Dot-Com Not-Bubble

I set up this domain almost a year ago, but it was an article by Conor Dougherty in the New York Times today that inspired me to finally start posting something here.

Overvalued in Silicon Valley, but Don’t Say ‘Tech Bubble’

SAN FRANCISCO — It is a wild time in Silicon Valley. Two-year-old companies are valued in the billions, ramshackle homes are worth millions and hubris has reached the point where otherwise sane businesspeople muse about seceding from the United States.

But the tech industry’s venture capitalists — the financiers who bet on companies when they are little more than an idea — are going out of their way to avoid the one word that could describe what is happening around them.

Bubble.

Could it be? Another dot-com bubble?

A bubble, in the economic sense, is basically a period of excessive speculation in something, whether it is tulips, tech companies or houses. And it is a loaded, even fearful, term in the tech industry, because it reminds people of the 1990s dot-com bubble, when companies with little revenue and zero profits sold billions in stock to a naïve public.
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Today, people see shades of 2000 in the eye-popping valuations assigned to private companies like Uber, the on-demand cab company, which is raising $1.5 billion at terms that deem the company worth $50 billion, and Slack, the corporate messaging service that is about a year old and valued at $2.8 billion in its latest funding round.

But of course it’s not a bubble. At least, not according to people whose continued good fortune and ability to rake in huge piles of money depend on it not being a bubble…

In a recent analysis, [Tomasz Tunguz, a partner at Redpoint Ventures], who was in high school when the dot-com bubble burst, found that investors were paying twice as much for stakes in private technology companies as they were for those that were publicly traded.

He called it “a runaway train of late-stage fund-raising.” He also called it “a really weird time” and “a really hard environment to maintain financial discipline.”
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“If the question is, Are these valuations divorced from fundamentals? I think they are,” [Jerry Neumann, founder of Neu Venture Capital in New York] said.

But that is not a bubble, he said. Rather, it is “an irrational pricing decision.”
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Sam Altman, president of Y Combinator, an incubator that invests in very young companies, has grown so tired of bubble talk that this month he countered it with a $100,000 “no bubble” bet.

The bet, which will be donated to charity, is based on several variables, including his prediction that the five most valuable unicorns, a list that includes Uber and Airbnb, the home rental service, will be worth more than $200 billion by 2020.

That is an impressive display of Olympic-level mental gymnastics just to avoid saying the word “bubble.” Here’s an excerpt from Sam Altman’s blog post in which he proposes the wager:

I’m tired of reading about investors and journalists claiming there’s a bubble in tech. I understand that it’s fun to do and easy press, but it’s boring reading. I also understand that it might scare newer investors away and bring down valuations, but there’s got to be a better way to win than that.
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Instead of just making statements, here is a bet looking 5 years out. To win, I have to be right on all three propositions.

1) The top 6 US companies at http://fortune.com/2015/01/22/the-age-of-unicorns/ (Uber, Palantir, Airbnb, Dropbox, Pinterest, and SpaceX) are currently worth just over $100B. I am leaving out Snapchat because I couldn’t get verification of its valuation. Proposition 1: On January 1st, 2020, these companies will be worth at least $200B in aggregate.

2) Stripe, Zenefits, Instacart, Mixpanel, Teespring, Optimizely, Coinbase, Docker, and Weebly are a selection of mid-stage YC companies currently worth less than $9B in aggregate. Proposition 2: On January 1st, 2020, they will be worth at least $27B in aggregate.

3) Proposition 3: The current YC Winter 2015 batch—currently worth something that rounds down to $0—will be worth at least $3B on Jan 1st, 2020.
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This bet is open to the first VC who would like to take it (though it is not clear to me anyone who wants to take the other side should be investing in startups.) The loser donates $100,000 to a charity of the winner’s choice.

I’d probably take that bet if I were a VC with $100k to burn.

Back to the New York Times:

And no matter how hard people try to avoid them, bubbles happen again and again, from the Dutch tulip bubble of 1636, to the 1929 stock bubble that resulted in the Great Depression, to the housing bubble that buckled Wall Street in 2008.

Even the smartest get caught up. Isaac Newton, whose laws of motion and gravity arguably make him the most important scientist ever, bought into the South Sea Bubble of 1720. It was a bad bet on a company granted a monopoly on trade with South America by the British government. He reportedly said: “I can calculate the motions of the heavenly bodies, but not the madness of people.”

Bubbles seem obvious after the crash, of course. The problem is they are almost impossible to see in the present.

But are they though? Are they, really?