Tech Bubble? Maybe, Maybe Not (opens in new tab)

I think the strongest indication that there is a bubble is all the Smart People nervously chattering about there not being a bubble.

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.

Surprisingly this is a great article about the speculation of there being another tech bubble. I wasn't expecting there to be actual metrics and charts, I have become too used to people voicing their opinions without backing up their claims with actual data. I am still on the fence about whether or not we are entering a bubble (or if you believe some people already within one). Comparing metrics to the early 2000's is one thing, but I think the landscape is dramatically different than it was in the early 2000's to the point where maybe you can't make a direct comparison to what happened.

We are seeing highly successful and VC funded companies like Snapchat and Twitter achieving high user rates, but failing to monetise their userbase. Herein lies the problem: these companies are being valued at billions of dollars because of their VC investment, but they're not making any money (at least not enough to make a profit). In comparison to companies that are making profits, but might only be valued at a fraction of Twitter or Snapchat. Surely this has to have consequences even if they're not on the scale of what we saw during the dot-com bust of the early 2000's.

Maybe we're not in a tech bubble like we saw in the nineties, but I think something is definitely going on. Just because people aren't losing retirement funds due to buying stock in an IPO'd tech company that dies doesn't mean a bubble hasn't formed in other areas that necessarily don't affect your average investor. Like many things involving historical and financial data, nobody knows what is going to happen tomorrow or in 6 months time. We can speculate, but honestly, nobody knows: that's both the beautiful and destructive nature of finance.

VC's are throwing money at these companies that are burning through more money than they are making. Having to go through multiple rounds just to keep the lights on. I don't see how that is sustainable in the long-run, at some point you have to start making money right? It seems the approach most companies take these days is to try and get as much investment as they can and when they reach the point where they've given up X percentage of their company to venture capitalists they either have to IPO or close down.

One thing that is definitely different from the nineties is we aren't seeing startups host ridiculously expensive launch parties and events as much anymore.

The main arguments against there being a bubble seem to be that things aren't as obviously a bubble as they were before the previous tech bubble. This is all a businessperson's approach to analyzing this situation.

Looking at it from a technical perspective: there are two kinds of companies out there. There are companies that do something people care about and ones that don't.

Think about Twitter for a second. If Twitter dropped off the face of the earth, would you really care? I wouldn't. Even if I used Twitter, it wouldn't be hard to just go find all the same people on Facebook or whatever and follow them there. People and companies use Twitter for self-promotion, but that puts Twitter into the same business demographic as a TV channel that runs infomercials. Some people watch infomercials, but if the entire infomercial market disappeared, nobody would really care. The problem with Twitter isn't that they can't monetize their product, it's that they don't have a product.

Then there are companies that actually have a product. They may not charge for their product, but if they did, people would pay for it. Uber and AirBNB charge for their products.

Duolingo doesn't charge language learners, but they probably could: my experience is that they are more effective for language learning than Pimsleur, which a lot of people pay for. It's an artifact of the Google age that companies don't actually charge for their product, but charge for ancilliary services around it. Google doesn't charge for search: they charge for ads. But if Google decided to start charging $10/mo for search? A lot of people would pay it.

Startups will eventually have to stop giving out free VC money to acquire users. I think the user acquisition cost currently is way to high. Companies give away between $10-$25 (or $1000 for new drivers on Lyft) just to try their service. There are no major differentiators between many of them apart from free credits. Companies race to acquire users like how Groupon did in the coupon business when tens of clones popped up within days in multiple countries. There are many examples of these - I have no reason to stick with one service or have brand loyalty. As long as the service is within reason the cheapest one is the one I'd use.

At some point the incentivizing would stop after burning through a lot of cash - to show profits. At that very moment some other startup could begin giving out lots of free credits and users could very easily move.

That's when things could potentially come crashing down.

Man, we've sure been in a tech bubble for quite a long time!

https://hn.algolia.com/?query=tech%20bubble&sort=byPopularit...

