41,000,006 reasons why I think we're in a bubble

B2C (and tools for programmers) is overrepresented amongst hackers because it is easier to gain domain knowledge in these territories especially for young hackers. I also think that B2B is still underrepresented, and I am more interested in that. But we should also note that solving Customer n's problem is very different than solving Customer M's problems at once where M is s big set of customers. The first is 'consulting', the second is building a product and a scalable startup. The second is much harder than the first, that may be also a reason for not being there that much B2B startups (but lots of consulatants).

One reason I know we're not in a bubble: because everyone is saying we're in a bubble.

For you young whippersnappers who were too young to remember the 90's, a bubble is a manifestation of irrational exuberance- with (almost) everyone saying it's a whole new market, it doesn't matter how much the thing costs it's worth it to buy it because it's price is just going to keep going up up up, so do whatever you need to do to buy in now, because the longer you wait, the less you make.

In other words- it's a bubble when everyone is saying it's not a bubble. But if everyone is saying it IS a bubble, then it's not a bubble.

There is a difference between a healthy (or at least "not on death's doorstop") economy and a bubble.

Make no mistake, a big factor in the creation / encouragement of recent bubbles has been super easy monetary policy that provides cheap and easy credit.

In '00 we had a market crash after a dramatic run up of stocks in general and tech in specific. In 1998-1999 rates were low and credit was easily available [1]. As we led up to the millennium changeover ("Y2K") unprecedented amounts of short term capital were made available to banks and other institutions to allow them to weather any run on banks that might occur [2]. This money made it out the the markets and proceeded to whip them into something that was similar to a drug fueled frenzy: the nasdaq has never come close to those levels again. Alan Greenspan later noted that he believed his actions played an important role in the boom/bust. Once the fed windows closed for Y2K and interest rates were pulled upwards quickly all the money disappeared. Coincidence?

After the dot.com bust targeted rates were lowered dramatically to attempt to smooth out the markets. Check out this chart of historical fed funds rates as it is really easy to spot the cycles [3]. The next bubble was in housing, and predictably it began to burst when interest rates were raised again.

Look at that chart again [3]. The last couple of years have seen the lowest interest rates that have ever been available since the chart started more than 50 years ago. They have been approximately 0 for some time. In addition, the quantitative easing programs that the fed has engaged in (currently, QE2 composed of $600BN worth of treasury debt purchases) has left monetary policy so easy that if it were a woman the village would be talking.

I've heard some confusion about how this money makes it into the markets. It's really quite simple. Many people and organizations who would normally put some of their money into safe debt like treasuries decide not to because they can't make any money off of it and they are concerned about the effects of inflation. This causes them to look for better investments that will have a chance of returning something decent. The explosion of angels in SV is directly related to this process - these geeks, unable to make a good return in some traditional markets switched to making private investments. If more money comes into a sector, valuations will naturally rise and the quality of the companies funded will likely fall (or at least that seems reasonable to me).

QE2 is scheduled to end June 30th, 2011. Unless it is followed by a "QE3" (which there is probably a strong chance of) monetary supply will contract and interest rates will rise. At some point fed target rates will need to rise as a response to current growing inflation in the commodity markets and the retail increases in food and gasoline. Once the fed signals that the party is over, a ton of this money is going to run for the exits [4]. Don't expect to be able to close your next round unless you're of stellar quality or can hold out for 2-3 years.

Or at least, that's one version of it.

Of course, no one whose business relies on the expansion of public and private equity prices will explain this to you. The reasons for that should be relatively obvious.

[NOTE: I am not an economist. I wasn't classically schooled in this stuff. I'm also not a tea partier nor do I have any particular political axe to grind here. I am just a coder who has been watching carefully since the dot-com crash when I took a very big haircut. Take it all for what it's worth]

[1] https://secure.wikimedia.org/wikipedia/en/wiki/Dot_com_bubbl...

[2] http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id...

[3] https://secure.wikimedia.org/wikipedia/en/wiki/Federal_funds...

[4] http://www.chrismartenson.com/martensonreport/coming-rout

Someone should track the Color Fund vs. the 43 participants in YCombinator W2011 class:

Round Color's (err) round up to $43m. Then say that Milner's 150K was actually $1m with the same terms (convertible debt). You'd have 2 investments of $43m. Track follow up rounds for the 43 YC alumni and Color and see which pot grew the most.

What is far more likely is for Color to try to get themselves acquired by Facebook.

If this is their real company strategy, the $41M investment actually makes sense.