Join 3,433 readers in helping fund MetaFilter (Hide)


More and more people are (paper) rich. Another internet bubble?
February 5, 2013 5:19 AM   Subscribe

More and more companies residing (typically) in Silicon Valley are getting $1 billion+ valuations. Are we in the midst of another bubble? Link to the NYT graphic describing some of these companies. According to the article, a bubble doesn't exist, as the previous internet bubble is still fresh in people's minds. Many places are trying to copy this Silicon Valley phenomenon, but is it worth it / sustainable?
posted by JiffyQ (62 comments total) 8 users marked this as a favorite

 
yes, we are in the midst of another bubble. Next question.
posted by JPD at 5:30 AM on February 5, 2013 [7 favorites]


Pinterest is valued at $1e9 and the claim is that we AREN'T in a bubble? Maybe I'm not seeing the details here, but isn't Pinterest just an internet inside your internet? You post stuff you like and people can subscribe and search and link? It's not even a walled garden. It's just...the internet.
posted by DU at 5:30 AM on February 5, 2013 [8 favorites]


The bubble is made up of rich people's money so I'm fine with them throwing it at silly companies all they like. The onerousness of the 90s tech bubble was how every guy on his couch had CNBC telling him he should be getting in on this internet money thing and investing in publicly traded companies with questionable value.
posted by Space Coyote at 5:32 AM on February 5, 2013 [1 favorite]


Valued by private investors with the goal of exit at a tidy profit. The suckers who buy stocks retail are what will make it a bubble. Can't wait to short Pinterest.
posted by borges at 5:34 AM on February 5, 2013


Pinterest is an internet inside the internet with a large female audience and a huge focus on consumerism and shopping. I don't know if its worth $1billion but the potential to make alot of money there is pretty easy to see.

Which is not to say that we are not in a bubble of sorts - but it seems much more like individual companies are bubbling nowadays rather than the sector as a whole. Groupon & Zygna are deflating rapidly at the moment for example.
posted by Another Fine Product From The Nonsense Factory at 5:41 AM on February 5, 2013 [2 favorites]


The whole thing about a bubble is you don't know it exists until it pops.
posted by shakespeherian at 5:48 AM on February 5, 2013 [1 favorite]


An amazing stat - in the past 12 years or so, a billion dollar software company has been founded in Silicon Valley on average every three months.

At the same time it's easy to see companies that have lost billions in their valuations
posted by DanCall at 5:48 AM on February 5, 2013


Basing your business model on being bought by another business is a bad plan. The incentive for VC is to over-value their investment in the hopes that they will make more in the sale of the company.

If the company folds before its sold, VCs are out a fraction of the valuation, and the fictitious amount it was valued at goes poof. Over-value enough companies, and someone somewhere is bound to pick up one, cover the difference in the portfolio of the VC (and add a tidy profit) and they can afford to let the others crumble in the inevitability. Moreover, the mega companies then get further overvalued, which helps feed the cycle even more...

The problem I really see isn't that this is just throwing around rich people's money - its that the individual employee who joins the company is now at greater risk of having the rug pulled out from under them completely. Sure, its a steady paycheck for now, but once that crash comes... it is going to be an epic disaster. At least in 2001 there was an option of picking up a service jobs for the short term.
posted by Nanukthedog at 5:48 AM on February 5, 2013 [2 favorites]


Pinterest is excessively visual, and lends itself to a different kind of browsing than text-heavy sites. That said, yeah, overvalued.
posted by ZeusHumms at 6:02 AM on February 5, 2013


╭ ╮
╰ ╯
posted by fairmettle at 6:06 AM on February 5, 2013 [2 favorites]


It's not a bubble so much as a crime wave. This is just more big finance looking to launch fraud driven IPOs where they steal from the rubes. And by rubes I mean people who have retirement savings. Expect your government to look the other way or levy a puny after the fact fine.
posted by srboisvert at 6:15 AM on February 5, 2013 [5 favorites]


VCs look mostly to M&A for exit these days, not IPO. Or so I'm told.
posted by snuffleupagus at 6:18 AM on February 5, 2013


Someone on hacker news thread posted Cramer's top ten from 2000. If you invested your money in those it's like all gone.
posted by bukvich at 6:23 AM on February 5, 2013 [3 favorites]


The bubble is made up of rich people's money so I'm fine with them throwing it at silly companies all they like. The onerousness of the 90s tech bubble was how every guy on his couch had CNBC telling him he should be getting in on this internet money thing and investing in publicly traded companies with questionable value.

