believe in, and they'll have had the opportunity to actually save some money to exercise those options when the time comes.
Of course, this advice doesn't apply to unicorns which, by definition, most people are not.
This is incredibly rare. Including equity and bonus, the numbers are closer to $140-170k, and that's for Stanford graduates. $200k+ comes later (although it can come quick if you're good at career planning). That's Staff Engineer territory at Google.
I agree with everything that you're saying. I just don't want misinformation to be out there.
Uber has published comp for engineers[1] that put them starting at $110K/yr + $410K in equity. Presuming a 4-year cliff that's $212K/yr. The top end of that scale is $170K/yr in cash + $2M in equity, or $670K/yr. My guess is that Uber also pays decent-sized performance-based cash bonuses or has other cash-like benefits (401k matching?) that aren't included. Uber is also not some kind of iffy, fly-by-night startup.
Apple, Google, Facebook, and myriad other companies all have to compete in that market for the same talent.
[1] https://angel.co/uber/jobs/57827-ios-engineer-uber-multiple-...
$170k + $500k of paper as valued by VCs (who have a different risk profile, and get the bonus of being able to inject their buddies into executive roles) is not the same thing as $670k. Also, Uber is a company that everyone hates and it has to pay an "asshole tax" to be able to hire anyone.
As far as the asshole tax, I don't think Uber's reputation is all that much worse than Facebook or Google, do you?
Absolutely yes. I wouldn't work for Uber for less than a million dollars. Google (and to a lesser extent, Facebook) is seen as a cool company that does (mostly) positive things. Uber are seen as a bunch of libertarian assholes who actively break the law, dodge liability, screw over their ~~employees~~ independent contractors and price-gouge their customers.
This though, is why concern one — the lack of access for retail investors — is arguably a firewall against this truly being a bubble.
This seemed to me one of the key necessary factors to the dotcom bubble and the housing bubble after it: online brokers allowed people who previously didn't have a lot of experience to buy stocks and even daytrade. (Count me in!)
Similarly, ARMs and the various other exotic mortgage tools opened up the housing market to lots of people who traditionally wouldn't have had access. (Thankfully learned my lesson with the NASDAQ bubble.)
If Uber at $20 billion is such a great deal, why don't Larry Ellison, Bill Gates or Warren Buffet buy it outright?
But if all the snapchats and instagrams--heck, even Facebook--come crashing to earth, it's not clear to me there's a huge amount of collateral damage outside of the companies directly involved and their (mostly non-retail) investors. Not zero of course. But a lot less than post-2000.
The opening paragraph creates an infallible criteria. It's true that many people thought instagram wasn't worth $1billion. Does that mean $35 billion is less indicative of a bubble, or more? Simply saying 'hah! Bubble predictions were wrong in 2012 because valuations are still rising, so they must be wrong now too.' This sort of thinking would never predict a bubble.
https://www.youtube.com/watch?v=IFe9wiDfb0E I hope they're wrong if it looks like this.
However, the NASDAQ was basically where it is now. Many people I knew were getting multiple job offers with incentives like a Boxster S or a 4-day workweek thrown in.
We may or may not be in a bubble now, but the excessiveness of that time really felt like a different level to me.
With this bubble, I'm bearish not because I don't think that the general investment thesis of tech disrupting existing markets is wrong, but because I don't think these particular companies will be the ones left standing when the dust settles. Basically, I'm betting that technological progress will be more dramatic than we expect, and that these are early market leaders that will then fade away into obscurity as future technology changes the assumptions they're built upon. Uber and Lyft, for example, are dead as soon as self-driving cars become viable. DropBox is vulnerable to the end of the file; in recent devices, the filesystem is quite hidden and peoples' workflows just don't involve creating files, they involve inputting information in some specialized cloud service provider. AirBnB may end up being eaten by itself: as it becomes more viable economically, you'll see more purpose-built construction being built to be listed straight on AirBnB, and at some point it becomes worth it to ignore the consumer sellers entirely and just act as a broker between commercial property owners and travelers.
