A Silicon Bubble Shows Signs Of Reinflating(dealbook.nytimes.com)
dealbook.nytimes.com
A Silicon Bubble Shows Signs Of Reinflating
http://dealbook.nytimes.com/2010/12/03/a-silicon-bubble-shows-signs-of-reinflating/
30 comments
"Cash is cheap nowadays" -- in what currency? ;)
Basis points. Cash is dirt cheap right now, and the US fed has said they'll keep it that way for a few years.
Wait, wasn't that the storyline for another recent story....
Wait, wasn't that the storyline for another recent story....
"while investors reportedly signed a check for close to $30 million for a niche blogging site called Tumblr"
Last I checked, Tumblr was on the 100 most visited websites list. That's pretty good for a "niche" blogging site.
This story is pure sensationalism, most of the companies listed have proven business models or at least substantial traction.
Last I checked, Tumblr was on the 100 most visited websites list. That's pretty good for a "niche" blogging site.
This story is pure sensationalism, most of the companies listed have proven business models or at least substantial traction.
That doesn't mean that the companies aren't overvalued. I think the David McClure quote puts it decently:
“I’m not saying Quora, Foursquare, Square aren’t eventually worth a lot of money, but the price to pay to get into those games is kind of amazing — $50 to $80 million?” said Dave McClure, founding partner of 500 Startups, a technology incubator in Silicon Valley. “These companies are in big markets with proven founders, so maybe not absolutely crazy but certainly eyebrow-raising.”
“I’m not saying Quora, Foursquare, Square aren’t eventually worth a lot of money, but the price to pay to get into those games is kind of amazing — $50 to $80 million?” said Dave McClure, founding partner of 500 Startups, a technology incubator in Silicon Valley. “These companies are in big markets with proven founders, so maybe not absolutely crazy but certainly eyebrow-raising.”
I agree:
"The chief evidence, according to industry experts and analysts, is the way venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea."
This just seems inaccurate. All of the companies mentioned in the article (and most of the companies that seem to get funding) at least have a functioning product or service. You still have to actually build something.
"The chief evidence, according to industry experts and analysts, is the way venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea."
This just seems inaccurate. All of the companies mentioned in the article (and most of the companies that seem to get funding) at least have a functioning product or service. You still have to actually build something.
Having a functioning product isn't that relevant.
Take Yammer - it's not difficult to build. People made identi.ca in their spare time, for free. If Yammer turns out to have a real market, competitors in the intranet space can easily add a similar product to their line. How is a $40m VC investment justified? My guess is that the investors are betting on selling Yammer to a bigger company. This is what's known as "find a rich sucker" (or "AOL") business model, and is typical of a bubble.
To determine if it's a bubble, you don't look at the companies or products. You look at the investors. If they are loose with their money, that's when you know.
Take Yammer - it's not difficult to build. People made identi.ca in their spare time, for free. If Yammer turns out to have a real market, competitors in the intranet space can easily add a similar product to their line. How is a $40m VC investment justified? My guess is that the investors are betting on selling Yammer to a bigger company. This is what's known as "find a rich sucker" (or "AOL") business model, and is typical of a bubble.
To determine if it's a bubble, you don't look at the companies or products. You look at the investors. If they are loose with their money, that's when you know.
A minor factual correction: identi.ca is a product of StatusNet, Inc., which has at least three employees at the moment. Evan did not build it "in his spare time". However, it's true that you could take the StatusNet code and use it to build a product like Yammer "in your spare time" if you were a "competitor in the intranet space".
Well, do they turn a profit? Being one of the most visited sites on the net does not equal making money.
yeah, i sent jenna and evelyn a private note about tumblr
they really got that one wrong
they really got that one wrong
While I'd agree it's incorrect to call Tumblr a niche site (it's demographic is too broad to be niche), I disagree with your logic. Why can't a niche site be in the top 100? If a niche is big enough, why not? Facebook at one time was in the college niche.
I have no authority to argue whether there is a bubble or not so I'll let that matter aside. What I am glad about the tech in 2010 (vs 2000) is that the sites which are currently being hyped up actually work and are very useful. My wife uses Groupon and I have a few Tumblr blogs. My dad uses Facebook and my mom plays Farmville for hours.
All of these companies have scaled their architecture to support millions of daily users. They have managed to reach their target market and many of them are already profitable. The developers behind these sites aren't folks who picked up a "Dummies Guide to HTML5" on a weekend. Many of the interesting articles posted on HN are by the founders and/or people running the operations at these companies (e.g. http://www.marco.org).
All of these companies have scaled their architecture to support millions of daily users. They have managed to reach their target market and many of them are already profitable. The developers behind these sites aren't folks who picked up a "Dummies Guide to HTML5" on a weekend. Many of the interesting articles posted on HN are by the founders and/or people running the operations at these companies (e.g. http://www.marco.org).
