The New Tech Bubble(economist.com)
economist.com
The New Tech Bubble
http://www.economist.com/node/18681576
"Compared with the rest of corporate America, Silicon Valley feels like a boomtown. Valuations are once again soaring. In our leader, we point out the differences from the last tech bubble, but we still think that irrational exuberance has returned to the internet world."
16 comments
I think it goes back to the learnings from the original tech bubble: companies with a real business plan survive, those with a nebulous product don't make it.
For example: Amazon was a rising star during the late-90s tech bubble, and it's still around today. And it's very much a player in the tech space. How many of us use AWS?
Google has a solid business platform and has definitely made it by all measures.
Netflix is another example. Good product, has upset the industry, sky's the limit type stuff.
Could all of these golden companies fail? Absolutely. For example, look at Microsoft right now - they are still innovating in some spaces, but really struggling in others. Will they go the way of IBM? (Hey, I hope so, but let's not start dreaming now).
Then there's Facebook and Twitter - arguably the stars of the current tech bubble. Are they worth what people say they are? Really depends on what happens over the next few years. Both are definitely becoming platforms that people do all kinds of interesting things on. But at the same time, people could get tired of social networking. (That's my personal bias shining through).
So...it's a bubble for some and not for others.
For example: Amazon was a rising star during the late-90s tech bubble, and it's still around today. And it's very much a player in the tech space. How many of us use AWS?
Google has a solid business platform and has definitely made it by all measures.
Netflix is another example. Good product, has upset the industry, sky's the limit type stuff.
Could all of these golden companies fail? Absolutely. For example, look at Microsoft right now - they are still innovating in some spaces, but really struggling in others. Will they go the way of IBM? (Hey, I hope so, but let's not start dreaming now).
Then there's Facebook and Twitter - arguably the stars of the current tech bubble. Are they worth what people say they are? Really depends on what happens over the next few years. Both are definitely becoming platforms that people do all kinds of interesting things on. But at the same time, people could get tired of social networking. (That's my personal bias shining through).
So...it's a bubble for some and not for others.
I don't think Amazon, Netflix, and Google are the companies people are referring to when talking about this new bubble.
Amazon was definitely one of the companies people were referring to when talking about the last bubble, though.
It's hard to predict the future. A bunch of companies that people have thought could never be worth their outlandish valuations turned out to be. And vice versa.
It's hard to predict the future. A bunch of companies that people have thought could never be worth their outlandish valuations turned out to be. And vice versa.
Poster is illustrating how those companies survived the previous bubble thanks to their business models.
I call bullshit. This article is heavy on speculation and light on (if not absent of) actual analysis. Tell us, beyond valuations you disagree with, what fundamentals are unsound here. Are businesses IPOing despite being unprofitable? Are companies burning cash and garnering additional investment despite no steps toward profitability? What, exactly, other than a sneaking suspicion that Facebook might not be worth it's valuation? Clearly some people, the people buying Facebook stock, disagree with you. Why are you right and they're wrong?
Agreed. The writer gives credit to Facebook, Groupon, etc. and then throws in at least 10 phrases of hedging/qualification and then warns us of the next, as yet unseen, wave of startups that, it blindly guesses, might just be, perhaps, possibly, a tad, just a bit, overvalued. Thanks for the tip, Economist. Let us know when you pair some facts with your sanctimonious speculation.
> "What, exactly, other than a sneaking suspicion that Facebook might not be worth it's valuation? Clearly some people, the people buying Facebook stock, disagree with you. Why are you right and they're wrong?"
It's not about anyone being right or wrong. The future is inherently uncertain. Investing is about making a bet that will pay off on average. As valuations go higher and higher, it becomes more and more likely that people are only going to make money on an above average future. That's a bubble, and the longer it takes for a below average future to come the bigger that bubble will grow.
It's not about anyone being right or wrong. The future is inherently uncertain. Investing is about making a bet that will pay off on average. As valuations go higher and higher, it becomes more and more likely that people are only going to make money on an above average future. That's a bubble, and the longer it takes for a below average future to come the bigger that bubble will grow.
You're not totally wrong, but this is a 'first-level' analysis that is devoid of any real depth or understanding. I generally expect more of The Economist. The point is to try to explain the world in a way that makes sense despite the uncertainy, giving specific examples that explain the reason for high valuations and why those valuations are unjustified.
