Tech Bubble? Maybe, Maybe Not

This is a good article, but I think you could argue that the point is that this bubble isn't like the last bubble. No bubble is the same as the last bubble. The sources of investment, and what is being invested in, is different in every bubble.

Bubble is such a loaded, judgemental term. How about over-optimistic? A lot of new things have been doing really well: Facebook, Uber, etc. So many investments are priced very optimistically. Some will succeed, many will fail. Many useful investents will be made. Much money will be lost. Unless you are an angel investor I wouldn't lose a lot of sleep over it.

The problem with bubble prediction is the perverse incentives. If you say there is no bubble, you look like an ignorant groupie. If you say there is a bubble, even if nothing happens, you can just say "you guys got real lucky this time".

To this excellent article I would add one fact.

A huge difference between the dot com bubble and now is that Sarbanes-Oxley makes IPOs a lot less appealing. That is the most likely reason why acquisitions and late funding rounds have replaced IPOs. This also means that the amount of money that can pour into a bubble is less than the last time around.

That said, bubbles usually are based a new theory about valuation for some key asset. The echo chamber of people who believe this theory bids up the value of that asset until they collectively do not have the resources to bid it higher. Then when it starts to collapse, and everyone abandons the theory, the bubble pops.

Given that, the growth of valuations is very worrisome. Doubly so since they center around social apps. One of the elements of the last bubble was the widespread belief in Metcalfe's law, that the value of a network scales as the size of the network squared. I was one of several people who came to the conclusion that O(n log(n)) is a better estimate. See http://spectrum.ieee.org/computing/networks/metcalfes-law-is... for more on that. Networks were not worth as much as people thought last time.

This time round we're again seeing a belief that social networks (such as the one Facebook owns) are worth a tremendous amount. And this belief persists despite the fact that those networks are regularly being forced to buy newer social networks at high valuations because they can't prevent new entrants from gaining traction in the marketplace. So current valuations seem to be based on a theory which we have fairly direct evidence is wrong.

That fact is my top reason for believing that current valuations will not hold up over time.

More important than the current bubble, what happens when the self-driving car becomes a reality? Probably a dotcom-esque era. Even if the current bubble pops tomorrow, the self-driving car will bring so much focus to the tech industry that it will recover pretty quickly. If not the self-driving car, then personalized medicine or something.

Whenever I see charts that focus on statistics like IPO valuations (e.g. #4. High-end IPO valuations are rising dramatically), it makes me think that people have forgotten the cost differential in a starting a software-based business now vs. 1995. When people talk of the few (I wish people would flip the argument and instead of saying tech bubble, start asking about the death rate of all the millions of apps, small shops, and side projects that are flooding the tech sector. I would like to see if this "fail" rate is too low (in the sense of not having enough winners) rather than a tech "bubble" being too high.