I'm calling this Bubble 2.0, and it's ready to burst

http://www.antipope.org/charlie/blog-static/2012/05/bubble-20.html

by cstross • 14 years ago

146 130 14 years ago

I've been written a summary about all bubble theories here: http://blog.trejdify.com/2012/05/summary-do-we-have-new-tech...

neilk3• 14 years ago

Isn't it absurd to suggest that there cannot be a bubble if everyone agrees we are in a bubble?

fourply• 14 years ago

Interesting article, Mr. Stross. I think it's great to see so many people hungry for the next new thing, out hustling and working hard to try to make it happen.

As awareness of startup culture grows, it is necessarily going to attract some goofiness. That's OK. Not every idea is a good one, and not every good idea is going to work. We need these stories to make the successes stand out so much brighter.

You may be right, but I hope you're not. I see things like Pebble's success on Kickstarter, Amanda Palmer bringing more attention to the idea of crowdsourcing funding for something that is every bit today's poetry, and see the spread of the paradigm shift we all already value (or else we wouldn't be here). I think it's right to be nervous, but I am cautiously optimistic that hacker/maker/startup culture is an attractive alternative to the existing production model.

I always appreciate your thoughts, but nowhere near as much as I would appreciate a new Laundry novel. Thanks for the good times.

nicholassmith• 14 years ago

"but nowhere near as much as I would appreciate a new Laundry novel"

So very soon, July last time I looked on Amazon.

cstross• 14 years ago

I was in the web/dotcom 1.0 biz from early 1995 through late 2001.

I am reading the news these days with a strong sense of deja vu for late 1999.

Kickstarter and crowdsourced funding is great news for artists, but I don't see it scaling much bigger than AFP and "Iron Sky" without attracting fraudsters. Again: hacker/maker culture is great, it has brought us great things in the past, and I expect great things to come of it in future, but it's not delivering huge new industries on the scale of a Google or Facebook or Apple. (Making stuff with atoms instead of bits is intrinsically slow, energy and matter intensive, and hard to scale up exponentially.)

But this isn't about artists making a living. If this guy was talking about crowdsourcing to fund his next book of poetry I'd be all in favour. But instead, he's talking about building some kind of bullshit hosting/purchasing storefront with the idea of raking off a percentage of gross from a market that died of natural causes three quarters of a century ago.

Thinking you can set yourself up to rake off a chunk of the value in each exchange in a particular field is the sort of wishful thinking that gave us the Feb 2000 bust.

condiment• 14 years ago

I appreciate how your experience in the late 90s has given you a heuristic for picking up on the signals and leading indicators of a bubble, but I question how relevant it is in this case.

The poetry blog post is just one bad idea that a couple guys had in an attempt to gain a small amount of funding from a notable startup indicator. That's not to say that there aren't more small teams with laughable ideas out there, but I think it's important to note that nobody gave them money. I suspect they went home empty handed because the folks who manage VC funds did learn from the mistakes of the 90s, even if a new generation of wantrepeneurs have no clue.

Which brings me to my point. The niche based thinking expressed by the poetry disruptors and many others is an expression of the realization that individual programmers have the ability to work alone to create products and businesses that are capable of supporting them financially in much the same way that a sole proprietorship would in the physical world.

I'm fairly certain that this wasn't possible in the 90s without outside help, but I think that it explains a lot of the misguided enthusiasm from people who want to build lifestyle businesses, but don't realize that venture capital is not the way to go about it.

moldbug• 14 years ago

Not only is poetry dead as a market, it's arguably even deader as a form. The profession of poetry is all about making the connections you need to get a book published, at which point you can work (for pennies) at a community college teaching poetry, and have as good a right as anyone to introduce yourself to chicks as "a poet." You can't be utterly illiterate, though, unless you're a protected minority.

But "Poetry," capital P, is an entirely different and quite solid business. I wouldn't at all count this startup out. It's called a vanity press, honey! The profession of fleecing people who want to be Poets may not be the oldest, but it's got to be at least fourth or fifth.

(It's also worth noting that before, I don't know, 1850 or so, the distinction between a vanity press and a real one was by no means clear. Plenty of reputable authors invested in the production costs of their early works. It was almost embarrassingly easy for a good writer to acquire a reputation based on one work - Dr. Johnson went from nobody to lion after one 300-line poem, his imitation of Juvenal's Third Satire. Of course, the tennis court had a net then.)

phatbyte• 14 years ago

Unfortunately I'm starting to agree with the bubble 2.0.

Last year I didn't believe it that much, but this year I'm starting to see crazy company evaluations, highly inflated that don't generate any revenue at all, so I don't know how can they be worth billions of dollars, but I know math and little about economics.

But if bursts, it's a good thing. It brings perspective, a thing that's missing a lot these days, where every social app or thingy that's the hottie of the week is evaluated on > $400M.

twiceaday• 14 years ago

Seems to me like each of these overblown evaluations is a bubble onto itself. Perhaps there is a general trend but such a thing cant lead to a crash. What would a crash involve?

nextparadigms• 14 years ago

Investors realizing that they can't make their money back. Right now even if they pay $10 billion for a photo app, they're still expecting other investors will buy their shares at a $20 billion valuation or more later on. All investments are made on speculation right now, rather than based on true value and potential for making money.

But if that doesn't come true, and everyone realizes this, then there will be a crash. Valuations will fall, and the initial investors won't be able to make their money back because those photo apps weren't making any revenue, let alone profits.

jnorthrop• 14 years ago

What happens in a crash is a rapid collapse of a single market (say the social segment of online businesses) then then the markets supported by that market follow suit until the momentum threatens the economy as a whole. Financial markets can react fast to this causing a "crash."

toemetoch2• 14 years ago

We're 12 years past the .com bubble. A large portion of the people who're creating and moving money today are in their twenties, they didn't experience 1999 in an economic point of view so there are no signals for them.

Having said that, let's not forget that a lot of the uncharted terrain from 1999 is now thoroughly explored with a microscope. If you're talking about a bubble, don't forget to mention which subset of the internet you're referring to. Yes, social thingies are the new buzz but they are such a small part of the online ecosystem. A lot of the social stuff was created as an add-on to existing stuff - take it out of the equation and very little value is lost.

hkarthik2• 14 years ago

The financiers are, in general, folks that lived through the dotcom bust. That's the perplexing part right now. You'd think they would know better.

benwerd2• 14 years ago

So let's be clear about this: these kinds of startups are arbitrary containers for investment dollars. They could be corn, or property, or jelly futures. But as it happens, technology companies are where a lot of people are putting their money right now.