Someone will get the timing right though, and go on to do a number of interviews and maybe even publish a book.

Silicon Valley real estate bubble yes.

Businesses making use of modern technology bubble? No.

somewhat off topic - it seems like there is a bubble in biotech. Something like 70% of the companies in the nasdaq biotech index have no earnings (losing money!) yet the index is up ~5x in the past few years. echoes of 2001 tech bubble and 2007 real estate bubble.

it does get irritating to hear about "uber as a bubble." Consider how much cash is flowing through uber right now, it is going to become/remain a massive business.

Calling this a "tech bubble" seems like an obfuscation of the issue. Biotech companies aren't being overinflated. Hardware companies like Tesla aren't being overinflated.

This is just the HTML5/ mobile app bubble, or in other words ".com bubble 2: the media companies disguised as technology firms strike back."

Not sure they are counting money that is coming from wall street(banks, mutual funds, pension funds, etc) that is in FOMO state and is actually making VCs less relevant in later stage investing. Good article on that: http://www.bloomberg.com/news/articles/2015-03-23/dizzying-p...

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 (<20) winners being multiple billions of dollars, they don't consider all the thousands upon thousands of tiny sub-five person startups that quickly try an idea and fail. So the total number of startups in the "universe" of startups is probably an order of magnitude greater today than in 1995 or 2000. It makes sense that more winners would come out of a much larger pool of companies.

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.

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.

IMO the most worrying statistic in support of a bubble is that graph showing valuations outpacing fundraising. The very definition of a bubble is a positive feedback loop of overvaluation.

Fundraising being low compared to valuations is a sign that VCs' risk appetites take into account the probability that everything is hugely overvalued.

Fundraising could ultimately surge towards 2000 levels if people really start drinking the Kool-Aid. But if it pulls back then I'd expect to see valuations plummet and, accordingly, share prices.

Talking about a tech bubble in the current 0% interest rate (negative in some countries), QE state of global finance is like complaining about a flooded basement when a tsunami is about to come in. Economic incentives have been so distorted for so long that the tech sector is probably one of the healthier ones.

This article has lot more data and is comparatively less biased than a lot of ones out there.

That's a good analysis. A key point is that this time, the bubble companies are privately held, because IPOs happen so much later now. The losers when the bubble collapses will be the second and third round financers.

Who are those parties? How much reliance do they have on borrowed money? That's the big question - who are the losers when the bubble pops?

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.

I had no idea how much money was being thrown into the tech sector before the 2000 bubble. $100 billion seems unreal.

Two bubble articles on the front page? Is it going to be fulfilling?

Regardless, I'm honestly kind of scared, despite it not being a particularly rational thing to think.

I can think of 3 potential bubble bursters 1) Social media companies (2nd party advertisers) 2) Webtilities 3) Taps

IoT to the rescue!

This one seems more mean-spirited and anti-intellectual than the last one, not that the last was an era of virtue and heroism. The social distances between employees and founders, and between founders and investors, have become huge (and yet so many people are in denial about their prospects). We're now in a world where age discrimination in a job that requires many years of focused experience to be good at it is the norm and almost taken for granted. Meanwhile, startup cultures are a lot more corporate than in the last bubble; sure, there are foosball tables, but there's also that "Agile" shit that exists to cement the idea of the programmer as a permanent subordinate.

I don't care much whether "the market" goes up or down, but I want us to get our fucking values back. How the fuck did "tech" beget Snapchat and Clinkle? Those founders aren't fit to work in tech companies, let alone fucking run them. How'd we let ourselves get colonized by the mainstream business culture and rendered their shitty outpost, instead of being something unique in the world?

The 2011-15 bubble wasn't the worst in terms of numerical overrating of technology companies, but I'm afraid that it will go down in history as the time in which Silicon Valley lost what remaining character it had and became a sideshow for the existing corporate elite, rather than a credible opposition to entrenched and malevolent private-sector stagnation.