Yes, so far the average small investor is definitely getting screwed less than they did in the first tech bubble. The IPO flops (Zynga, Groupon, Facebook) certainly caught some retail investors, but not nearly as badly as if they'd skyrocketed in price before crashing.

However, a lot of pension funds and endowments still invest in VC, right? So it's not like there's only rich people's money at stake...
posted by pete_22 at 6:36 AM on February 5, 2013


My wife knows a few programmers with startups. It's always fascinating to talk with them, because they are so blindly, incredibly, high on their own supply. It's amazing. They have big dreams of being bought up by Google or Apple or whatever, and their ideas are just the most banal. Which is not to say that they won't get bought up by Google, or that their ideas and execution aren't difficult (these are PhDs / masters from the 'Tute, so they're at the top of the pile).

But it's always like--I'm developing a new way to keep track of your bookmarks, or I'm creating a new way to keep track of what tweets might be most interesting to you based on your Amazon purchasing history, or I have a service that will SMS you to wear boots if it's going to be rainy today. And they're always so certain that it's a multimillion dollar (or billion dollar) idea.

And again--it might be. But as someone more or less outside that sphere (I'm on Metafilter all day, but that's pretty much all I do online), I'm astounded at how picayune it all sounds. I really could not care less about my bookmarks, or some "Thought Leader's" tweets, and you don't need an app to pull the boots out of the closet.

The valuations are insane. I continually think that everyone from VCs and PE guys, to PMs, to mom and pop are all wildly optimistic about where these companies are going.
posted by Admiral Haddock at 6:41 AM on February 5, 2013 [20 favorites]


Basing your business model on being bought by another business is a bad plan.

My impression is that this is the business plan of literally all pharma startups, because drug development is so costly, time-consuming and risky: you just have to try to assemble a few promising lead compounds and hope Merck notices. (Okay, I guess there's one other model, the one where you sell goods/services to big pharma companies.)
posted by en forme de poire at 6:42 AM on February 5, 2013 [1 favorite]


Right, VC's are often funded by Pensions and Endowments.

The moment I knew it was a ridiculous cycle again was when I heard that a high profile startup and MeFi favorite was able to raise a VC round while telling people they had no plans to exit/monetize EVER. And they then took that round and bought real estate and built their HQ with it.

Then I saw a VC defending that transaction by saying "you don't understand"
posted by JPD at 6:44 AM on February 5, 2013 [4 favorites]


I'm 90% sure that a bubble may be forming in calling things bubbles.
posted by vozworth at 6:46 AM on February 5, 2013 [1 favorite]


The valuations are insane. I continually think that everyone from VCs and PE guys, to PMs, to mom and pop are all wildly optimistic about where these companies are going.

You are misunderstanding the game. The startups purpose is to merely sound like a plausible investment. The real app is finding a way to soak up the dumb money that is floating around pretty much unwatched thanks to all the pressures to invest forcing people into the market whether want to be or not. The valuations don't reflect the viability of the startup's idea. They reflect the amount of dumb money to be had.
posted by srboisvert at 6:48 AM on February 5, 2013 [2 favorites]


Well FreedomPop launched last year so we're up to the NetZero part of the bubble. Two more years folks.
posted by Talez at 6:49 AM on February 5, 2013 [1 favorite]


right - its a great fools game for 99% of startups - that only works because of the 1% (or less) that are actually on their own standalone great, tremendous, businesses.

The problem is almost no one thinks they are the biggest fool.

