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from the double-double-toil-and-trouble-fire-burn-and-market-bubble dept.
Conor Dougherty writes in the NYT that the tech industry’s venture capitalists — the financiers who bet on companies when they are little more than an idea — are going out of their way to avoid the one word that could describe what is happening around them: Bubble “I guess it is a scary word because in some sense no one wants it to stop,” says Tomasz Tunguz. “And so if you utter it, do you pop it?”
In 2000, tech stocks crashed, venture capital dried up and many young companies were vaporized. Today, people see shades of 2000 in the enormous valuations assigned to private companies like Uber, with a valuation of $41 billion, and Slack, the corporate messaging service that is about a year old and valued at $2.8 billion in its latest funding round.
A few years ago private companies worth more than $1 billion were rare enough that venture capitalists called them “unicorns.” Today, there are 107 unicorns and while nobody doubts that many of tech’s unicorns are indeed real businesses, valuations are inflating, leading some people to worry that investment decisions are being guided by something venture capitalists call FOMO — the fear of missing out.
With interest rates at historic lows, excess capital causes investment bubbles. The result is too much money chasing too few great deals. Unfortunately, overcapitalizing startups with easy money results in superfluous spending and dangerously high burn rates and investors are happy to admit that this torrid pace of investment has started to worry them. “Do I think companies are overvalued as a whole? No,” says Sam Altman, president of Y Combinator. “Do I think too much money can kill good companies? Yes. And that is an important difference.”
(Score: 2, Disagree) by VLM on Monday May 25 2015, @12:50PM
while nobody doubts that many of tech’s unicorns are indeed real businesses
Uh, sure, go on believing that.
Isn't that being a false belief kind of the whole point of the article, or isn't the point that a startup by definition isn't a real business if the numbers worked out they'd call it a "real business" not a startup?
Note that something very few people understand is how valuations are calculated.
At a real company valuation is vaguely based at the core on the value of liquidated assets - debts or the cost of replicating the overall system/plant and then innumerable correction factors are applied to account for likely future growth, net present value of money, the leadtime it would take to rebuild or upgrade a competitor, and "normal" stock market irrational exuberance. Exactly how the financial statements are manipulated varies by industry and corruption level, but fundamentally there is sound economic theory based on financial statements at the root of the argument. So the value is the bottom line of the balance sheet plus or minus fudge factors, or the income statement combined with interest rates and net present value calculations plus or minus fudge factors, or whatever. The key is fundamentally the business is a going concern based on real world numbers at its core.
At a startup valuations have nothing to do with operations or finance at least as real companies know it. So dilute/sell/issue 10% of your stock to a VC in exchange for $100M of VC money and the "valuation" is $1B. That doesn't mean the company net assets are worth $1B, it means in the sense of auction winners regret, that the VC bought a lottery ticket that won't pay off unless the company sells over $1B. And everyone thinks that of course they're going to be the one lotto winner with a side dish of we all invest in everyone so we can't help but be in the pool of lotto ticket investors. The important point is the company balance sheet, income sheet, cash flow sheet all have nothing in common with the advantages and disadvantages of "real" billion dollar class companies.
A good analogy, is a startup is the secretarial staff getting together and pooling their money and buying fat stacks of lotto tickets to share equally when they win, and then issuing a press release that the value of their lotto ticket pool is $464M because thats the megabucks jackpot that night. We're planning on issuing 1000 shares in an IPO of our lotto ticket pool at an issue price of only $400K and thats a can't lose price, and most importantly FIRE sector commissioned sales people are taking a skim at every step in the process, so "everyone" wants this to go thru without anyone looking too closely at the facts. Also, we got foozball tables.
(Score: 1) by caffeinated bacon on Monday May 25 2015, @02:22PM
You're forgetting the future.
What if this company gains critical market share? How much money will they make if they are the first to exploit some niche that turns out to be profitable?
First mover advantage is quite real, how much are people willing to risk for a big payoff?
(Score: 2) by VLM on Monday May 25 2015, @02:54PM
Exactly, just like the flooz market or the dog food delivery over the internet market.
(Score: 2, Insightful) by Anonymous Coward on Monday May 25 2015, @03:06PM
Do you really think Uber is worth $41 billion?
How much do you think Facebook is worth and when will investors be able to cash out on it?
(Score: 2, Insightful) by caffeinated bacon on Tuesday May 26 2015, @04:24AM
No of course not. Free money has caused an everything bubble.
But compared to an identical company just starting out today, it must be worth more.
You both must have missed the 'turns out to be profitable' part.
(Score: 2) by tibman on Monday May 25 2015, @05:11PM
Transitioning from startup to real company is where failure seems to occur. Where the startup use to have 1mil+ of fun money to play with they now only have what is in the sales pipeline. If the startup hasn't even figured out how to monetize the product then they may never ever transition to a real company. In this case they seem to shoot for mega-popular and keep the VC coming. Eventually they have a public offering or just plain sellout to someone who thinks they can monetize.
When my company made the transition from startup to real we lost about 1/3 of the workforce. We also had to cut the office space down by half. A year later the company has naturally grown enough to need a new building. Seems to have survived, which is great because i like getting paid : ) But i wouldn't call it a mega success or a dud. More like a decent investment.
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