An interesting twist in the current incarnation is this story is how big "private" money is taking risks on the tech sector.
Overall, I don't really find this story convincing for a few of reasons, though I suppose there is plenty of room for disagreement. (1)T he first boom actually did get a lot right. The PC-internet revolutions was intense and did create a lot of new value. The mistake was treating it like a land grab where all major players would be established by the year 2000. (2) Scale does matter when we are talking about bubbles.Smaller means safer. (3) There is real revenue being generated by Google, Facebook and every reason to think it will be generated by Uber too. (4) Private money doesn't (I hope) break the economy in the same way that public money can. If VCs go bust there are ramifications, but these markets are not that liquid. There aren't margin calls going off and forcing fire sales. (5) War chests: The big boys and many of the up-and-comers have nice big war chests. They are obviously concerned about equity, but Facebook would be very hard to kill with a sharp decrease in stock price. Options might need to give way to bonuses, but the Facebook is no longer in the business of selling equity. They have plenty of cash. This goes doubly for Google, MSFT, Apple & a surprising number of no-rush-to-IPO mega startups like Uber , Airbnb, Dropbox Snapchat, etc. Their continued existence is not dependent on the market for tech stock.
Bubbles are some sort of unstable financial complex that can be brought down as soon as the equilibrium is broken. In 99' the money was ultimately coming from IPOs and public markets. When that well dried, everything went bottom up.
The recent financial crash was bullet on financial instrument tautologies, a system that created correlated risk. It could only continue to exist so long as everyone could maintain that the risk was much smaller than it was.
Think of the companies in question. Most could continue to survive if investors hid in a hole for two years, that's robust. Smaller, younger startups would be in for hard times if investment stopped coming in, but 1,000 $10m (on paper) startups going under is a just 1,000 individual failures. This is correlated in the sense that a shortage of cash would effect them all, but it's not systemic in that their failure would extend far beyond the investors, founders & employees that understand the risk.
> Private money doesn't (I hope) break the economy in the same way that public money can. If VCs go bust there are ramifications, but these markets are not that liquid. There aren't margin calls going off and forcing fire sales.
Too many people trying to compare today's bubble to the first bubble are making the mistake of assuming that it's being led by tech. It isn't.
The current "tech bubble" is just one of multiple bubbles being driven by an even larger bubble in public equities. When the public equities bubble bursts, Silicon Valley will this time be a victim, not the culprit. And there are going to be lots of other victims as well.
> Smaller, younger startups would be in for hard times if investment stopped coming in, but 1,000 $10m (on paper) startups going under is a just 1,000 individual failures. This is correlated in the sense that a shortage of cash would effect them all, but it's not systemic in that their failure would extend far beyond the investors, founders & employees that understand the risk.
How many people are employed by these startups? How would a glut of now-unemployed startup workers affect wage trends? How many non-tech businesses in the Bay Area are thriving on the tech funny money?
Companies like Google and Facebook aren't going anywhere, even if their stock prices become heavily depressed for some time. And despite tech's prominence, the Bay Area economy is still fairly diverse. But it's short-sighted to believe that a significant decline in the number of funded startups would be of minimal impact to anyone but investors, founders and employees.
"The current 'tech bubble' is just one of multiple bubbles being driven by an even larger bubble in public equities."
I would be interested in how you reason to that statement. I enjoyed reading Michael Pettis' blog entry[1] about excess capital, which provided an alternative narrative to the rise in equities but it wasn't really a bubble so much as it was just an excess of capital.
To your question "How many people are employed by these startups?" I believe the median size is <10 employees[2]. If you dumped 10,000 employees onto the market in the Bay Area it would probably sort out reasonably quickly.
I'm still stuck trying to figure out if this is really just a capital excess or a bubble though.
[2] Hard to get precise numbers but you can troll around Crunchbase and other 'tracking' sites and get an idea on the size for "Smaller Younger startups" which is what this question referred to.
> I enjoyed reading Michael Pettis' blog entry[1] about excess capital, which provided an alternative narrative to the rise in equities but it wasn't really a bubble so much as it was just an excess of capital.