VC funds returns only don't suck horribly (like light your money on fire bad) when they are invested during times where no one is interested in tech. Like any other investment its a price thing. The valuations you enter your winning investments at are too high so you can't make up for the long-tail of failed investments that are part and parcel of VC investing.
posted by JPD at 6:51 AM on February 5, 2013


Anybody got an idea? I can sling the rails code.
posted by rakish_yet_centered at 7:04 AM on February 5, 2013 [3 favorites]


You can always count on Metafilter for the cynicism. I don't know much about company valuations, but I do know that Silicon Valley and the tech industry in general is producing absolutely unprecedented innovation. These past 20 years have been amazingly innovative, really since the Internet became a consumer thing that anyone can use. Everything really is changing and some of those companies making that change are very valuable.
posted by Nelson at 7:21 AM on February 5, 2013 [3 favorites]


Innovation does not equal gigantic value. Yes, SOME companies are innovating, but do you really think that all of these innovations are worth billions of dollars? I would argue there was much greater and faster innovations from 96 to 2000 but does that mean that the tech bubble of that time was not a gigantic clusterfuck of overvaluation?
posted by spicynuts at 7:27 AM on February 5, 2013


It's really hard to believe that airbnb is worth a billion dollars.
posted by maryr at 7:28 AM on February 5, 2013


Basing your business model on being bought by another business is a bad plan.

And yeah, that's actually a really common goal for a startup. As far as VC money is concerned, any startup has two (positive) outcomes: either IPO or buyout. Otherwise why would they invest? It's perfectly reasonable.
posted by maryr at 7:32 AM on February 5, 2013


It's not really a bubble unless Joey and Carl get the band back together.
posted by entropicamericana at 7:40 AM on February 5, 2013 [1 favorite]


From the Times article, the writer believes that a 9B twitter valuation is high because Microsoft was valued at 1.6B (in today's dollars) in 1986. Microsoft currently has a market cap 231B, so isn't reasonable to think that the 1985 Microsoft valuation was ridiculously low, not that the current twitter valuation is high?
posted by rakish_yet_centered at 7:49 AM on February 5, 2013


Almost every commercial during the Superbowl featured a hashtag. I think Twitter is much more valuable than its also-ran peers.

But then you do crazy VC math and say, well if Twitter is going to be worth $10B and Pinterest has a 10% chance of becoming its equal...
posted by RobotVoodooPower at 7:56 AM on February 5, 2013


Its just a bad analogy - When Microsoft had a market cap of 1.6B it had something it sold for money and there were other companies that sold a similar product for money. Twitter's revenue model is far less obvious. Can they make a few hundred mil selling ads? I have no idea.
posted by JPD at 7:56 AM on February 5, 2013 [6 favorites]


Basing your business model on being bought by another business is a bad plan.

Why? I've worked for multiple startups that got bought by larger companies.
posted by octothorpe at 7:58 AM on February 5, 2013


The whole thing about a bubble is you don't know it exists until it pops.

With most bubbles, there's people predicting that they are a bubble at they will pop. Some people become so bubble-adverse that they start seeing them in everything though.
posted by drezdn at 8:02 AM on February 5, 2013


>Basing your business model on being bought by another business is a bad plan.

Why? I've worked for multiple startups that got bought by larger companies.


Here's a Bloomberg short on startup exits; the options are usually IPO and M&A. So when IPOs are unpopular, it's M&A by default.
posted by snuffleupagus at 8:05 AM on February 5, 2013


It's not really a bubble unless Joey and Carl get the band back together.

*cough*
posted by mecran01 at 8:09 AM on February 5, 2013


Basing your business model on being bought by another business is a bad plan.

I've come across a few job posting that even advertise a startup's "billion dollar" exit strategy right alongside the 401k and dental benefits.

Must be great places to work.
posted by RonButNotStupid at 8:11 AM on February 5, 2013


Difference between exiting via M&A vs a business model that is predicated on an exit via M&A
posted by JPD at 8:20 AM on February 5, 2013


Basing your business model on being bought by another business is a bad plan.

