Not knowing a whole lot about Silicon valley in particular and even less about economics, I still get the feeling that the US tech industry is very much in a bubble.
From the outside, these absolutely soaring valuations of everything from established players like Facebook, Twitter and LinkedIn, to new start ups (Color being a recent example), resembles a somewhat illogical and overly optimistic view of the value of those companies.
Also many new and unproven companies raise amazing amounts of money, for, at least seen from the outside, downright silly business proposals (share your credit card expenses, anyone?).
Apart from the valuations, there is the point of founders and early investors taking huge amounts of money "off the table" in subsequent funding rounds. A recent example being Groupon, where I think up to 30-40% of the raised capital went directly to "executive officers, directors or promoters". In my uninformed opinion, in a "normal" market, very few investors would accept that money invested for business growth, was used for the purpose of massive payouts to founders and C level personnel. However in the US, at the moment at least, it seems very common. Maybe this has to do with the assumed fact, that if some investors aren't up for those terms, other investors are itching to jump in.
This gives way to first founders having massive payouts. Then directors, then investors, then the next round investors etc. This, in my mind, resembles the "greater fool" theory, which was common behaviour during the recent housing bubble (buy the house, flip it 6 months later for 20% profit, next owner repeats).
Finally, there's the "gold rush" or the less flattering "herd" mentality, where it seems that there are now so many people interested in investing in tech, that again valuations goes higher and higher. We even have hollywood actors, investing heavily in mobile app companies.
As mentioned, I am not an expert in economics, bubbles or Silicon valley, so I'd be interested in hearing from anyone who can question my conclusions, and add to the discussion.
I am not an expert either, but I may be able to comment on a few things.
> Also many new and unproven companies raise amazing amounts of money, for, at least seen from the outside, downright silly business proposals (share your credit card expenses, anyone?).
Judging by the current climate in SV, I can safely say that silly businesses are not still not really getting funded. Blippy for example was forced to pivot. Investors are still looking for businesses that are either going to make lots of money now, or engage lots of people and make lots of money later. Many people outside SV scoff at the 2nd clause, but with 1B people online and 3B cellphones in the world, and instant distribution channels like the App Store, it's not so absurd. Just as a general rule, if you see something seemingly stupid get funded, they probably have something else going for them -- crazy traction, awesome customers, or past entrepreneurs as founders.
> Apart from the valuations...taking huge amounts of money "off the table" in subsequent funding rounds.
It's true that a huge amount of the raised money went to the execs, but that stock was sold, at the established price, by the "executive officers, directors or promoters" in question - one could argue, [as Andrew Mason himself does](http://www.businessinsider.com/groupon-ceo-andrew-mason-tell...), that it was an intentional way to get early liquidity. Obviously that price has now gone up; it was their choice to sell. Founders often argue that raking back is a good thing because it prevents people from needing to sell perfectly good businesses to get liquidity. Just playing devil's advocate.
It is one thing to argue that valuations are high and another thing to argue that silly ideas are being funded. I don't see any evidence that the bar for getting funding has been lowered. I know perfectly good teams with some traction hustling hard to get funded. In the case of Color, Bill Nguyen has sold a company for 800 M$ in 2000 and 80 M$ in 2009. I'm pretty sure he's not raising a big round to feel good about himself. Also: Sequoia Capital http://en.wikipedia.org/wiki/Sequoia_Capital
@colinyoung makes a good point about taking money off the table. Personally, I think it's a good thing that some of these companies remain independent instead of Flickr-ing off.
I would add that investors in most tech companies right now are qualified and certainly no fools. Don't worry until you see your dentist trying to invest in a startup unrelated to his field of practice.
We are in a growth cycle and hopefully, all the press about a bubble won't become a self fulfilling prophecy. I'm more concerned about journalists than angels or VCs.
Comments
Not knowing a whole lot about Silicon valley in particular and even less about economics, I still get the feeling that the US tech industry is very much in a bubble.
From the outside, these absolutely soaring valuations of everything from established players like Facebook, Twitter and LinkedIn, to new start ups (Color being a recent example), resembles a somewhat illogical and overly optimistic view of the value of those companies.
Also many new and unproven companies raise amazing amounts of money, for, at least seen from the outside, downright silly business proposals (share your credit card expenses, anyone?).
Apart from the valuations, there is the point of founders and early investors taking huge amounts of money "off the table" in subsequent funding rounds. A recent example being Groupon, where I think up to 30-40% of the raised capital went directly to "executive officers, directors or promoters". In my uninformed opinion, in a "normal" market, very few investors would accept that money invested for business growth, was used for the purpose of massive payouts to founders and C level personnel. However in the US, at the moment at least, it seems very common. Maybe this has to do with the assumed fact, that if some investors aren't up for those terms, other investors are itching to jump in.
This gives way to first founders having massive payouts. Then directors, then investors, then the next round investors etc. This, in my mind, resembles the "greater fool" theory, which was common behaviour during the recent housing bubble (buy the house, flip it 6 months later for 20% profit, next owner repeats).
Finally, there's the "gold rush" or the less flattering "herd" mentality, where it seems that there are now so many people interested in investing in tech, that again valuations goes higher and higher. We even have hollywood actors, investing heavily in mobile app companies.
As mentioned, I am not an expert in economics, bubbles or Silicon valley, so I'd be interested in hearing from anyone who can question my conclusions, and add to the discussion.
I am not an expert either, but I may be able to comment on a few things.
> Also many new and unproven companies raise amazing amounts of money, for, at least seen from the outside, downright silly business proposals (share your credit card expenses, anyone?).
Judging by the current climate in SV, I can safely say that silly businesses are not still not really getting funded. Blippy for example was forced to pivot. Investors are still looking for businesses that are either going to make lots of money now, or engage lots of people and make lots of money later. Many people outside SV scoff at the 2nd clause, but with 1B people online and 3B cellphones in the world, and instant distribution channels like the App Store, it's not so absurd. Just as a general rule, if you see something seemingly stupid get funded, they probably have something else going for them -- crazy traction, awesome customers, or past entrepreneurs as founders.
> Apart from the valuations...taking huge amounts of money "off the table" in subsequent funding rounds.
It's true that a huge amount of the raised money went to the execs, but that stock was sold, at the established price, by the "executive officers, directors or promoters" in question - one could argue, [as Andrew Mason himself does](http://www.businessinsider.com/groupon-ceo-andrew-mason-tell...), that it was an intentional way to get early liquidity. Obviously that price has now gone up; it was their choice to sell. Founders often argue that raking back is a good thing because it prevents people from needing to sell perfectly good businesses to get liquidity. Just playing devil's advocate.
I am not an expert either.
It is one thing to argue that valuations are high and another thing to argue that silly ideas are being funded. I don't see any evidence that the bar for getting funding has been lowered. I know perfectly good teams with some traction hustling hard to get funded. In the case of Color, Bill Nguyen has sold a company for 800 M$ in 2000 and 80 M$ in 2009. I'm pretty sure he's not raising a big round to feel good about himself. Also: Sequoia Capital http://en.wikipedia.org/wiki/Sequoia_Capital
@colinyoung makes a good point about taking money off the table. Personally, I think it's a good thing that some of these companies remain independent instead of Flickr-ing off.
I would add that investors in most tech companies right now are qualified and certainly no fools. Don't worry until you see your dentist trying to invest in a startup unrelated to his field of practice.
We are in a growth cycle and hopefully, all the press about a bubble won't become a self fulfilling prophecy. I'm more concerned about journalists than angels or VCs.