As a result, it's not the startups with the secure bottom line that are getting investment: it's shiny startups that happen to be very popular. Because those are the ones that look great in an investment portfolio, and which could potentially be sold elsewhere. It's not about dividends over time; it's about passing on a shiny valuable to someone else for a cash return.

Given that premise, it seems like two things need to happen for the bubble to burst:

- The odds of an investment going bad must increase (or the perceived odds) / the perceived value of shiny startups in general must decrease

- Another arbitrary, shiny container for investment must arise

Thanks to the banking crisis, we know that property and related investments are going to be tainted for a little while. What else out there could threaten the startup market today? How about in five years?

tomgallard• 14 years ago

From what I understand, bubbles bursting in the past (e.g. Tulips, Dotcom) have been triggered by a specific event rather than a new, more exciting outlet for money.

In the Tulip bubble it was a failed auction in Haarlan, in the DotCom bubble it was the Fed raising interest rates, paired with the judgement in the US vs Microsoft trial.

So, its interesting to hypothesize what the 'trigger' event could be in this case. I doubt it will be the Facebook float, as I think we have a while to run yet.

MrMan• 14 years ago

here's a scenario for you - end of 2012, and for some reason ad spending is down and consumer spending has not increased as much as was forecast. the major platforms that capture that ad money suffer hits to their stock. FaceBook will be public by then, and if they suffer a decline in profits, much less a decline in revenue, this early in their history, the luster will come right off, taking them from $100 to $30 in a few days. the reverse halo effect of FB will cause optimism about the resale value of shiny startups to decrease. by this time next year, PG is blogging about "sanity and wisdom" and how he has seen it all before.

hemancuso4• 14 years ago

I think it's important to recognize that the Public can't easily invest into startups. It really is just a small group of investors who are in this market right now. This is an important difference between today and the late 90s.

F_J_H4• 14 years ago

Resource plays - particularly natural gas?

debacle2• 14 years ago

We will see the bubble deflate a bit when FB doesn't hit its target valuation, and it will either pop at that point or it will pop when one of:

* LinkedIn busts

* Zynga busts

* Google sees a dip

Happen.

gosub• 14 years ago

Saying that something is going to happen is easy, as in astrology easy. The meat of any prediction is in the timeframe. If you know for sure that the bubble is gonna burst in n months, you should bet against it in the stock/future market.

rrreese• 14 years ago

I absolutely agree. I've been hearing predictions about the startup bubble for quite a while now, no doubt the market will fall at some point. Markets are cyclical so you can safely make a prediction once a year and eventually be right. What I want to see are people stating when the bubble will burst and even better, putting money on their predictions.

didgeoridoo• 14 years ago

Am I missing something? The example of a "poetry startup" is obviously meant to be an extreme case, but doesn't prove anything about a bubble -- rejected from YC, miles from funding, no product, no customers. If this idea just closed a $500K seed round, it would be a different story. But people have been coming up with silly business plans forever... What makes this one a particularly convincing bellwether of the imminent pop of the 2.0 bubble?

ojr• 14 years ago

Im 19 I've Spent $100 on Facebook ads, and when ads are mobile, i'll probably spend more, and if I had a disposable chunk of 100K I will definitely try to promote on Twitter Trending Topics, as the startup culture continues to grow, college students like me will be willing to throw money on Facebook,Twitter, and other sites rather than you know drugs and alcohol ;)

wtvanhest3• 14 years ago

Bubble or not:

shoe-shine boys offering stock tips - Happens in all markets, even in really bad ones.

sneak• 14 years ago

Says the guy who sells books. I suppose that's a few rungs up from shoe-shine boy, innit?

(Don't get me wrong, I love his books. But are we really looking to SF authors for market guidance now? Just because he cites one failed business model?)

evilvoidhamster• 14 years ago

He's an ex-developer for a payment processor. Might have a little bit of knowledge...

ThomPete• 14 years ago

Poetry is the only artform that has more practitioners than appreciators. So no wonder.

bdg• 14 years ago

Everything that might have been invented has been, because I haven't seen enough mind blowing stuff this week. Therefore, we are closing the patent office. Good day.

zweiterlinde2• 14 years ago

A startup bubble is the best thing that could possibly happen.

Look at it this way. There are plenty of talented engineers, designers, and entrepreneurs out there trying to build the next big thing. Due to the incredible scale and reach of the internet economy, those who succeed will become fabulously wealthy. But most will fail (or at least not reach that scale) due to various circumstances---a misstep in execution, a superior competitor, our simply bad luck. There are certainly many small successes, but success or failure can seem like an incredibly binary event.

Why should engineers shoulder that risk? That’s the raison d’etre of finance and investment. Let those with capital take on the risk, and give the engineers enough security so that a “failure” doesn’t put a talented person out of the game. If every startup that demonstrates that it execute on an idea and can clear some threshold of viability gets a reasonable exit, then the investors will still get enough Facebooks to generate a good return, and the startup teams are much less captive to chance and fortune with respect to whether they can pay the bills or not.

dodo53• 14 years ago

It's not about whether third party investment is a good idea, it's about whether the valuations third parties make are reasonable or based on hype. The cost of bubbles is in talent misallocation - could talented people be producing other things of more enduring value?

zweiterlinde2• 14 years ago

I don't disagree, but I would suggest that if the "successes" are worth billions upon billions, then even "failures" are quite valuable as well, at whatever point in the processes they are still indistinguishable.

As hard as economic value is to quantify, "enduring value" is even harder. So I won't even attempt to make judgments on that front.

sethg• 14 years ago

In a tech bubble, capital does not chase engineering talent; it chases whatever shiny thing resembles the last shiny thing that made headlines. And when the bubble bursts, the entire sector goes hungry for capital, even companies which, in a more sober market, would be recognized as good prospects for growth.

gaius• 14 years ago

AKA the AI Winter...

guard-of-terra2• 14 years ago

The Poetry startup seems to be a very healthy idea. There is a large audience of poets; writing poetry is a very social process; and they use Internet extensively . Right now they are scattered thru a million of small resources and communities in social networks. But what if you can bring them all in one place? There might be a sufficiently large audience to monetize even if we forget about readers at all.