You're taking the stance of investors are valuing Facebook and the like at X. Prove that's wrong. I think in general if you're going to value companies at significantly abnormal multiples of earnings. The burden of proof should fall on the person assigning those multiples.
But I'll play along anyway. I'll use Facebook as an example. One of the reasons for Facebook's lofty valuation is the very thin trading volumes. People are buying/selling very small $ amounts of Facebook stock in a private market at very high valuations. Imagine company X has one million shares of stock outstanding and I sell 1 of them for $100. Do you think company X is worth $100 million? If so I've got an endless supply of companies for you and I'll even be silly enough to part with them for the bargain price of $50 million. One of us will be rich...
So I contend that the published valuations are somewhat meaningless. The question then becomes what is a company like Facebook worth? Generally there are three main factors that determine a companies value. Tangible assets (cash in this case), earnings, and the value of retained capital. The first is easy and relatively insignificant in this case. The second is very hard, the third is just about impossible. My point is simply that high valuations relative to earnings should imply that there is a very high probability of significant growth in earnings. I think the people that believe in Facebook believe in what it could become not what it is today. If that's true, then the true profit engine is vaporware and it is therefore impossible to have enough certainty in a sufficiently positive future to justify the earnings multiple.
Now one example doesn't prove the point but I do think there is enough anecdotal evidence to justify thinking about the possibility of a bubble.
But I'll play along anyway. I'll use Facebook as an example. One of the reasons for Facebook's lofty valuation is the very thin trading volumes. People are buying/selling very small $ amounts of Facebook stock in a private market at very high valuations. Imagine company X has one million shares of stock outstanding and I sell 1 of them for $100. Do you think company X is worth $100 million? If so I've got an endless supply of companies for you and I'll even be silly enough to part with them for the bargain price of $50 million. One of us will be rich...
So I contend that the published valuations are somewhat meaningless. The question then becomes what is a company like Facebook worth? Generally there are three main factors that determine a companies value. Tangible assets (cash in this case), earnings, and the value of retained capital. The first is easy and relatively insignificant in this case. The second is very hard, the third is just about impossible. My point is simply that high valuations relative to earnings should imply that there is a very high probability of significant growth in earnings. I think the people that believe in Facebook believe in what it could become not what it is today. If that's true, then the true profit engine is vaporware and it is therefore impossible to have enough certainty in a sufficiently positive future to justify the earnings multiple.
Now one example doesn't prove the point but I do think there is enough anecdotal evidence to justify thinking about the possibility of a bubble.
Sorta seems like a bubble.. its not the first time its been said.. whether or not I agree with the rationale -- doesn't make the observation or the phenomena any less valid. Or, do we wait for the bubble to burst before anyone can call it a bubble. (I dont know..)
From the article: This time is indeed different, though not because the boom-and-bust cycle has miraculously disappeared. It is different because the tech bubble-in-the-making is forming largely out of sight in private markets and has a global dimension that its predecessor lacked.
This may be a private tech bubble though. To me it don't seems like tech stocks are too inflated compared to the revenues we can see. Facebook may be overvalued, the Skype buy was very expensive, VCs invest like crazy, but all of that is private investment. Does anyone here see a risk for the stocks also?
Where do you think all the VC and angel money is coming from? Banks and pension funds and investment firms are almost certainly funneling money into these things, we just don't get to see it because it's being done on the private market.
The very thing that makes everyone comfortable with this bubble (that it's mainly "private" capital) is the scariest part. Last time, you could mostly tell when grandma's retirement fund was betting the bank on social networks for dogs. This time, it's all on the down-low.
The very thing that makes everyone comfortable with this bubble (that it's mainly "private" capital) is the scariest part. Last time, you could mostly tell when grandma's retirement fund was betting the bank on social networks for dogs. This time, it's all on the down-low.
It's really more about the amount of leverage and the total volume of money at stake. I haven't seen much evidence of either, although that doesn't really mean anything. But let's take Facebook as an example. It really seems like the "valuation" is due to the tiny volumes of shares being traded.
In general it seems like VCs are throwing 10s of millions around fairly recklessly. 10 million is a lot for most of us, but it's nothing in terms of the US economy. If/when it starts turning into billions instead of millions we could see trouble
In general it seems like VCs are throwing 10s of millions around fairly recklessly. 10 million is a lot for most of us, but it's nothing in terms of the US economy. If/when it starts turning into billions instead of millions we could see trouble
Yes, you are right. Good insight, thanks. On the same line, my comment that Skype was a private investment also isn't true, because MSFT is a public company.
