Is Silicon Valley in Another Bubble?

[mcliu]

http://www.vanityfair.com/news/2015/08/is-silicon-valley-in-another-bubble

 

Valuations for SaaS and mobile companies seem to be very high. Are we in another bubble like the dot-com bubble? Your thoughts?

[Jurgis]

The question is badly put.

 

Some companies have bubbly valuations.

Some are cheap.

Some are in between.

[mcliu]

The question is badly put.

 

Some companies have bubbly valuations.

Some are cheap.

Some are in between.

 

What's a better way of putting it?

[Liberty]

The question is badly put.

 

Some companies have bubbly valuations.

Some are cheap.

Some are in between.

 

What's a better way of putting it?

 

Jurgis is right. "Silicon Valley" is very broad and includes many things.

 

But if you mean if the aggregate market capitalization of silicon valley companies in bubble territory, then your answer is no. The industry is also very different from 2000 when profits were hard to find; nowadays, silicon valley is bringing in tens and tens of billions of free cash flow every year and most of the big players are selling for relatively low multiples.

[Jurgis]

I read through the article. Though it has some good points, it also drags a lot of anecdotes to the preplanned conclusion.

 

Can valuations drop? Sure. Even for companies that are already selling at somewhat reasonable valuations.

Would I call such a drop "a bubble going kaboom"? Not sure.

 

Would I prefer that more Silly Valley companies focused on really important and hard problems (like industrial robotics, materials for solar, medical sw/hw/drugs, brain modeling, strong-AI, etc.) instead of doing yet-another-ad-based-social-network-crap? Sure.

Would this happen if yet-another-ad-based-social-network-crap goes bust? Not necessarily.

 

Would I prefer that Silly Valley expanded geographically instead of running CA RE to nebulous levels? Sure.

Will any kind of bust help with that? Not really.

 

Would I prefer that SV multimillionaires spent their cash on improving human condition on this planet instead of buying cars that have doors that go "like that"? Sure.

Would that happen if their companies lost X% of valuation? No. Some of them do good things with their money already.

 

So, overall, rather pointless article with a large dose of envy. What did Munger say about the worst sin? ;)

[mcliu]

I do agree that the article presents too many anecdotes as evidence. On the other hand, the author probably had limitations since it was probably hard to find and aggregate data on these private firms. Plus he has to write for an audience that may not be sophisticated financial types. In the article, the author does mention that even some VC guys like Bill Gurley (that do have access to the data) express concerns at the excesses.

 

Bill Gurley, a partner at Benchmark Capital and Andreessen’s nemesis (“my Newman,” as he recently put it, referring to the Seinfeld character), echoed this sentiment on Twitter, venture capitalists’ preferred platform of communication. (Many are staked in it.) “Arguing we aren’t in a bubble because it’s not as bad as 1999,” Gurley tweeted, “is like saying that Kim Jong-un is fine because he’s not as bad as Hitler.”

 

I was hoping that maybe there's someone close to the action here that could prove/disprove some of the things in the article. I'm on the fence on this one since there seems to be a lot of genuine innovation but a lot of stupid-apps. I guess the other question is, how much is too much?

 

Also, I do admit, "Silicon Valley" and "Bubble" are pretty vague terms. I'm not posing this as a serious question as much as a rehash of the title of the article. Just wanted to generate some discussion. (Didn't want to post a question like "Do you think the latest post-money Series B valuations are too high given historical averages?") Plus, the data on these things seems to be quite sparse. I would be happy to change the question into something more "appropriate" if you could give me some suggestions.

[plato1976]

why so many ppl think they are "smarter" than the silicon valley and assume the valley "should" do A instead of B is totally beyond me...

 

I read through the article. Though it has some good points, it also drags a lot of anecdotes to the preplanned conclusion.

 

Can valuations drop? Sure. Even for companies that are already selling at somewhat reasonable valuations.

Would I call such a drop "a bubble going kaboom"? Not sure.

 

Would I prefer that more Silly Valley companies focused on really important and hard problems (like industrial robotics, materials for solar, medical sw/hw/drugs, brain modeling, strong-AI, etc.) instead of doing yet-another-ad-based-social-network-crap? Sure.

Would this happen if yet-another-ad-based-social-network-crap goes bust? Not necessarily.

 

Would I prefer that Silly Valley expanded geographically instead of running CA RE to nebulous levels? Sure.

Will any kind of bust help with that? Not really.

 

Would I prefer that SV multimillionaires spent their cash on improving human condition on this planet instead of buying cars that have doors that go "like that"? Sure.

Would that happen if their companies lost X% of valuation? No. Some of them do good things with their money already.

 

So, overall, rather pointless article with a large dose of envy. What did Munger say about the worst sin? ;)

[ratiman]

Look at the investment in Handy by Ashton Kutcher's firm and then look at the miserable Alexa ranking for Handy. Homejoy was already in the process of shutting down and Ashton Kutcher thought, yeah, I'll put $15M in the exact same disproven business model.

[Liberty]

why so many ppl think they are "smarter" than the silicon valley and assume the valley "should" do A instead of B is totally beyond me...