So his bubble sample has meaning and therefore his POV rests unproved.

brudgers2• 14 years ago

This reaoning is why it's a bubble - the idea that selling services to poets scales in the way that selling poetry to consumers would (in theory).

guard-of-terra2• 14 years ago

Poets are consumers, consumers are poets. Also, you can target every poet out there, in the past you could not target every consumer or producer.

It does not have to be big for seed funding. Might as well pay dividents.

lmm• 14 years ago

I've been thinking for a while that someone (perhaps even me) should build a better steam engine. It's cool technology, and the current speed record has stood for over a century; surely we have better materials science now (and the recent success of Tornado, a replica A3 Pacific, shows that it's possible for enthusiasts to build a steam engine on a not implausibly huge budget). One for kickstarter?

ivarious• 14 years ago

I don't agree that poetry have no consumers. It is an arguable pity that eyes have blinders. Between simple taglines, among headlines. Happily in advertising, Poetry vines.

sushi• 14 years ago

It is temerity to pass this prediction based on extremely small sample data.

Instagram, Colors, Zynga and others like that are still exceptions rather than a rule. Indeed media attention for these social apps/gaming companies tend to be high which might give the illusion that internet industry as a whole is moving towards valuations without any base underneath.

davidw• 14 years ago

There's certainly some bubblish stuff going on, but you're right that it'd be nice to have more data.

mark_integerdsv• 14 years ago

You are wasting time with this pointles pontificating.

Head down. Innovate.

jcfrei3• 14 years ago

the only bubble I see is in social media (instagram and zynga, mentioned a lot already in this thread). it's funny that business models which from my point of view are far more sustainable and also much more beneficial for society get considerably lower valuations (or at least media attention). i mean startups like asana, heroku, fogbugz or duolingo - whose main use case goes beyond sharing/playing with friends.

numeromancer• 14 years ago

With the exception of duolingo, these are all companies which make products for other businesses, so we should ask: What do their clients make? If their clients get popped in this (hypothetical) bubble, won't they?

jcfrei3• 14 years ago

good point, there's certainly some exposure to let's say rather overvalued companies. eg. if you looke at the featured clients list of asana. nonetheless in their case, I think the possible applications for their service go well beyond IT companies.

metatronscube• 14 years ago

I hope in a way this bubble would burst, I'm getting thoroughly sick of all this web2.0 bullshit. Its nothing but social networks and photo/something sharing sites. Nothing really happening and we need smart Engineers and developers getting back into some worthwhile endeavors. I blame Facebook.

pavel_lishin• 14 years ago

> some worthwhile endeavors.

Like what?

d4nt• 14 years ago

I have a theory about bubbles: It's relatively easy to spot that you're in one, but it's very hard to pinpoint what sort of bubble it is. I'll explain...

During the lead up the 2008 debt crisis I saw a lot of people talking about how house prices had been going up year on year and questioning whether we were in a property bubble. There was a debate though. Demand for housing was strong (partly due to population growth) and it appeared that globalisation had freed up the capital so banks had plenty of money to lend to people to buy houses. So the rising price of property, it was argued, looked like the natural effect of market forces. In hindsight it's easy to see that there was an oversupply of wholesale debt, but at the time I think people assumed that it was just a more efficient distribution of global capital that was opening things up.

Similarly, in the lead up to 1999 people seemed to know that there was too much money floating around. Everyone seemed to be investing in stocks or property and swapping stories of how much they had made. Yes, tech stocks were rising quickly, but so was everything else, and there seemed to be no shortage of investors coming up with money to fund these tech companies so what's the problem.

I think what happens is that people always look at current circumstances in the context of recent bubbles and try to look for patterns. When they don't quite fit, they argue over whether this really is another instance of a previous bubble. My theory is that the overpriced asset is rarely the same thing as in the last 3 or 4 bubbles.

So, back to the present day. We have lots of high valuations for tech companies. But we also have lots of tech companies actually making a profit, plus operating costs are a lot lower. So we're not about to see a burst in the sense that the funding will dry up and companies will run out of runway. Instagram was like, 12 people(?), if they couldn't have got that $50mil investment I'm sure they could have found a way to keep operating for another year or two.

The challenge is to think about where the bubble might actually be. Could it be in advertising revenue? Are advertisers burning though reserves trying to get attention? Could it be in mineral resources? Are server or bandwidth costs artificially low? Could it be a bubble in intellectual property? Is the exact implementation of Facebook not actually as valuable as the companies valuation suggests. I have no idea, but I don't think this a complete re-run of 1999.

TLDR; I don't think this is "[Tech] Bubble 2.0", this is probably "[Something else] Bubble 1.0".

roc6• 14 years ago

Bubbles require huge flows of investment cash to grow. You can't miss that scale of growth. They don't sneak up on you. What's hard is determining the point at which the growth is legitimate and at which point it's fad investment/fraud.

It was easy to see huge flows of cash into tech in the dot com bubble. It was easy to see huge flows of cash into real estate and the financial sector in our most-recent bubble.

But the biggest problem right now, is a lack of growth. I simply don't see how you can have a bubble without massive investment and no-one's investing like that in anything.

Most investors are paying any stable sovereign nation with its own currency to hold onto their money for them (very low, and in some cases negative, real bond rates.)

Estragon• 14 years ago

It's actually relatively easy to see when it's become fad/fraud driven. The hard part is predicting when the music is going to stop, because that's controlled by the people investing. Some of the best times to invest in a bubble come during the final frenzy. Warren Buffett was absolutely correct that the dot com bubble was vapid, but he still lost money betting that way. People were predicting in 2003 that the housing market would crash by 2005, with detailed and accurate predictions about how the crash would happen, just two years too early. It is quite clear that the Australian (and, I've heard, the Canadian) housing market is in a bubble, but not so clear how long it's going to go on.