Skype buy was very expensive...but all of that is private investment
meh?
meh?
This is the cover of this week's Economist, despite the fact they really only have two other articles in it...one talking about the Skype purchase and another talking about the increased investment of web technology companies in both the US, Europe and China.
Bubbles require genuine belief of a large group of experts and leaders. They need to be convinced that eyeball counts will rise forever, that real estate will keep going, and that the growth potential of users is near infinite. They will come up with lots of analysis to protect their viewpoints and their belief will get more profound with every passing minute. I dont see that type of blind naivete in today's tech community
What do you say to the fact that Skype just sold for $8.5 billion when it's income is only about $400 million? And there is Color that is valued at $100 million even though its product is in almost-beta? Anyone who has watched the tech. industry for the past few years could notice that the way valuation of tech. companies are going up, it is alarming and exude "exuberance".
(Figures mentioned above are from the original article).
(Figures mentioned above are from the original article).
Consumer focused companies are barely ever valued correctly, and it is the reason to invest in mature stocks with predictable incomes. Consumers are simply too finicky, and revenue is just too erratic. Today, I bought tech cominco(TCK), and later hypercom(HYC). I already have sell orders in, and we'll see how it goes (as an example).
These are just potentially poor decisions made by people with lots of money. Tech startups are inherently risky -- many more succeed than fail -- even if they are well funded. It is a fundamentally different equation than starting a bagel shop or a car wash.
I assume you meant many more fail than succeed?
[deleted]
I think a lot of the responses here call out some definite omissions in this article (detailed analysis, the preparedness of certain companies, etc.). All of these points are valid, however, I don't think the concept of another bubble should be entirely dismissed. The thing to pay attention to does not revolve around the major companies like Facebook. The focus, rather, should be on the smaller companies that seem to get ridiculous valuations and investments for seemingly cheap ideas. Yes, Angry Birds is great but millions of dollars in investments? The bust will come from mindless investments like these. People will get bored with this game or that app and any dev that can't keep up will find themselves having to answer for insane investments that went nowhere. Luckily, like some have said, we've learned from the past in regard to bigger web firms, but until recently, "small business" didn't have a large voice in the web. You love the bakery down the street, but are their cookies worth millions? Probably not.
We'll see.
We'll see.
There is a bubble of tech bubble articles. No?
Edit: What I mean here is that we seem to like to read about "the new tech bubble". It still is largely a speculation, no matter what arguments are presented. The present time may, just may be a golden period for tech innovation, rather than a bubble.
Edit: What I mean here is that we seem to like to read about "the new tech bubble". It still is largely a speculation, no matter what arguments are presented. The present time may, just may be a golden period for tech innovation, rather than a bubble.
The fact that "are we in a bubble?" is the question on everyone's mind is highly telling.
Are we in a Bubble? Who cares?
Really. Who is investing in startups right now? Rich people who think they can make more money investing in startups than they can investing in other investment vehicles.
What happens if these rich people lose their money? Nothing. No bail outs. No massive loss of income for "normal" citizens. Rich people get a little less rich. Some rich people who put all their money into angel investing lose all their money.
Who is getting funded? Teams of two and three engineers who have built a product and have gotten some form of traction. Last published figures I've read said that Angel List has gotten 300 startups funded this past year. How much money are these startups getting? Anywhere from $50k to $1M.
300 startups * $1M = $300M in funding in angel capital this past year. The National Venture Capital Association's numbers [1] states that Total VC in 2010 was $23B, which is still 1/5th of the VC that was spent in 1999, and is in line with VC investment over the past 10 years.
$300M in angel funding is roughly 1.3% of the average VC funding per year over the past 10 years.
What _is_ different this time around, is that there are hundreds of smaller bets being placed, rather than dozens of huge bets.
Are all of these hundreds of startups going to have decent exits? No. Are a number of them going to turn into successful businesses, perhaps.
But, what is going to happen is that hundreds of founders are getting an amazing education on raising capital, starting a company, shipping product, and trying to make money. What really excited me is what Silicon Valley and the tech landscape is going to look like in 10 years. What this surge in angel investment is doing is educating massive numbers of engineers in how to build and ship product.
As far as I'm concerned that's a huge win for everyone, regardless of how many exits there are this time around.
Is this a Bubble, really, who cares? Writers that need to sell magazines.
ref:
[1] http://www.nvca.org/index.php?option=com_content&view=ar...
