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The New Tech Bubble

economist.com

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Re: The New Tech Bubble

#31

Post by iamelgringo »

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...

Re: The New Tech Bubble

#32

Post by ikono »

gfodor wrote: post #21

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'…

> "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.

Re: The New Tech Bubble

#33

Post by ikono »

timr wrote: post #11
maigret wrote: post #7

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…

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

Re: The New Tech Bubble

#34

Post by ikono »

Spyro7 wrote: post #23

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…

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, ...

Re: The New Tech Bubble

#35

Post by gfodor »

ikono wrote: post #32
gfodor wrote: post #21

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'…

> "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…

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.

Re: The New Tech Bubble

#36

Post by ikono »

gfodor wrote: post #35
ikono wrote: post #32

Earlier quoted context omitted.

> "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…

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.

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