One person who seems to know how to think about these things is George Soros. His New Paradigm for Financial Markets is a good read on this question.

neilk3• 14 years ago

Maybe it's not a bubble per se, maybe it's just overinvestment? The world economy really sucks right now, and people are seeking havens for their cash. The tech industry is one of the few bright spots in the world economy, and there's an evergreen hope of some runaway hit. So it could be possible for there to be overinvestment even in the face of widespread skepticism.

We also have a lot of supercool mobile electronics platforms being made by China now, and the companies and workers over there are just not getting a fair share of the value they are creating. Just look at Apple's balance sheet. Labor costs are rising, but given how things work in China...? So maybe it's the Chinese Oppression Bubble.

rpeden4• 14 years ago

Overinvestment in hope of exceptional returns is what a financial bubble is. Excess liquidity in the economy is one of the things that can lead to a bubble, as people look for places to put the money to use. If this is the case now, we should be seeing the same thing in other business sectors that promise the potential of well above average returns.

achompas• 14 years ago

I agree wholeheartedly and would point people towards Chris Dixon's article on the topic.[0]

Specifically, I think we're witnessing early-stage overinvestment. This has been anecdotally validated by Dixon and Fred Wilson, who state that companies are struggling to follow up blowout seed rounds. "Anecdotes" and all that, but this fits with Neil's idea above (not the one on a Chinese Oppression Bubble, though :P).

[0] http://cdixon.org/2012/04/29/is-it-a-tech-bubble/

heelhook2• 14 years ago

Too many people are throwing around the "people are just seeking a place to park their cash because the economy sucks" misguided idea.

Startups offer investors exactly the opposite of what a capital preservation strategy seeks: high risk with low possibility of considerable returns.

Even if the world economy were in recession (its not [1]) most asset managers would recommend dozens of other asset classes before recommending investing in a startup for capital preservation, specially when inflation is low as is the case in most of the world at the moment [2].

[1] http://en.wikipedia.org/wiki/Global_recession http://www.economy.com/dismal/map/default.asp

[2] http://www.indexmundi.com/world/inflation_rate_(consumer_pri...

matwood3• 14 years ago

TLDR; I don't think this is "[Tech] Bubble 2.0", this is probably "[Something else] Bubble 1.0".

It's a 'social, generate zero or near zero revenue bubble.' It's certainly not a tech bubble in general. There are lots of small tech companies making plenty of money right now. Some happen to be acquired so not, but even the ones that are not continue to generate profits and carve out their niche.

The other thing, is that when this bubble bursts it will mainly effect investors and the tech worker who happens to bounce from social app X to social app Y in SV. Those tech workers who are running their small profitable startup will keep on running it. Those working in BigCorp won't even know what happened other than not seeing Instagram like news anymore.

And as an aside, so what if funding dries up. The barrier to entry on the software side really has reached what Carmack mentioned years ago. A lone developer with some motivation, a computer, and a fridge of diet cokes can make a successful startup/piece of software. No rounds of financing needed.

webwright• 14 years ago

"It's a 'social, generate zero or near zero revenue bubble.'"

Can you point to a few high profile examples of this besides Instagram? There are SO MANY new ways to make money now and new low-friction ways to get distribution.

We'll always have the next hot social thing (Instagram, Twitter, Facebook, Turntable.fm, FormSpring). But Zynga? Groupon? Social games in general? PaaS plays like Parse and Heroku? Fab.com? Zulily? Gumroad? Twilio? Many startups might have inflated valuations/outcomes, but they certainly can't be described as "zero or near zero revenue".

rehack• 14 years ago

Using your template: I think it will be 'Facebook bubble 1.0' or 'social bubble 1.0'.

In an Internet 1.0 world "Facebook", would have happened via a 'social' protocol on the Internet just like SMTP, and Zuckerberg would have been a hacker icon just like a Tim Berners Lee.

In this Internet 2.0 world its heading for a 100 billion dollar IPO. I think, its a bad movement of capital. As Facebook was more lucky - timing wise it happened just when broadband Internet was getting prevalent in developing countries of Asia, and many other things.

And unfortunately, it has got no real competition. The only people who are trying to compete (atleast visible to most, discounting efforts like status.net) are Google. Who are just building another Facebook like walled Garden in Google+.

How I would have loved to see a concerted effort from hackers to liberate 'social' to what it should always have been - a protocol!

PS: If mails had happened in Internet 2.0 world. We would have gmail users only mailing to other gmail users and hotmail users only mailing to other hotmail users ... but actually gmail would not have happened as Sabeer Bhatia or Microsoft would have been still ruling the mail world ;-) ... But thankfully it did not turn out that way, as there was already a protocol called SMTP!

roc6• 14 years ago

I thought one of the characteristics of a bubble -- almost a pre-requisite -- was for the money of the general public to be flowing in.

If things like this poetry IPO idea haven't happened and garnered piles of cash from unwitting investors throwing money into a market they don't understand in a herd mentality ... how exactly is it a sign of anything other than a goofy idea?

jcfrei3• 14 years ago

a bubble in the sense of the dotcom bubble doesnt require the involvment of the public at all - it's simply an overvaluation of companies. as mentioned before, bubbles may be limited to very small sectors (eg. social media) and don't need to take down whole economies (like the housing bubble did) once they pop.

roc6• 14 years ago

But it's a chronic or widespread overvaluation of something, right?

I guess I just don't see how professional investors could be snowed on a grand scale. Even if there is a bit of a trend in, say, social media - that doesn't mean an incubator is going to be taken in by a nonsense pitch, does it?

I would think you would need a lot more money from less educated or indirect sources to start passing off unquestionably weak companies, due the heat of the sector. (e.g. people trusting their long term money to money-managers with conflicting short-term incentives who are willing to gamble on known-bad goods on the assumption that they can find a bigger idiot to sell to before the music stops. Which essentially describes the entirety of the IPO and CDO nonsense in the last two bubbles.)

jonhendry• 14 years ago

"I thought one of the characteristics of a bubble -- almost a pre-requisite -- was for the money of the general public to be flowing in."

The recent US "JOBS" bill included "Loosening regulations on small businesses that wish to raise capital, including through crowdfunding, while retaining investor protections." aimed at getting more of the general public's money flowing into early-stage ventures.