Why? I've worked for multiple startups that got bought by larger companies.


I read that as not necessarily a bad way to make money so much as a plan a bad person would have. Literally all you are doing is sucking money away from whoever the VCs stole it from.
posted by DU at 8:27 AM on February 5, 2013


Many places are trying to copy this Silicon Valley phenomenon

In Kenya they are digging up grasslands used by migrating herds to build a "Silicon Savanna" - replacing wildlife with cubicles. Konza Technology City.
posted by stbalbach at 8:31 AM on February 5, 2013 [2 favorites]


Everything really is changing

You're going to have to define "everything" and "changing" or else all I'm gonna do is roll my eyes at you.

I mean, I still might, but if you don't it's a certainty.
posted by adamdschneider at 8:32 AM on February 5, 2013 [1 favorite]


srboisvert: "Expect your government to look the other way or levy a puny after the fact fine."

Well, the Justice Department just sued S&P for deceptively rating mortgage-backed securities.
posted by exogenous at 8:35 AM on February 5, 2013


Nelson: "some of those companies making that change are very valuable."

Absolutely but there are many criticisms too. A big one is that these technology jobs are very often working to displace and eliminate jobs elsewhere. Robots, automated systems etc.. anything to increase efficiency is ultimately going to eliminate jobs in the rest of the economy. Technology is hugely disruptive, we can't stop it, but it's not always the science fiction better future of novels either. Google is making self driving cars - how many millions of pizza delivery, taxi and truck drivers are they going to eliminate, versus how many jobs created? I'd say at least 10:1. We've covered this before in other FPs so it's a bit off topic. The reason there is so much focus on "silicon valley" is because it's starting cannibalizing everything else, out competing. And it's very good at it. At what point does it kill the host like a cancer. Jobs done better and cheaper by machines creates a labor problem, an economic problem, a social problem. The data shows we are already there.
posted by stbalbach at 8:43 AM on February 5, 2013 [3 favorites]


The reason there is so much focus on "silicon valley" is because it's starting cannibalizing everything else, out competing. And it's very good at it. At what point does it kill the host like a cancer.

The problem is that once you've spent a billion dollars on building social media sites, what do you have: a bunch of programmers who can build social media sites. Repeat.

Yet, when the government spends a billion dollars on advanced battery technology, producing a core of engineers, technicians, subsidizing machine and material suppliers, it becomes some sort of scandal. If we are going to have a bubble based on over-estimated returns, we should have it in battery technology, or alternative ("green") electricity production. Hell, even the "hydrogen economy would be a better waste of money than social media.
posted by ennui.bz at 9:11 AM on February 5, 2013 [11 favorites]


Our entire economy has become a bubble, or Ponzi scheme. It’s entirely ridiculous and unsustainable. People really want these schemes to work. People are trying to get the housing bubble going again in some places. Every bubble is marked by people saying "this isn’t like the last time, this time is different".

People don’t learn very well and are easily distracted by shiny objects.
posted by bongo_x at 9:43 AM on February 5, 2013 [1 favorite]


how do we know that 'ponzi scheme' isn't just 'the future'? Star Trek never explained how we got to the money-free economy but how do we know this isn't an evolutionary step?
posted by spicynuts at 9:47 AM on February 5, 2013 [2 favorites]


First off, a billion dollars is less than it used to be.

Second, some of these companies have a high valuation based on growth and cash flow, even if they're not inherently profitable. Like AirBnB. Money comes in, money goes out and as long as more money going in and out they have this huge valuation. That said, it's a perfectly legitimate service and they've been very aggressive about growth.

Most of these companies are for real it seems to me. I worked for a Marketo competitor that got bought for about $800M. Box.net is a real business with paying, long-term users. People love their goddamn Pinterest, past all logical reason and as someone else mentioned, it's basically all about shopping and buying stuff which makes it extremely attractive for a variety of advertisers and partners.

I mean, none of those companies are even funded by advertising! Well, Pinterest sort of. But it's not the traditional $1 CPM display ad business.