Many of the sites and businesses in the first bubble did at least work; I don't think that was the main problem. They just weren't able to make money. To pick two notorious examples: WebVan really did deliver groceries, and the customer experience was fairly popular; and GeoCities was a reasonably well run site that fostered a lot of user-generated content. But WebVan couldn't pay for its operations and scaled up way too fast, and GeoCities, while it would've been a good idea at a lower valuation, wasn't worth the $3.5 billion that Yahoo paid for it.
Ah yes, but with better management both could still be in business.
Or in other words, Starbucks could also have been mismanaged. And http://www.peapod.com/ is still in businesses.
As others in this thread have pointed out, the key distinction between bubble 1.0 and 2.0 is complete nonsense vs. real value.
Most likely currently hugely overvalued value, but still real value.
After bubble 1.0 burst, it hurt the very concept of business on the internet badly.
When 2.0 bursts, a very few companies will close shop, the rest will simply be worth a lot less and lay off people but will return to operating profitably as before.
Or in other words, Starbucks could also have been mismanaged. And http://www.peapod.com/ is still in businesses.
As others in this thread have pointed out, the key distinction between bubble 1.0 and 2.0 is complete nonsense vs. real value.
Most likely currently hugely overvalued value, but still real value.
After bubble 1.0 burst, it hurt the very concept of business on the internet badly.
When 2.0 bursts, a very few companies will close shop, the rest will simply be worth a lot less and lay off people but will return to operating profitably as before.
> ... very useful... my mom plays Farmville for hours.
I wouldn't call Farmville "very useful." I don't think my mom's life would be worse without Bejeweled.
I wouldn't call Farmville "very useful." I don't think my mom's life would be worse without Bejeweled.
Who are these reporters. Where is the analysis?
The paint with a broad brush trends at which they "tsk, tsk" without presenting the data, discussing what criteria constitute evidence of "bubbling", or demostrating overvaluation.
Consider:
"The chief evidence, according to industry experts and analysts, is the way venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea. "
Which "experts and analysts"? ?All? of them? Do none dissent? How much of "an idea" is "as shred of an idea." Do they mean "only a shred of a business plan?"
I believe this meets the criterion for "a bubble of journalism."
Look out for Rupert: it seems the NYT has surrendereed.
The paint with a broad brush trends at which they "tsk, tsk" without presenting the data, discussing what criteria constitute evidence of "bubbling", or demostrating overvaluation.
Consider:
"The chief evidence, according to industry experts and analysts, is the way venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea. "
Which "experts and analysts"? ?All? of them? Do none dissent? How much of "an idea" is "as shred of an idea." Do they mean "only a shred of a business plan?"
I believe this meets the criterion for "a bubble of journalism."
Look out for Rupert: it seems the NYT has surrendereed.
Of course it's a bubble. There's an article in the NYTimes asking if its a bubble.
Ever thought of investing in greentech? The early stage ecosystem there is much less developed -- there are simply fewer investors participating. I think what's limiting them is mainly non-essential: a combination of forbidding myths about capital intensity + regulations + time to market, plus the science being trickier. Probably a lack of angels who became wealthy from the space is an issue too, but there is no shortage of angels who were formerly physicists, aerospace engineers, chemists, biologists, etc.
There are massive opportunities, and the capital cost & lead time, at least in the earliest stages, are not nearly so bad as people assume. Working on design and theory costs roughly as much as a web startup -- founder's living expenses, some time at a machine shop, a few sourced parts.
At least that's how it was for us.
I think that the valuations, if you look from afar, are can seem pretty staggering as well, but I think that burn rates can be made low with the right approach.
There are massive opportunities, and the capital cost & lead time, at least in the earliest stages, are not nearly so bad as people assume. Working on design and theory costs roughly as much as a web startup -- founder's living expenses, some time at a machine shop, a few sourced parts.
At least that's how it was for us.
I think that the valuations, if you look from afar, are can seem pretty staggering as well, but I think that burn rates can be made low with the right approach.
I'm finding the same exact reaction in medtech. Same foreboding myths, same massive opportunities, and same chance to build lean operations. We're grinding along but I'm surprised that tractable obstacles look scary to otherwise savvy investors.
Have you looked into government grants? It's a very different process and set of expectations than a pitch deck, but the capital is non-dilutionary and there is a bunch of stimulus money sloshing around. Obama seems to recognize that the future US economy will be in biotech and greentech.
Have you looked into government grants? It's a very different process and set of expectations than a pitch deck, but the capital is non-dilutionary and there is a bunch of stimulus money sloshing around. Obama seems to recognize that the future US economy will be in biotech and greentech.