Given its timing, it likely hasn't played a role in the bubble to date, but it's clear that those behind that language in the bill want to inflate a bubble.

hemancuso4• 14 years ago

Bubble 1.0 created an asset class that the public could get irrationally excited about and invest into. Calling this Bubble 2.0 is misleading. The tech bubble in the late 90s could characterized by companies going public with sky-high valuations without revenue. It seems obvious the major difference is that there are still very few companies going public. And the companies that do all have meaningful revenue/profit.

What I think we are seeing now is the Venture Capital bubble. Lots of funds have shitloads of money they MUST put to work. If they don't put money to work most firms can't raise another fund and at some point the LPs can back out of their commitment. For a while now there is a market where the only way to put large amounts of money to work is to make much larger investments at a high valuation, expecting a lower return.

9 and 10 figure valuations are being driven by too many large funds chasing too few good companies. The LPs will get burned, funds will close, but there is going to be no collapse of the venture/seed market.

If you see this Bubble "burst" it will slowly over the next 5-10 years when second tier funds can't raise more money. VC is turning to a winner-take-all game where only the top 3-5 players make sizeable returns, because their brands are the only ones who afford them access to deals.

diminish• 14 years ago

definitely this time it is less of a bubble, nowadays investors have more tech experience and knowledge the late 90s. just need to watch specific startups and what they are doing.

tatsuke95• 14 years ago

>"What I think we are seeing now is the Venture Capital bubble. Lots of funds have shitloads of money they MUST put to work."

I agree. The fallacy of some who don't believe we're in any sort of bubble often lies in the fact that they believe it will play out like 2000. If you read some of the anti-bubble VC chatter, that's the spiel you'll often hear, "I lived through the first tech bubble, and this ain't it."

But no two bubbles are alike. I don't expect the Nasdaq to blow up, crushing people's savings. But I do expect to hear a large sucking sound as VC money dries up. I do expect that the crazy demand for engineers we are seeing will soften, drastically. I do expect to see far few incubators and poetry startups. All of this amid an ongoing global recession.

There's a lot of money, billions, that is sloshing around the system. When that disappears, the resulting effect is never nothing.

neilk3• 14 years ago

I'm not an expert here, but is the real problem that there is no way to short a startup? You pretty much have to wait until a startup IPOs to bet against it. (Or is there some equivalent of shorting in secondary markets?)

Would it be fair to say that, until the IPO, every player in the system has an incentive to inflate the price?

And in our little world even the press doesn't usually see itself as having a critical role. Quite the contrary as with Arrington & Calcanis and their ilk.

hemancuso4• 14 years ago

  Would it be fair to say that, until the IPO, every player 
  in the system has an incentive to inflate the price?

If you had unlimited money to invest, this would be true. But every player invests out of a fixed size fund. The more money out of your fund you bid, the lower your return.

tgrass2• 14 years ago

I would not say the tech startup market is overvalued if one looks at money invested.

On the other hand, if one considers the amount of time we're all dedicating to development and market research on our as yet unprofitable projects...

jasonkester• 14 years ago

So what exactly is supposed to happen when this Bubble bursts that in any way affects anybody here?

The 1999 bubble was only an issue because it happened with publicly traded companies that lots of people were investing in and making unrealistic gains on. You couldn't watch television without seeing ads for online brokers showing how easy it was to get rich quick, and your "My Account" page on said brokerage site was eager to tell you about your 10X margin and encourage you to use it. When it popped, all those stock portfolios went back to where they started (or worse), and hilarity ensued.

This time around, there's none of that. The "Bubble" is simply a handful of private companies getting silly valuations. If that stops happening, there's really no aspect of it that will bankrupt your random average family in the Midwest.

So yeah, sure, call it a bubble if you'd like. But it seems from here to be a harmless one floating off in the distance rather than a 1999-style one that we were all living on top of.

F_J_H4• 14 years ago

hmmm....

Here's an exaggeration to make a point:

“The housing bubble didn’t really hurt anyone who already owned their home, or those who never owned a home in the first place.”

Yes, a tech/start up bubble burst would not have near as much impact as the housing bubble for the reasons you point out, but when you suggest that it won’t hurt “anyone here” (i.e. people who frequent HN), I’m not sure I agree.

Let’s say Angel and VC money dries up, and Series A funding also dries up. You then have a bunch of start ups that don’t get funded at all, or who burn through their first Angel/VC raise, and then can’t get any further funding. They then can’t afford to hire or keep talent (hackers, system admins, designers, etc. – i.e. the people here) and there are only so many positions at companies like Apple, Google, Facebook, etc.

So, depending on the percentage of people who depend on work from start up, or early stage companies who are not yet profitable and need to rely on further funding to grow, a “bubble burst” could impact people on HN.

firefoxman12• 14 years ago

The difference is that this time there's only a few hot .com IPO's that could "pop" (ZNGA, GRPN, LNKD) and most of Wall Street is really skeptical of those already...just look at their charts.

If it is a bubble and it doest pop, it's really only going to affect the tech jobs market and the ridiculous valuations at which tech companies can be acquired or raise money. So it will be like 2-4 years ago when we all thought Mint.com was an enormous exit, and 12 million for Reddit was more than fair.

dkrich4• 14 years ago

> Let’s say Angel and VC money dries up, and Series A funding also dries up. You then have a bunch of start ups that don’t get funded at all, or who burn through their first Angel/VC raise, and then can’t get any further funding. They then can’t afford to hire or keep talent (hackers, system admins, designers, etc. – i.e. the people here) and there are only so many positions at companies like Apple, Google, Facebook, etc.

This is precisely what the view looks like for those inside the bubble. Outside the bubble, that would be called a return to normalcy. A world in which solid businesses that have a prayer of actually returning investor money are rewarded and those that don't, die on the vine. The reality is that if you can't raise money for your startup and you aren't making enough to pay your employees, your business sucks and it's time to do something other than create slide decks and beg people for money.

dkrich4• 14 years ago

Agreed 100%. This is not a bubble that is going to burst because this "bubble" consists of VC's, angels, and private investors putting their own cash into the businesses. These people are already wealthy. If they stop nobody will notice except the people who are desperately seeking funding. There are a few tech stocks that are insanely overvalued (Linkedin, Zynga, Groupon, and Pandora to name a few). But even those only represent a very small amount of money relative to the market overall, and they are all crashing down to earth as we speak.

ajross• 14 years ago

But you're skipping a bubble: the 2008 collapse wasn't like that at all. Everyone ("everyone") knew we were in a housing bubble. Everyone expected housing prices to collapse. No one expected what happened.