True, if they're not nimble enough to adapt. But think about that statement applied to Netflix 10 years ago. "Netflix is dead as soon as video streaming becomes viable" (i.e. They were a DVD rental business).
I could see Uber and Lyft adding a fleet of self-driving cars for people to call on-demand. Or even closer to their current model: maybe they sign up owners of those cards to sublet them in the middle of the day while they're at the office.
I don't think most of us—me included—can fully appreciate the massive shift that will come if and when cars are fully autonomous, driving about with no occupants.
Wouldn't they just replace drivers with self-driving cars but maintain the rest of their infrastructure? It has already been announced that Uber is working to develop automatic cars. http://money.cnn.com/2015/02/03/technology/innovationnation/...
A good example is the IBM PC. When it came out, everyone was saying "Of course, IBM will now dominate the new personal computer market, because they have the sales & marketing apparatus to reach into every business that will want to buy one. Nobody ever got fired for buying IBM, after all, and now that they own the technology to make a personal computer, their offering is clearly superior."
But that's not what happened. Instead, they did dominate the PC market - for approximately 5 years. But the PC had reduced prices so that it was now targeting a market that was cost-sensitive, and it had created a secondary market of applications that let it reach into many areas that had previously required custom software direct from the manufacturer. IBM did not own the critical matchmaking components of this, the instruction set, operating system, and BIOS. Intel and Microsoft did, and then Compaq reverse-engineered the BIOS. As a result, clones flooded in, IBM's sales & marketing prowess counted for nothing, and they found their market commoditized.
Uber's critical value proposition is serving as a market-maker in a two-sided market. That's the part that's really difficult for a startup to clone. You can make the Uber ride-sharing software trivially, and many people have [1]. But even if you do, riders won't use your service because you don't have the same number of drivers available that Uber does, and drivers won't join because they won't make as much in fares.
When self-driving cars come out, that two-sided marketplace becomes a one-sided marketplace. We've yet to see how Google will market the technology, but the most strategically advantageous approach for them is to contract out manufacture of the cars, own the hardware, put their own software on it (and not license it out), and then sell a service to riders, undercutting Ubers' prices. Under this model, Uber's competitive advantage counts for nothing - their supply chain costs more than the competition, in a price-sensitive one-sided market.
Google could then use a number of different tactics to lock Uber out. The most likely one is regulatory; in the interest of public safety, they could argue that all self-driving cars need to pass a very stringent safety test, consisting of real-world driving for X00,000 miles. Google's got a 10-year head start on Uber for developing this software, and once a critical mass of cars on the road are Google self-drivers, they have accurate position information on everybody else, a key factor in making this safer.
[1] http://www.businessinsider.com/homeless-coders-trees-for-car...
As I see it, Uber and Lyft have built systems that would be very useful for managing a fleet of self-driving cars to provide on-demand service, and one or both of them are likely to either buy such fleets, adapt their services slightly to be the middleman between such fleets and consumers, or be purchased at a premium price by the operators of such fleets once self-driving cars are viable.
Now, sure, driving for Uber and Lyft as a profit-making job is dead fairly quickly once self-driving cars become viable, but that doesn't mean Uber or Lyft is.
> AirBnB may end up being eaten by itself: as it becomes more viable economically, you'll see more purpose-built construction being built to be listed straight on AirBnB, and at some point it becomes worth it to ignore the consumer sellers entirely and just act as a broker between commercial property owners and travelers.
Again, that's not really a great threat to AirBnB in the absence of someone else whose built just as strong a relation with travelers and also has better connections with commercial property owners. But, most likely the transition of the suppliers offering via AirBnB from casual to commercial will be gradual -- and its already been happening from day one -- and AirBnB, as long as it maintains an advantage as the traveler destination, will be ideally positioned to continue that dominance as the property "sharing" market is less consumer sharing and more commercial rentals that are outsourcing much of the traveler-facing side of operations (and exploiting whatever rules are adopted for "property sharing" distinct from hotel operation.)
