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) by c0lo on Monday May 25 2015, @12:42PM
https://www.youtube.com/watch?v=aoFiw2jMy-0 https://soylentnews.org/~MichaelDavidCrawford
(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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(Score: 3, Interesting) by kadal on Monday May 25 2015, @01:13PM
The New Yorker recently published a good article on Marc Andreessen, big time VC: http://www.newyorker.com/magazine/2015/05/18/tomorrows-advance-man [newyorker.com]
(Score: 0) by Anonymous Coward on Monday May 25 2015, @02:23PM
I'm getting close to retirement age (USA). An IRA I started long ago is in a Fortune 500 index fund, which has been doing really well lately. Is it time to switch over to something more conservative (ie, money market funds)? Or will the current tech bubble pop on it's own with minimal damage to the larger stock market?
(Score: 2) by rts008 on Monday May 25 2015, @03:25PM
I don't feel knowledgeable enough to answer your question, but I do feel comfortable enough to say that I doubt the tech bubble can pop without significantly harming other 'areas'. The reason I say that is that tech is so widespread and entrenched in almost everything nowadays, it has a huge impact on almost everything.
One example: 'High-speed trading', where a software or hardware glitch can have profound impact on the stock market, not even considering the mention of deliberate manipulation.
I switched mine to more 'traditionally/historic' stable investments a few years ago, and haven't felt foolish for it. I'm not much of a gambler with my limited resources. :-)
(Score: 2) by bzipitidoo on Monday May 25 2015, @04:56PM
We're still in a depressed environment. There are still no real good places to park money. While interest rates stay near 0%, savings accounts and money markets won't pay well. So what do people do, when interest is so low? Bonds are horrible. The moment interest goes up, bonds tank, as everyone will want to trade up, dump those stinkers with super low interest rates in favor of new issues of bonds that pay more. Still, people put some money there. It's only when interest rates are high and likely to head down that bonds are good-- if, that is, the bond issuers can weather the downturn and not go bankrupt, leaving their bonds worthless. Stocks are about it, and because they're about the only place to go, they're overvalued right now.
Gold has seldom been a good investment. Beware of "gold bugs", who say that the stock market will lose 90% of its value. If that happened, gold would be a good investment, but the market is almost certainly not ever going to dive that far. 30%, yes, 50% yes, but not 90%. The last 50% dive, in 2008, was accompanied by much angst and government action to bail investors out. Imagine what the government would do if the market actually flirted with a 90% drop.
We're still perilously close to deflation. In that environment, the best place for an individual to put money is literally under the mattress. Collectively, we should invest more. However, we shouldn't invest in just anything. We need to think beyond money. So much of finance is about exploitation and greed. It won't do us any good to invest more if we invest in reckless, extractive industry and wreck the environment in the process.
(Score: 0) by Anonymous Coward on Monday May 25 2015, @06:06PM
Another option is to assume you won't need the money in the next ~5-10 years--keep working if it's still fun. This seems to be about (very roughly) the stock market cycle time, in recent history. Grit your teeth, accept that market timing doesn't work, and stay in S&P 500, knowing that it might fall 50% again (like 2001 and 2008), but will charge back up before you have to start taking the minimum required payout at age 71(?).
(Score: 0) by Anonymous Coward on Monday May 25 2015, @06:22PM
You are close to retirement! Good god man of course it is time to move to conservative ventures! Don't risk what you can't lose!
(Score: 2) by Non Sequor on Tuesday May 26 2015, @01:03AM
You've cut a good chunk of your investment risk by diversifying your investments. Moving into something else needs to be based on analysis of risks and benefits.
Dropping down to a money market may be throwing out the baby with the bathwater. A money market fund is expected to only offer a small return over inflation, if any. That won't work unless you can make the money on hand last the rest of your life after accounting for social security.
Most retirement portfolio recommendations are more bonds than stocks, but still some stocks. You can manage some of your investment risk by setting a budget that leaves some padding for adverse circumstances. If there's a stock or bond market crash, a combination of tightening spending and not doing anything rash with your investments can manage some of that risk.
The headline life expectancy numbers are based on period rates. That means that if you take the rates of death by age observed in, say, 2014 and pretended they applied to your entire life, that would be the life expectancy. You should expect to live a few years longer than the "current" life expectancy plus a bit more than that for the sake of planning. If you die younger, you may very well leave higher medical bills in your wake anyway.
Plan a budget so that even if you live longer than expected, you still have some money left, giving you some means of adjusting your spending over time.
Write your congressman. Tell him he sucks.
(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!)
(Score: 2) by Hairyfeet on Tuesday May 26 2015, @03:44PM
As much as I am in complete opposition to everything the man believes in (and with his "De-FOOing" is very cult leader like) even a busted clock is right twice a day and Stefan Molyneux talked about this issue in 08 [youtube.com] that thanks to 401K and 403B pumping billions into the market the government changed the stock market from a place for those to invest in a company into Las Vegas with nicer clothes because with so much money flowing in its no longer about long term growth, its about short term bounces.
Now it doesn't matter if the company is profitable, or hell even financially sound, all that matters is the ultra short term. Nowadays a company can literally commit suicide and still get a short term bounce, for example look at the bounce Circuit City got by "cutting costs" which involved firing all their best and most knowledgeable salespersons for clueless minimum wage earners that couldn't move a 20th of the merchandise the pros could. But "hey the CEO made huge cuts and look at what they made last quarter" so they got a bounce, the CEO cashed out, and everybody else got screwed. We'll see the same thing here as all the "multibillion" valuations come crashing down when its shown they will never make a 1000th of that and it all turns to shit.
ACs are never seen so don't bother. Always ready to show SJWs for the racists they are.