As it turned out, all of the big investment banks were insanely leveraged in the housing market. And when it went sound just a little bit they went belly up first. No one outside the inner sanctums of those companies had any clue this was going to happen.

So the question here isn't "is there a bubble?", but "what unforseen side effects will it have?".

tgrass2• 14 years ago

This is more Gold Rush 2.0 than Bubble 2.0.

gozman• 14 years ago

I've been thinking a lot about this as we finish up our tenure at a Canadian accelerator and are getting our seed round together.

In MBA school, you learn about stuff like discounted cash flows and how they are ultimately what is used to value a company. (Comparables and multipliers are really just proxies for the notion of what the present value of a company's cash flow is)

Then you get out and start raising a round, you throw valuations around in the air and to most outsiders it seems illogical. I think this comes about because many founders simply aren't financially literate enough to do more than say "If AirBnB is worth X, then we must be worth at least Y"

Some people get excited by these uninformed valuations, others write blog posts and call it a bubble. In my opinion, the truth is somewhere in the middle. This crop of entrepreneurs learned some big lessons from their older brothers. They've learned the importance of revenue and having an unfair advantage. With a few exceptions, my experience leads me to say that most entrepreneurs are trying to build real businesses and are not gaming the funding community. This is very different from the IPO fever of the dot-com bubble. (Not to mention the fact that the size of many seed rounds today would barely cover a month of runway in 1999)

Capital is out there but the funding environment is not loose and there is less cash in the system than there was the last time around. TechCrunch and YC make it look easy, but fundraising is still fucking hard. Anybody who's pounded the pavement or sat through months of due diligence only to miss closing date after closing date will confirm this.

Instead of arguing on what our companies are worth, we should all be focussed on building a strong, diverse and healthy North American tech industry. It's time to get back to work and stop giving a flying fuck about what some investor thinks you're worth. Debating whether or not we are in a bubble are simply unproductive.

IsaacL2• 14 years ago

I upvoted you for being a voice of reason. I also find it interesting how much the startup community in general hates on MBAs, and yet they also know so little about finance. (I don't know much about finance, either, but from just a little bit of self-education I feel like I know more than the average Techcrunch etc blogger.)

rpeden4• 14 years ago

As an outsider who watched a couple of bubbles from the outside (dotcom and housing), it seems that the likelihood of being in one ends up being inversely proportional to the vociferousness with which those on the inside claim it's not a bubble.

i.e. Tell a Pets.com shareholder in 1999 that owning company stock and they'd look at you incredulously and tell you how we're in a new economy. Or tell a homeowner in early 2007 that prices are crazy and it might be a good time to sell, and they'd look at you like you had two heads because, as everyone knows, house prices always go up.

wtvanhest3• 14 years ago

This is really interesting. It seems like everyone on HN, arguably the people who are most inside this industry are agreeing it is a bubble.

Usually that only happens after it is in mid/late pop. Is it possible that people are just scared of bubbles as we are reminded every day of the housing bubble? Alternatively is it possible that there is a specific asset class (ad based platforms) which may be in a bubble? Possibly it is a real bubble across startups that will certainly pop? I have no idea, but it is very strange to see so many people talking about a bubble before it is clearer the bubble is bursting.

rpeden4• 14 years ago

I see a lot of people who are inside the industry as employees agreeing that it is a bubble. But I see a lot of people inside the industry as investors saying it isn't. I'm not sure if that means anything, though.

mikemoka• 14 years ago

Everyone keeps talking about the new bubble.. there is a slight difference from the 2000s anyway..hasn't anyone noticed the 2 BILLION PEOPLE online?...

LargeWu• 14 years ago

And somehow, Twitter, Groupon, Instagram etc., have not yet figured out how to actually make money off of those 2 BILLION PEOPLE. And last time I checked, making money was the whole point of investing.

Edit: Just to clarify the above, making money == making a profit. I think that's pretty well understood in business, guys. If I bought a single share of stock for $100, and sold it for $50, I sure as hell did not "make money" on the deal, even though I gained $50 in revenue from selling the stock.

zwigby• 14 years ago

Actually Twitter and Groupon both make a lot of money off those people. Revenue != profit. Groupon is spending a ton of money moving into new markets. Now, I don't love Groupon but saying they don't make money is just wrong.

debacle2• 14 years ago

I think the author makes some weak arguments. I've worked as a consultant on a few zany startups and all I have to say is that this kind of crap happens all the time:

http://ixjy.com/post/22704727159/will-somebody-please-disrup...

There are so many cocked up ideas out there (many of them built with someone else's money in the hope that somehow, someone, somewhere will give them money).

Some of these ideas actually get funding, which is tragic, and some of them actually make it, which might be worse, but most of them never see the light of day.

steve8918• 14 years ago

As the old saying goes, history never repeats itself, but it often rhymes.

Asset bubbles occur when people are more interested in acquiring assets rather than effort to acquire the money used to buy the assets. Basically, people start throwing money around just to get that asset.

It usually occurs when money is easily acquired through loans, etc, and as the asset prices increase, the general idea is "I can borrow the money, make some money on the asset, and then pay back the loan".

Usually a lot of delusional math occurs that convince people that the price they are paying is actually "cheap". For example, people who made $50k/yr and bought a $1M house would delude themselves into buying the house by saying "Well, I can take the teaser rate for 2 years, and by then the price should go up by $100k, and then I can sell, and use that money for a downpayment on a house I can afford." Or, similarly during the dotcom bubble, analysts would say "Well, the P/E ratio is currently 1000, but based on the projected earnings 5 years from now, it's actually only 20." To be honest, in the midst of the bubble, this type of thinking works well. We all know what happens once the bubble bursts, though.

So when popular products like Instagram with zero revenues are being sold for $1 billion, there's a lot of the bubble math going on. "There are 30M users and we're paying $1 billion, so we're only paying $30/user." Anyone remember the acquisition of broadcast.com by Yahoo as a strategic acquisition? The same goes for the rumored attempted acquisition of Path for $100M a couple of years ago. Or Color.com paying $300k for their domain name. I think these massive Internet companies like Google and Facebook are taking a product, and applying dotcom math to it, and coming up with sky-high valuations given the size of their audience. Maybe they're right, maybe not. But they are the ones contributing to the idea that revenue-less products are worth hundreds of millions or billions of dollars.