Finally, internet company infrastructure costs have fallen into the basement. Want to set up a site to serve a million concurrent users customized content? That used to be nearly impossibly hard. Now half a dozen people can use OSS to put it together with zero capital cost on AWS. It's crazy how commoditized the back-end of all these companies has become.

Even during the last bubble there were plenty of legitimate companies building real businesses. This seems a lot more real than even those companies did.
posted by GuyZero at 10:01 AM on February 5, 2013 [2 favorites]


The bubble is made up of rich people's money so I'm fine with them throwing it at silly companies all they like.

Yeah, rich people like your pension plan and insurance company using the money they're supposed to give you when you need it.
posted by The 10th Regiment of Foot at 10:10 AM on February 5, 2013 [4 favorites]


Second, some of these companies have a high valuation based on growth and cash flow, even if they're not inherently profitable. Like AirBnB. Money comes in, money goes out and as long as more money going in and out they have this huge valuation. That said, it's a perfectly legitimate service and they've been very aggressive about growth.

Read this article about how Amazon operates as a low-margin company:
Almost all customers paid by credit card, so Amazon would receive payment in a day. But they didn't pay the average distributor or publisher for 90 days for books they purchased. This gave Amazon a magical financial quality called a negative operating cycle. With every book sale, Amazon got cash it could hang on to for up weeks on end (in practice it wasn't actually 89 days of float since Amazon did purchase some high velocity selling books ahead of time). The more Amazon grew, the more cash it banked. Amazon was turning its inventory 30, 40 times a year, whereas companies like Barnes and Noble were sweating to turn their inventory twice a year. Most people just look at a company's margins and judge the quality of the business model based on that, but the cash flow characteristics of the business can make one company a far more valuable company than another with the exact same operating margin. Amazon could have had a margin of zero and still made money.
Amazon is more like a hedge fund than a retailer. Yes, it introduced operational efficiencies, but they are essentially taking money from the publishers and consumers. So, instead of the surplus from those efficiencies making it's way to increased consumption or increased production, you have an economy with deflating prices and which is about finding novel ways not to pay content producers i.e. artists.

I think Amazon typifies these internet age investments. The efficiencies produced are just re-arranging the pie from the perspective of the larger economy.
posted by ennui.bz at 10:50 AM on February 5, 2013 [4 favorites]


Comparing Amazon to AirBnB isn't unreasonable but AirBnB goes a step further as they don't have any inventory. It's as if Amazon just sold MP3s and ebooks.

That said I don't know if AirBnB actually makes any money on their operating cycle. I suspect they're still burning investment cash for operating expenses.
posted by GuyZero at 10:55 AM on February 5, 2013


There is always another bubble. The day the last bubble bursts will be the day the world economy collapses and the primary currency becomes semi-automatic weapons... and drones.
posted by evilmidnightbomberwhatbombsatmidnight at 11:19 AM on February 5, 2013


In related news ...

About.me Buys Itself Back From AOL
Here’s your next challenge as a founder of a start-up: Sell your company to a digital behemoth for tens of millions of dollars, then buy it back for a fraction of the cost. Oh, and keep the change.

On Monday, About.me, an online identity Web site, announced that it had done just that, buying itself back from AOL, which acquired the company two years ago.

About.me lets people create a digital business card with links to sites like Twitter, LinkedIn and Facebook.

Tony Conrad, a venture capital investor and co-founder of About.me, said in a phone interview that he chose to repurchase his start-up because he thought it could thrive in a more autonomous setting.

“I think we can build it so much faster, and so much better, by making it independent again,” he said. “There’s no obvious leverage in being part of the AOL media network, and there’s no synergy and integration.”
posted by ericb at 11:35 AM on February 5, 2013


Brings to mind this WSJ article from this past Friday: Sycamore Networks: From $45 Billion to Zilch.
posted by ericb at 11:42 AM on February 5, 2013


I think Amazon typifies these internet age investments. The efficiencies produced are just re-arranging the pie from the perspective of the larger economy.