But it starts off with it's very worst argument, the ultimate '99 argument even: analysts suggesting Instagram's value increased 35-fold since acquisition based on the assumption that if it "fully monetized" it could contribute $2bn revenue (ie. at zero costs and zero discount rate you're still looking at a 17 year time horizon to get $35bn from Instagram, which is about three lifetimes for youth-oriented media properties) It suggests that's quite reasonable with reference to the stock price of yet-to-turn-a-profit Twitter.
It doesn't get any better when it suggests the "unicorns" are different because they're competing with non-tech-enabled businesses. That could have been a slide from the WebVan pitch deck. Plus it's very, very wrong in the case of AirBnB: Sabre et al sewed up a large chunk of the profitable end of the distribution market by solving the technical problems of filling hotel rooms, and locking themselves into the infrastructure, before the internet. AirBnB has a flair for consumer marketing, but does that really make it worth more?
The argument that the '99 companies failed because the mass of consumers didn't exist and the infrastructure wasn't ready is true, but for any self-respecting bear that's an indication of exactly why it could be worse than 99 when investors get cynical about companies peaking at hundreds of millions of users whilst still being unable to squeeze a respectable profit to justify their valuation.
So, all of us doing the hard and annoying work of building the companies are getting screwed.
Is that really a fact? Clicking through to that article and reading it (which I don't recommend) shows that that valuation is based on the whims of a group of analysts at Citigroup.
From the article:
“While Instagram is still early in monetizing its audience and data assets and its financial contribution to FB is minimal today, we believe that it is quickly gaining monetization traction and would contribute more than $2bn in high margin revenue at current user and engagement levels if fully monetized,” they wrote.
It's a bit ironic that the initial premise of the article is that commentators on the Apple/Microsoft battle of the 80's had their facts wrong.
Whether businesses making use of emerging technologies and the internet are worth one million vs twenty billion seems to pale in comparison in the realm of economic balance and bubbles.
Visual chart for reference: http://xkcd.com/980/huge/
"much of the media has adopted Gurley as the apostle of the “here we go it’s 1999 all over again” mantra, but that was a valuation bubble. Companies simply weren’t worth what they were priced at. Gurley is arguing that the private market with its limited information and oversight is producing something very different: investors putting too much money in companies without enough information or enough potential upside to justify the risk."
To me "investors putting too much money in companies without enough information or enough potential upside to justify the risk" == valuation bubble.
(Projected Revenue * %Risk of Ruin) = Valuation
If you overestimate the projected revenues, or underestimate the risk , you're still arriving at the wrong valuation, and if investors are doing this systematically, we get a bubble.
Then computers showed up. Instead of worker productivity inching up slowly, it started multiplying. Your secretary didn't go from being able to answer 25 letters a day to 27, she went from being able to answer 25 letters a day to 150. No one knew how to deal with this. Keeping worker compensation in line with the value being created would require annual raises to get much larger. Companies would need fewer workers every year to reach the same levels of productivity. Entirely new products and services became possible all at the same time. Companies needed thinkers, not laborers. So many things changed so fast. And societies and economies don't really 'do' fast. 1980 was yesterday as far as social change is concerned. Analysts are still looking at companies and industries through lenses shaped by the Industrial Revolution - and most companies are operating in the same old ways too.
We haven't adapted to the computer age yet, and it will probably be a long time before we do. Until then, 'Are we crashing or soaring?' is probably going to be a constant topic of debate.
"In short — and I’m not the first to say this — it’s less that valuations are unnaturally high than it is the fact that there is a completely new capital market — the growth market."
No, you're not the first to say this. Down through the ages it is usually phrased as follows: "this time is different."
I'm not yet convinced that we're in a bubble, but a few more articles like this and I will be.
(And as others have pointed out, the attempt to draw a distinction between a "risk bubble" and a "valuation" bubble is hand-waving nonsense.)
Can you elaborate on why? "If it bleeds it leads" and the potential of another bursting bubble is making the media wet themselves. And when the media starts getting orgasmic about something its only natural that bloggers are want to follow.
But them constantly writing about a bubble doesn't make it true any more than them constantly writing about Ebola wiping out civilization (at least that was the implication).