So, when VCs know there are giant vacuum cleaners that are willing to pay ridiculous prices for products, of course they are going to drop all their money and invest in as many startups as possible. They would love to invest $250k in another Instagram and make $78M. And this helps sell investment in their funds as well, which causes more investors to pile in, trying to get a piece of a bunch of Silicon Valley startups.

And this is the situation where companies like Facebook or Google, or VCs are more interested in acquiring assets (ie investments in startups), rather than caring about the actual money itself.

My guess is that the bubble will burst soon after the Facebook IPO. Why? Because at that point, paying $1B for a company with zero revenues will likely be the cause of shareholder lawsuits, and there will be a lot more scrutiny involved in these acquisitions. Since selling to Google or Facebook is the exit strategy for most of these SV startups, if that door closes, then funding will get pulled quickly and violently, and it will be the start of the next dotcom bust 2.0.

People will also be closely watching Facebook's financial performance and seeing if they can justify their valuation of $100B. If they miss estimates, or if their ability to monetize consumers flattens, then it's most likely a catastrophic, extinction-level event for most of the startups in the Valley.

I certainly hope this doesn't occur, but I can't see how it's not likely. EDIT: To be clear, I don't mean that I believe Facebook will miss estimates, I do however believe that we are in a bubble that will burst.

patrickk• 14 years ago

Some interesting points.

The most important point you make, that for me proves it's a bubble is this:

"And this is the situation where companies like Facebook or Google, or VCs are more interested in acquiring assets (ie investments in startups), rather than caring about the actual money itself."

Hello? You're "acquiring assets" and not caring about money? What? Some make the argument that Google bought youtube for a big sum, and use that to justify Facebook buying Instagram for $1 billion, but clearly this is not sustainable.

For the "acquiring Instagram for a billion" stage to continue (proving there isn't a bubble), acquiring company needs:

- To be doing 3 figure millions/billions in revenue (there are only so many of these)

- Have a really clear idea of what they're buying and why (Yahoo sucks at this)

- Have patient shareholders that allow you can take huge bets like Instagram (if Zuck went off and negotiated the purchase of Instagram without board approval and Facebook was a public company, I'd imagine the shareholders would scream blue murder and possibly sue).

All this is fine and well, but as you note it distorts people's thinking - people use the dollar figure per user from the Instagram deal, which only is applicable IF the above conditions are met (i.e. you are bought by someone who's buying you for something other than financial reasons. Which is a clear sign of the bullsh*t phase of the cycle, in my opinion.)

Daniel_Newby• 14 years ago

> ... then it's most likely a catastrophic, extinction-level event for most of the startups in the Valley.

Most SV startups are valueless Facebook partners? Really?

brudgers2• 14 years ago

>"Since selling to Google or Facebook is the exit strategy for most of these SV startups, if that door closes, then funding will get pulled quickly and violently, and it will be the start of the next dotcom bust 2.0"

This points to one of the differences between this boom and the last one. Valuations are being driven by companies with lots of cash are buying startups and sophisticated investors funding growth. Last time, the valuations came from dumb money parked in IRA's and 401k's via Wall Street.

In other words, currently valuations are primarily based on the potential sales of a company's products rather than on the potential sale of its stock to mutual funds.

If the current startup ecosystem went bust, most people wouldn't feel it because their retirement accounts and personal savings wouldn't see it directly. In the dot.com bust, many more ordinary people saw the value of their mutual funds decline because so many hot companies were publicly traded.

That's not to say that recent legislation to allow dumb money investment in startups won't ultimately lead to a similar bust. But we're not close to that yet.

hkmurakami• 14 years ago

Mutual funds (since they typically invest in readily marketable securities) may not feel the pain, but pension funds, university endowments, sovereign wealth funds, etc. will take a hit: a non-trivial portion of VC money is derived from such institutional investors (who are limited partners in the fund).

Pension Funds: Retirees (ex: public workers) take a hit.

University Endowments: Future students, faculty, and employees (think of the guy who's repairing the plumbing in the dorms, rather than the chancellor) take a hit.

Sovereign Wealth Funds: The citizens of said country takes a hit.

SkyMarshal• 14 years ago

Good writeup, completely agree.

>My guess is that the bubble will burst soon after the Facebook IPO. Why? Because at that point, paying $1B for a company with zero revenues will likely be the cause of shareholder lawsuits, and there will be a lot more scrutiny involved in these acquisitions. Since selling to Google or Facebook is the exit strategy for most of these SV startups, if that door closes, then funding will get pulled quickly and violently, and it will be the start of the next dotcom bust 2.0.

Yes, another thing that would burst the bubble is the end of cheap money. The Fed's zero interest rates + debt monetization + QE + the Federal Government's massive deficit spending won't last forever.

The end result will either be hyper/inflation, higher across-the-board interest rates, and/or a contraction of the money supply, or some combination. The latter two will definitely end this state of affairs you've described, maybe the former as well.

The macro situation is ugly.

clarky07• 14 years ago

We may or may not be in a bubble (though I think we are) but I am sick of people using Instagram as their proof of this.

Instagram was a purely defensive purchase by Facebook. They were not buying them for their revenue, or their ability to make money in the future. They were buying them because they thought there was some chance (5% maybe?) that they could become a big competitor with them. They spent 1% of their value with 70% of that being stock to take out the possibility of a quality company taking on their entire business.

We can debate the merits of buying competition to kill them, but this is not new, and it is clearly far different than valuing them per user or per revenue. Facebook wasn't buying their users. They were killing their competition.

firefoxman12• 14 years ago

If it truly is a bubble, it must be the very beginning and people still have their sanity. Otherwise, this chart would look a whole lot better: http://www.google.com/finance?chdnp=1&chfdeh=0&chdet...

hkarthik2• 14 years ago

Ultimately, the issue right now is nobody really knows how much users are worth. There's a lot of speculation that if your site has a lot of users (20 million or more), your company is worth a lot of money. Even if you really have no idea how to monetize those users without pissing them off. There's an assumed value there that may not match up with reality.