 

What's the goal? If it is to improve human civilization, then I'm pretty sure that even most silicon valley types working in social-media app companies would agree that their talents would be better used working on other things. Same with all the physicists and mathematicians working for HFT and writing derivatives on Wall Street; in aggregate all their work is probably a net loss for society, and their talents would be more useful elsewhere...

 

But if the primary goal t is to make money, then they may be right, it's probably easier to make money that way.

 

But those are different things, and it's not about being smarter or not; it's about looking at what direction they are driving in and where that leads. (and yes, social-media is changing the world for the better in many way -- all I'm saying is that other fields that could also make a big difference are under-developed in comparison because they are harder problems, which is what makes Elon Musk special, he does the hard stuff).

[racemize]

I think the start-up industry is bubbly.  I've talked to several start-up guys, and they are able to get much much better deals than normal, simply because there is more demand than supply of start-ups.  As one of my friends put it, he was one of 15 or so presenters for a y-combinator presentation, and there were 50 guys in the audience ready to put in money.  He got whatever he wanted.

[Jurgis]

why so many ppl think they are "smarter" than the silicon valley and assume the valley "should" do A instead of B is totally beyond me...

 

What's the goal? If it is to improve human civilization, then I'm pretty sure that even most silicon valley types working in social-media app companies would agree that their talents would be better used working on other things. Same with all the physicists and mathematicians working for HFT and writing derivatives on Wall Street; in aggregate all their work is probably a net loss for society, and their talents would be more useful elsewhere...

 

But if the primary goal t is to make money, then they may be right, it's probably easier to make money that way.

 

But those are different things, and it's not about being smarter or not; it's about looking at what direction they are driving in and where that leads. (and yes, social-media is changing the world for the better in many way -- all I'm saying is that other fields that could also make a big difference are under-developed in comparison because they are harder problems, which is what makes Elon Musk special, he does the hard stuff).

 

Second in a row post by Liberty that I agree with.

 

Did I get transported to a parallel universe while sleeping? :)

Probably should buy a lottery ticket today. If I jackpot, we split.  8)

[Jurgis]

I think the start-up industry is bubbly.  I've talked to several start-up guys, and they are able to get much much better deals than normal, simply because there is more demand than supply of start-ups.  As one of my friends put it, he was one of 15 or so presenters for a y-combinator presentation, and there were 50 guys in the audience ready to put in money.  He got whatever he wanted.

 

Maybe I should try to persuade my wife to get VC funding then. She +1 are working on website kinda in Vistaprint area part-time, not funded. Might not be world changing billion-user-chat-app enough...

[Liberty]

why so many ppl think they are "smarter" than the silicon valley and assume the valley "should" do A instead of B is totally beyond me...

 

What's the goal? If it is to improve human civilization, then I'm pretty sure that even most silicon valley types working in social-media app companies would agree that their talents would be better used working on other things. Same with all the physicists and mathematicians working for HFT and writing derivatives on Wall Street; in aggregate all their work is probably a net loss for society, and their talents would be more useful elsewhere...

 

But if the primary goal t is to make money, then they may be right, it's probably easier to make money that way.

 

But those are different things, and it's not about being smarter or not; it's about looking at what direction they are driving in and where that leads. (and yes, social-media is changing the world for the better in many way -- all I'm saying is that other fields that could also make a big difference are under-developed in comparison because they are harder problems, which is what makes Elon Musk special, he does the hard stuff).

 

Second in a row post by Liberty that I agree with.

 

Did I get transported to a parallel universe while sleeping? :)

Probably should buy a lottery ticket today. If I jackpot, we split.  8)

 

I've always written stuff like this, welcome to the past six thousand posts ;)

[Pelagic]

I think the start-up industry is bubbly.  I've talked to several start-up guys, and they are able to get much much better deals than normal, simply because there is more demand than supply of start-ups.  As one of my friends put it, he was one of 15 or so presenters for a y-combinator presentation, and there were 50 guys in the audience ready to put in money.  He got whatever he wanted.

 

Maybe I should try to persuade my wife to get VC funding then. She +1 are working on website kinda in Vistaprint area part-time, not funded. Might not be world changing billion-user-chat-app enough...

 

I think a lot of it has to do with a self reinforcing culture of high valuations for startups. If founders have success and are bought out by another company, they take their "winnings" and often become angel investors or VCs themselves. Thus, they're more willing to pay high multiples because they had success at those multiples themselves. Anecdotally, I was having a discussion with a tech VC and they said the goal of companies they invest in is for them to be bought by someone else while expanding user base, profitability was irrelevant. Investors, at least some, are content to sacrifice profitability for the metrics that "matter" to other investors like users essentially transferring the onus of successfully monetizing the underlying product on to the next group of investors. While it makes sense from the perspective of early stage investors and founders, a company can't grow users forever while operating at a loss.

 

That said, I think it's hard to generalize if the industry as a whole is in a bubble. Some products probably are worth their valuations while the valuations of others benefit from the rising tide the best companies create. On a personal level, I find it difficult to reconcile value investing with the mindset of investors involved in startups, it's like two different worlds speaking a completely different language.