Really? I've always found the number one barrier in medtech to be fact that the feds won't let you unleash cutting edge new medtech on humanity without a crushing time and money penalty to prove it is safe and worth it.
Just so people don't miss interpret what I'm saying: I do think we should try to prove medtech is safe and does something. But I think the quantity of proof we require slows down innovation tremendously. And the penalty we pay for bringing things YEARS to market later then we could have is human lives.
Just so people don't miss interpret what I'm saying: I do think we should try to prove medtech is safe and does something. But I think the quantity of proof we require slows down innovation tremendously. And the penalty we pay for bringing things YEARS to market later then we could have is human lives.
Me? I don't think I know enough about it.
That's something I'm also hearing. What's the best way, do you think, to help educate investors? Or is that simply not possible because the unknown risks seem daunting? I'm sure it's hard to trust an enthusiastic and green startup. Is that a sticking point?
I understand why web apps are easy to understand, if done well. But opportunities in greentech and medtech seem like a huge unmet need. We have health and defense grants to fall back on, but for seed-type money we can bring a product to the medical market. That to me is where a quiet revolution is already underway.
I understand why web apps are easy to understand, if done well. But opportunities in greentech and medtech seem like a huge unmet need. We have health and defense grants to fall back on, but for seed-type money we can bring a product to the medical market. That to me is where a quiet revolution is already underway.
I dunno. I invest in internet startups because I know the product space, I can do most of the work myself (I can code, I can make product decisions, etc) and I have a good sense of where it will go. And I'm excited about the space.
Cleantech (and medtech) are fascinating, but I don't have the thousands of hours of focus that I've had on webtech. It feels like I'm just analyzing the numbers when I look at those deals, and that makes me a bad angel there.
I'd consider a VC fund with some background in it, though.
Cleantech (and medtech) are fascinating, but I don't have the thousands of hours of focus that I've had on webtech. It feels like I'm just analyzing the numbers when I look at those deals, and that makes me a bad angel there.
I'd consider a VC fund with some background in it, though.
Of course the NYTimes asks - they just were in the vicinity of one quite recently.
What people fail to recognize is that inside the .com bubble was a solid pot of gold. Internet companies did change the world and became exceptionally profitable. The facts just got lost in the hysteria.
Is Groupon a bubble? Sure. Is there a pot of gold inside of it? You bet.
Is Groupon a bubble? Sure. Is there a pot of gold inside of it? You bet.
It's worth noting that _if_ there is a bubble, it is a fundamentally different bubble than we had in 2000.
In 2000, we had a lot of companies pre-profit having an IPO. It got so crazy that companies got into the IPO-business, you could drop anything on the public markets (it seemed) and watch the price skyrocket.
This is all private investing, not public offers. And it's a big difference between what a bunch of rich guys do with their extra money than what grandma does with her retirement fund. It's also different from the housing bubble, which involved huge swaths of public money and touched anybody with a mortgage. If you're a big believer in free markets (I am) then this is exactly what rich guys are supposed to be doing -- gambling their money on a horde of young bucks with crazy ideas to change the world (or little parts of it). I'd also point out that startups today are much sounder financially than they were back in 2000. So while it may be a bubble, it's a bubble we can easily live with. We could use more bubbling, actually.
In 2000, we had a lot of companies pre-profit having an IPO. It got so crazy that companies got into the IPO-business, you could drop anything on the public markets (it seemed) and watch the price skyrocket.
This is all private investing, not public offers. And it's a big difference between what a bunch of rich guys do with their extra money than what grandma does with her retirement fund. It's also different from the housing bubble, which involved huge swaths of public money and touched anybody with a mortgage. If you're a big believer in free markets (I am) then this is exactly what rich guys are supposed to be doing -- gambling their money on a horde of young bucks with crazy ideas to change the world (or little parts of it). I'd also point out that startups today are much sounder financially than they were back in 2000. So while it may be a bubble, it's a bubble we can easily live with. We could use more bubbling, actually.
Especially given the growing power of angel investors, you could easily spin this story as the erosion of the VC cartel. It's entirely possible that previous startup valuations were too low, with the recent increases simply being a market correction.
Those three companies have about $90 billion in cash on their books. McKinsey & Company calculates that the largest software and hardware companies have enough excess cash on hand to buy nearly all of the tech industry’s medium-sized companies.
As long as there is this kinda cash sitting with companies wanting to buy, there will be companies made. Cash is cheap nowadays and there are lot of people/companies willing to bet.
mobile tech, wireless access, cloud/aws, linux maturity, etc.. - everything culminated to make whole tech companies so disruptive, no other field is ripe with products or speed of innovation.