Really. Who is investing in startups right now? Rich people who think they can make more money investing in startups than they can investing in other investment vehicles.
What happens if these rich people lose their money? Nothing. No bail outs. No massive loss of income for "normal" citizens. Rich people get a little less rich. Some rich people who put all their money into angel investing lose all their money.
Who is getting funded? Teams of two and three engineers who have built a product and have gotten some form of traction. Last published figures I've read said that Angel List has gotten 300 startups funded this past year. How much money are these startups getting? Anywhere from $50k to $1M.
300 startups * $1M = $300M in funding in angel capital this past year. The National Venture Capital Association's numbers [1] states that Total VC in 2010 was $23B, which is still 1/5th of the VC that was spent in 1999, and is in line with VC investment over the past 10 years.
$300M in angel funding is roughly 1.3% of the average VC funding per year over the past 10 years.
What _is_ different this time around, is that there are hundreds of smaller bets being placed, rather than dozens of huge bets.
Are all of these hundreds of startups going to have decent exits? No. Are a number of them going to turn into successful businesses, perhaps.
But, what is going to happen is that hundreds of founders are getting an amazing education on raising capital, starting a company, shipping product, and trying to make money. What really excited me is what Silicon Valley and the tech landscape is going to look like in 10 years. What this surge in angel investment is doing is educating massive numbers of engineers in how to build and ship product.
As far as I'm concerned that's a huge win for everyone, regardless of how many exits there are this time around.
Is this a Bubble, really, who cares? Writers that need to sell magazines.
ref:
[1] http://www.nvca.org/index.php?option=com_content&view=ar...
They're hedging. They even go as far as to say "you heard it here first". I'm sure they would rather be in a position of being overly cautious than have people lose faith because they didn't report on a coming bubble.
In terms of actual analysis, they're falling into the trap all other journalists seem to be by just repeating the bubble rumors that are floating around. You'd think Economist could come up with more substance for their argument.
In terms of actual analysis, they're falling into the trap all other journalists seem to be by just repeating the bubble rumors that are floating around. You'd think Economist could come up with more substance for their argument.
If by "bubble" they mean companies that aren't profitable are being valued at enormous amounts, and continue to garner investment even without any clear revenue or exit strategy, then yes we are in a bubble.
The problem is the web industry considers investment to be revenue... in which case you're never in a bubble because profit doesn't really matter. Success in the web industry is simply getting someone to throw money at you.
The problem is the web industry considers investment to be revenue... in which case you're never in a bubble because profit doesn't really matter. Success in the web industry is simply getting someone to throw money at you.
I have not really studied this issue in depth, but from what I can tell most of the increasing investment activity that they are referring to is occuring in the private investment world - not on stock markets.
With that said, it seems that it would be difficult to call this activity a "bubble". "Bubble" in the popular nomenclature are typically used to refer to developments that can have widespread consequences when they "pop" (Re: the housing bubble, the credit derivative swap bubble, etc, etc).
There has been a lot of private investment activity in the tech world recently, but I think that it would be fear mongering to refer to this activity as a bubble. The Internet in general (and the web specifically) is still a relatively recent development. It makes sense that you will see a lot of investment activity in this area.
This same type of thing tends to happen whenever a major technological advancement spurns rapid innovation (Re: the gilded age). It is merely capitalism at work - not necessarily a bubble.
With that said, it seems that it would be difficult to call this activity a "bubble". "Bubble" in the popular nomenclature are typically used to refer to developments that can have widespread consequences when they "pop" (Re: the housing bubble, the credit derivative swap bubble, etc, etc).
There has been a lot of private investment activity in the tech world recently, but I think that it would be fear mongering to refer to this activity as a bubble. The Internet in general (and the web specifically) is still a relatively recent development. It makes sense that you will see a lot of investment activity in this area.
This same type of thing tends to happen whenever a major technological advancement spurns rapid innovation (Re: the gilded age). It is merely capitalism at work - not necessarily a bubble.
The real danger is that it's fairly localized to Silicon Valley. So it's fairly likely that if this is or becomes a bubble it will be sort of contained in a small area. As more money gets pored in, wages go up, rent/real estate goes up, ...
Tech bubble or not, judging companies based on how much finding they raise alone is bad. Put profitably first and you shall survive any disaster. I don't think we are in a bubble because people who invest usually consider profitably over potential to flip to the next sucker. Investors I've spoken with seem to be wanting in for the long haul.
[deleted]
[deleted]