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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: 5, Interesting) by PizzaRollPlinkett on Monday May 25 2015, @03:55PM
Hugh Pickens turned in a good summary with some good links - kudos! This was an interesting read. The way I see it, the VC world is working like it's supposed to. The problem they have is that no one knows which companies will be home runs and which will be duds ahead of time. All they can do is invest and hope. They spread their money out thinly. For every home run, they probably have 100+ duds, but when one of your home runs is Facebook or something, the rest are acceptable losses. In the last bubble, a lot of market analysts and media members carried water for the duds and talked them up, so other people were left holding the bag when everyone realized they were worthless. Sure, at some point, these inane companies will either be bought out by less smart people (like Yahoo overpaying for trivial apps they could have written in-house for a fraction of the cost) or go kaput, but that's how speculative investments work. If you can't stand the heat, get out of the kitchen.
In Uber's defense, you have to look at it like a business mind does. Uber is, at its essence, offloading the cost of buying and maintaining vehicles to "independent contractors" aka the suckers who work for them. To a business mind, this is genius. It's essentially creating a company that takes no risks but skims proft off of every transaction. To normal people, that's a useless parasite. To today's business minds, that's genius. No fleet of cars to maintain! Pure profit. Limited expenses. And there's always a fresh supply of suckers who will believe the pitch and take the job. They're long on this company for that reason. It's like three-card monte without the expense of cards and a table in the alley.
And it's funny how often even bad companies anticipate stuff. Selling bulky pet food over the Internet sounded silly a decade ago, and having a sock puppet mascot made the company (can't even remember the name) seem even more silly. But today Amazon and Wal-Mart are in a logistics race to figure out how to bring pet food to your door. (And King Crimson prophecied people eating cat food in the comfort of their own homes in the 1970s! Not even fit for a horse!)
(E-mail me if you want a pizza roll!)