You seem to be splitting hairs. From your referenced blog post:
Washington is absolutely correct, in my opinion, to want to boost American consumption, but the Fed seems to be trying to boost consumption by igniting another asset bubble in the hopes that, like before 2007, Americans will feel “richer” and so will consume more. This isn’t sustainable, however, and will leave us, as Paul and Druckenmiller fear, even more heavily indebted and more dangerously exposed to the underlying weakness in demand.
But to answer your question: the strong public equities market has provided investors with the capital and confidence to plow money into investments in private tech companies.
> If you dumped 10,000 employees onto the market in the Bay Area it would probably sort out reasonably quickly.
Even if we assume that we're looking at just 10,000 people, your assumption that the market will quickly absorb them without much pain is quite optimistic.
Companies like Google and Facebook will certainly pick up some of the most skilled folks, but the vast majority of startup employees are not as desirable as many would like to believe, and they won't be able to replace their salaries.
Put simply, there are 20-something [insert programming language du jour] developers with a few years of experience making $120,000/year plus benefits at unprofitable angel or venture-backed startups who are going to have to face the reality that their six-figure earning potential is completely dependent on the continued inflow of investment dollars to early-stage startups.
There is a real-estate / state government sourced investment bubble in China ATM.
In short, the Chinese federal government sets GDP growth targets for each and every state. Every state is therefore obligated to meet these targets. Post 2009, real GDP growth has been underperforming, and more of the remaining GDP has to be made up for in infrastructure spending (which includes building apartments, airports, and the usual roads, bridges rails etc on debt). This is visible in various "ghost" cities and malls which have popped up recently (in addition to undercapacity airports and elaborate train stations). This in itself isn't necessarily a problem. The problem comes in when increasingly, a large amount of the money the states are lending is coming from "shadow loans" (unregulated black-market loans, analogous to sub-prime mortgages (kindof)) because regular forms of more legitimate financing have dried for these purposes (too much infrastructure already).
This is simultaneously fueled by difficulties rich Chinese have in being able to invest abroad, leaving condos in these ghost cities being owned, and purchased by investors' excess capital as assets (similar to a real estate bubble as what happened in Dubai a few years ago).
This excess capital, sourced from underperforming Chinese states leaking over to other markets, have been responsible for local real estate bubbling over in major cities like London, Vancouver, San Francisco, New York, etc by foreign nationals buying these properties as investments as a way to shelter money. It's very likely this capital is also indirectly being displayed in public equity markets.
(note: this is my own analysis of several articles and reports I read, so take it with a grain of salt)
I know nothing about finance but the Federal Reserve has provided new money at almost no interest to banks for a fairly long period of time from ~2008 onwards (this was called quantitative easing). This essentially forced the EU and countries like Switzerland to do the same, if they did not want their currency to get too strong. It is not a stretch of imagination that this fueled much of the current stock market boom, both Euro and Dollar have lost a lot of value at roughly the same pace.
Yeah, the fed loans money to banks at, essentially, zero interest, and the banks then use it to invest in the stock market, or some such. They make money, because the market isat all-time highs. They pay back the fed, and keep their profits.
All the major firms do this. It's nuts, but our government literally lends free money to investors on Wall Street so they can make millions of dollars on trades.
Of course, this all comes tumbling down when the markets are in bad shape. And, unlike most people in this thread, I fully expect any and all bubbles to burst due to some outside influence: Ebola, 9/11, war, etc. Something big happens to scare the markets, and the big party here in the Valley is over. Who know when that will happen, but it feels like the next year or so will be the time frame, if my gut is any indication.
I think point (4) is the key here. The original bubble happened on the public exchanges with public money. The "IPO" was the big deal that everyone wanted to get in on after Netscape, et al valuations went crazy. Institutional investors were investing people's retirement accounts into companies they didn't understand. When that finally fell over, the impact was felt across the economy because it involved everybody's money.
This time the money is largely coming from private equity and there's not a lot of splashy IPOs happening. The people who are investing aren't mom and pop planning for their retirement. If a big VC firm looses it's shirt it's not as likely to have the impact on "Main Street" as we saw the last time around.
I'd like to say that I don't care one whit if a bunch of rich people suddenly loose their money, but if history has anything to show, it's that they'll somehow figure out a way to make the rest of us feel the pain too.
"This time the money is largely coming from private equity and there's not a lot of splashy IPOs happening."