Facebook's IPO is relevant here. Once more information comes out, we'll have a better idea of how large user bases (like Facebook's) can be monetized and what it takes to extract the value. Things could go either way after that, and it all depends on how the market reacts to this information.

My hope is that the software industry can weather this storm, and that its now diversified enough to deal with investors pulling out of the startups amassing users and shift to focusing on startups selling to SMBs or enterprises. There's bound to be some collateral damage here, but hopefully it'll be minimal.

viscanti• 14 years ago

There's a lot of comparing apples to oranges going on here. It's difficult to compare the current state of the world to Bubble 1.0. There's over 5x more users on the internet now than when the first Bubble hit. In fact, for a lot of those Bubble 1.0 companies, their biggest problem was that they were too far ahead of their time. There's a lot more attention bandwidth now on the internet, which can support higher valuations of more startups. I don't see people moving away from technology in any significant way any time soon.

The other problem I see is that people are looking at an isolated outlier and making predictions based on that. If we remove the one 1 billion dollar deal (which looks like it could actually have been competitive with FB and cost FB way more in time/money to compete down the road), we're not really seeing any examples of Bubble like behavior, other than what we should expect to see with a growing sector.

Some tech companies are focusing on growth over profitability, with the hopes of being acquired. In almost all cases, those aren't billion dollar+ moves. I haven't seen any broadcast.com like deals. The scale of deals/exits is different now than Bubble 1.0.

aidenn0• 14 years ago

Discovering a bubble is easy. Knowing when it will burst is not. This is why most people can't bet against bubbles in the market; the market can stay irrational longer than you can remain solvent.

mhartl• 14 years ago

It seems that the main piece of 'evidence' here is a post by someone who wants to "disrupt poetry" (contra the OP, no mention is made of an IPO), admits it's a "longshot", and in fact is abandoning the project to join a different startup. Moreover, it's just one dude with a blog. Charlie Stross realizes that anyone can start a blog, right? To call this a strawman is an insult to strawmen.

kriro• 14 years ago

Agreed, good chunks of the "web development startup scene" seem rather bubbly.

The entire "get a bunch of users and worry about making money later" mindset seems somewhat broken. Let's see what happens if all major browsers come with ad-blockers preinstalled overnight or more importantly if people/governments? start taking privacy more seriously.

What happened to the good old bootstrapping mindset that used to be the go to philosophy in IT. Seems like it got replaced by a cracklike addiction for VC-money-shots.

nostromo• 14 years ago

It's hard to use this poetry startup anecdote as proof of a bubble since the guy wasn't funded.

If YC had accepted the application, I could see it used as evidence that too much money is chasing too few ideas. But they didn't.

jyu• 14 years ago

I go by the taxi driver litmus test. If a taxi driver tells me about (insert bubble) easy investment, then that's my cue to sell.

JVIDEL• 14 years ago

TBH I don't know

I was certain this charade was going to explode in 2008/9 but it didn't and it even got bigger.

A guy I know mentioned the only thing that's going to pop this bubble is the Fed raising interest rates, which are near zero. That will severely limit the amount of money available for investments like these.

The problem is with a shitty job market and an economy that's doing bad almost everywhere else but tech odds are the government wont do anything that could risk heavily indebted California sinking into the sea because SV imploded.

Back to jobs, the amount of ex-something-else (not coders) turned watrepreneurs is staggering, and that's because they all want to ride the gravy train and "get paid". This is one aspect that's almost exactly like during the 1.0 bubble.

One scenario I think could pop this bubble is a new bubble in another industry siphoning the money from tech VCs to that other industry's investments. But it would've to be a revolution to beat the insane returns of some tech M&As.

But as long as there's people rushing in because they are afraid of missing the next instagram-like opportunity this is going to keep going.............until the "nextagram" explodes in a ball of fire burning everyone involved...

Then again chances are the guys who started this will get out mostly in one piece, since they already made their money. But like when the previous bubble collapsed there are going to be a lot of actually good startups with great ideas caught in the shitstorm, seeing their valuations drop to the price of a used geometro, and no way to get a loan let alone investments.

And the culprits? they'll be back the moment valuations get crazy again, and they'll make more money, again.

Sukotto• 14 years ago

Here's a thought experiment I found interesting.

Assume Charlie is right: this is a bubble and the pop is imminent. What would the you in 2014 or 2017 wish you had done now to prepare?

What will happen to your primary source of income when bubble2 pops? How much runway do you have to secure another source of income? What expenses would you wish you had cut? What relationships does 2014-you wish you had cultivated to help find new sources of income?

Then, I suggest you make it a priority now to do those things while you have the chance. If this is a bubble, and if it pops, you won't have any more warning than you do now.

2pasc• 14 years ago

Lots of interesting points made here. If I could add only a few data points, I would say the following.

I have taught a very successful class on Investor pitching in SF for 6 months. I have had between 10 and 50 students per class, always sold out, even when I raised prices... (http://fundraisingviparisoma.eventbrite.com/)until end of March. Then, in April, I had to cancel two classes because I had too few students, and I only have 10 next week in a venue when I never had less than 20. It just tells me that we are at the end of a cycle, when everybody who drunk the "Social Network Movie kool aid" thought they could create a Groupon for India, a language learning start up or an Opentable for Hair Salons. It's a good thing for everybody actually.

Now as for Facebook's valuations, the question is - will Facebook bring as much traffic to applications in the future than Google did to commerce websites. My belief is yes (look at Viddy, SocialCam, Zynga, Pinterest, Draw Something if you need examples). In that case, Facebook, like Google in 2004-2008, will grow into a 100B-$200 valuation (which does not mean that I think it is the best stock purchase to do, the big money on Facebook has been made already by earlier investors). Same for Pinterest. If Pinterest users convert like crazy, then they will be able to demand emerchants to "pay to play" and... they will.

georgemcbay• 14 years ago

My favorite of the new justifications is "in 1999, the Internet was niche, but now EVERYONE uses it".

So a relatively large audience then with no revenue meant nothing, but today a much larger audience still with no revenue is somehow different, somehow worth a lot more.

This sounds to me exactly like the (very old) "we'll make up for it with volume" joke, except people aren't using it as a joke! They believe it!

I'm calling this Bubble 2.0, and it's ready to burst

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