Amazon profits.
posted by drezdn at 1:11 PM on February 5, 2013


They have big dreams of being bought up by Google or Apple or whatever, and their ideas are just the most banal.

Exhibit A: the FPP just posted: " ... Once you're accepted, you'll get your first invite to set up a Grouper and can finalize the two friends you'll bring along with you. We handle the rest ..."
posted by ericb at 1:35 PM on February 5, 2013


Oh man, I'd be super excited if delicious could do that with Yahoo.
posted by maryr at 3:02 PM on February 5, 2013


Pinterest in Talks to Raise New Round at $2.5 Billion Valuation
"Take that, Quentin Hardy: A day The New York Times reporter declared that a billion dollar valuation ain’t what it used to be, word leaked this afternoon that Pinterest is working on a new funding round that will value the firm at $2 to $2.5 billion."
posted by ericb at 3:03 PM on February 5, 2013


I work at one of these companies; we have customers, revenue, and an excellent team (staying vague on purpose). Our market segment is doing quite well and our customers seem to be happy.

I don't know the finances, so I can't say if our evaluation is deserved but the company itself is making money on it's own and I see no reason it can't continue to be successful.
posted by caphector at 3:54 PM on February 5, 2013


Admiral Haddock: But it's always like--I'm developing a new way to keep track of your bookmarks, or I'm creating a new way to keep track of what tweets might be most interesting to you based on your Amazon purchasing history, or I have a service that will SMS you to wear boots if it's going to be rainy today. And they're always so certain that it's a multimillion dollar (or billion dollar) idea.

I'm actually working on that last one right now, not because I think it's worth a billion dollars (I'm pretty sure it's worthless) but as a bit of a "Can I figure out these API's" self-challenge.

If any mefites want in to the private beta of weathertext, memail me.
posted by Aizkolari at 7:30 PM on February 5, 2013 [1 favorite]


“There’s no obvious leverage in being part of the AOL media network, and there’s no synergy and integration.”

What? No leverage or synergy? Next you'll be telling me there's no scalability, no recontextualizing, and no paradigm shift to a user-centric experience.
posted by salvia at 11:24 PM on February 5, 2013 [2 favorites]


I like Matt's take on it:
I also want to mention a term people in the VC-world consider derogatory, which is “lifestyle business” where someone builds a site, and brings in enough money to support themselves. Investors see that as a bad thing, and it boggles my mind sometimes when I think about the twisted world that produces that kind of idea. I've had discussions with VC investors where they hear about my business and dismiss it as "just a lifestyle business" and I've come back with "hey, it's a pretty good lifestyle, probably a better lifestyle than yours, probably a better lifestyle than if I accepted five million dollars from you."
and Metafilter's success owes something to, literally, not selling out. A site that needs to generate huge returns isn't likely to be a place you want to hang out. Thanks.
posted by theora55 at 10:24 AM on February 6, 2013 [3 favorites]


I agree with the gist of Matt's view but it seems fair to point out that it's "derogatory" as a description as a potential investment, not a way of running a business. I wouldn't want to sink a bunch of money in Metafilter if my expectation is a many-times-over return on my capital within a fairly short timespan. By the same token, I might choose to invest money in a company that I would not seek out as a consumer--because my aim there is to make money, not spend it.
posted by snuffleupagus at 1:18 PM on February 6, 2013


maryr, Yahoo already sold Delicious to AVOS in 2011, and so far AVOS seems intent on destroying it.
posted by jjwiseman at 12:09 PM on February 11, 2013


How Frothy Is the Tech Boom?
"The business of selling tech businesses had a great 2012, with more mergers, and apparently more private sales of corporate equity, than ever before. It is still not enough to absorb the large number of start-ups valued at $1 billion or more. Sooner or later, they will have to conduct an I.P.O. "
posted by ericb at 2:22 PM on February 12, 2013


« Older folkinfo.org is a database of English-language fol...  |  Saving the ancient manuscripts... Newer »


This thread has been archived and is closed to new comments