There's a lot of public wealth caught up in the stock market in general right now. Technology is especially overvalued (e.g. Amazon at $150Bn, Yelp and Pandora at $5Bn, etc.) despite having more earnings than bubble v1.0. But even if you believe that the downside of a tech crash is limited, you're forgetting that technology is unlikely to crash without dragging down the entire market -- the same forces that are propping up tech are propping up everything else.
Moreover, people keep talking about hedge funds as if they're completely dissociated from the larger market. But a lot of pension, retirement and other "conservative" wealth has been flooding into these funds seeking a return over the last few years. Grandma's retirement not isolated from the health of the tech industry; it's just harder for journalists to see the risk this time, because it doesn't look like last time.
I didn't comment on Alibaba's financials. I simply responded to the statement that "there's not a lot of splashy IPOs happening," which I found somewhat amusing in light of the fact that the arguably "splashiest" IPO just took place.
That said, Alibaba's profitability and PE ratio compared to Amazon is meaningless in the context of a bubble discussion. A bubble does not merely consist of unprofitable companies becoming ridiculously valued; it consists of profitable companies becoming more highly valued than their fundamentals can support.
If Amazon's stock price fell by 25%, and Alibaba's did the same, as an Alibaba shareholder would you take comfort in the fact that Alibaba still has a PE ratio one tenth Amazon's? Of course not.
If Amazon's stock price fell by 25%, and Alibaba's did the same, as an Alibaba shareholder would you take comfort in the fact that Alibaba still has a PE ratio one tenth Amazon's? Of course not.
Actually, yes, I would take comfort in that fact. It would mean that Alibaba was far more likely to recover its value.
> It would mean that Alibaba was far more likely to recover its value.
You seem to misunderstand what the PE ratio actually represents.
As an experiment, I'd suggest you test your hypothesis against actual market data. Hint: you will have no problem finding stocks with higher than industry average PE ratios pre-2008 crash that have significantly outperformed their lower PE ratio counterparts since the market bottom in 2009.
> Compare to the 99's. One couldn't keep track of all the IPOs back then.
There have been close to 200 IPOs this year. How many people here can, by memory alone, name more than 10?
I'm not at all arguing that the IPO market of 2014 is the IPO market of 2000 reincarnated (it absolutely isn't), but anecdotal analyses that boil down to "it was crazier in 2000!" aren't very meaningful.
Not sure why its amusing; the presence of fewer splashy IPOs means less competing alternatives for the money of those investors seeking splashy IPOs to sink money into.
Insofar as "splashy" is mostly a factor of media attention in the runup, there being fewer splashy IPOs might itself contribute directly to the splashy IPOs that do exist being bigger (there's other contributors, too -- if the media isn't as prone to drive attention to every tech IPO, it means the IPOs that are splashy are likely splashy because of some fundamental newsworthy feature, which often includes things like strength in the fundamentals or the amount of money sought to be raised, that is, IPOs have to be set-up to be bigger to be splashy.)
>> "I'd like to say that I don't care one whit if a bunch of rich people suddenly loose their money, but if history has anything to show, it's that they'll somehow figure out a way to make the rest of us feel the pain too."
Definitely. The hiring market in our industry is _on fire_ right now, we are treated well, paid fairly, etc. When the hard times come, it might be a little less cushy to be an engineer/data scientist.
It's not cushy (to be an engineer). IT in it's current form is demanding (I like the "intense 24/7 activity" phrase). We are paid well for a reason and ofc it MAY feel cushy when you are on top of things. But this requires more than 8 hours a day, 5 days a week and some non-IT hobbies. I am even arguing on the side of "people just applying stuff" and ofc. the ones creating IT for them to use: No time to trim the beard (was prioritized down).
> IT in it's current form is demanding (I like the "intense 24/7 activity" phrase). We are paid well for a reason and ofc it MAY feel cushy when you are on top of things. But this requires more than 8 hours a day, 5 days a week and some non-IT hobbies.
I disagree with this (and it's certainly not my experience). If you put in these hours, on average you'll likely be better compensated, but you can very much make quite a lot of money in the objective and relative (to everyone else) sense without putting in absurd hours.
Even small start ups should continue to do ok -- the hardware overhead for early stage stuff now is so cheap it is nearly free. Models that require huge scale before the revenue comes in could be a problem.
I self-funded so my opinion is likely wrong, but it seems like a lot of the excess money is going to questionable things in addition to paid growth (no clue how much Uber, Lyft, and others are spending, Groupon certainly took the paid acquisition to the extreme buying up huge chunks of available online inventory.) Luxurious offices are nice but hardly necessary for a serious coder or designer.
Perhaps the most vulnerable are the start ups that already exist and are dependent on investor money to operate. In the event of a market pull back desperate companies should be easy pickings for the big boys to acquire talent and other interesting goodies.
Leverage -- that makes bubbles very dangerous and unpredictable. Investor leverage is one thing, companies' own leverage is quite another. Last I looked (a year ago), tech was the best of the best by this metric. For public companies in other sectors, its a wonder if they would be worth anything in another major credit crunch. The corporations we keep hearing about having massive cash stock piles have liabilities to match. A concern would be Facebook's or Apple's market cap dropping 50%+ . Go to 0? No.
Well, one thing about 1999 is where the actual revenue for the big players was coming from. That is, when Yahoo reporting their income what % just came from startups spending VC money without a business plan?
The whole dot-com thing in 99 was pretty much a pyramid scheme, where the first players showed there was promise, then when everyone rushed in with their VC money to spend, they looked solid. When the leaf nodes ran out of VC money though, everything dried up. And that hit not just Yahoo, but software/hardware vendors, and just about everyone else.
What could be dangerous now, is how much of Google's and/or Facebook's money is advertisers who are selling goods/services, or Advertisers wanting traffic for their ads.
Facebook seems to have a lot of ads from Answers.com, which is ad driven itself. Pretty much every mobile ad I get is an add for either Google or a different mobile product. I would say the whole 'freemium' game thing has put a lucrative revenue model to those eyeballs, but how much of that is a fad?
If those advertisers disappear, how badly will Facebook's revenue or Google's mobile revenue be affected?
There is some of that. but for the most part (1) advertising revenues come from across industries, (2) startup revenues as a whole are fairly diverse coming from advertising, saas, transaction fees on rooms or rides and (3) most importantly I don't think Dropbox's value will hit critical levels because twitter's business model fails. its all a lot less speculative. multiples are high, but not the imaginary. most of the mature 2.0 startups are real businesses with a company value derived from revenue and profit.
Overall, I don't really find this story convincing for a few of reasons, though I suppose there is plenty of room for disagreement. (1)T he first boom actually did get a lot right. The PC-internet revolutions was intense and did create a lot of new value. The mistake was treating it like a land grab where all major players would be established by the year 2000. (2) Scale does matter when we are talking about bubbles.Smaller means safer. (3) There is real revenue being generated by Google, Facebook and every reason to think it will be generated by Uber too. (4) Private money doesn't (I hope) break the economy in the same way that public money can. If VCs go bust there are ramifications, but these markets are not that liquid. There aren't margin calls going off and forcing fire sales. (5) War chests: The big boys and many of the up-and-comers have nice big war chests. They are obviously concerned about equity, but Facebook would be very hard to kill with a sharp decrease in stock price. Options might need to give way to bonuses, but the Facebook is no longer in the business of selling equity. They have plenty of cash. This goes doubly for Google, MSFT, Apple & a surprising number of no-rush-to-IPO mega startups like Uber , Airbnb, Dropbox Snapchat, etc. Their continued existence is not dependent on the market for tech stock.
Bubbles are some sort of unstable financial complex that can be brought down as soon as the equilibrium is broken. In 99' the money was ultimately coming from IPOs and public markets. When that well dried, everything went bottom up.
The recent financial crash was bullet on financial instrument tautologies, a system that created correlated risk. It could only continue to exist so long as everyone could maintain that the risk was much smaller than it was.
Think of the companies in question. Most could continue to survive if investors hid in a hole for two years, that's robust. Smaller, younger startups would be in for hard times if investment stopped coming in, but 1,000 $10m (on paper) startups going under is a just 1,000 individual failures. This is correlated in the sense that a shortage of cash would effect them all, but it's not systemic in that their failure would extend far beyond the investors, founders & employees that understand the risk.