Of course we’re in a bubble. Duh.

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Of course we’re in a tech bubble. But at what part? The early part? The late part?

What concerns me is that the biggest argument I hear for the “it’s not 2000” is this one:

Back then, those were not even real companies — today we’re investing in real companies.

WTF? Tulips were real in 1637. Houses were real in 2007. The companies being invested in the wild bull market of the 1920s were real (as were the companies in the Japanese bubble economy in the 80s).

It’s a completely illogical statement.

Every bubble needs a narrative. It needs a story. This “today these are real companies” is part of the story, the narrative.

Money money money
The Fed has been printing money at a mad rate for years. We haven’t seen serious consumer inflation because the money hasn’t crept into the general marketplace (increased money supply equates to inflation, but money supply is created through debt, and there’s not a lot of the right type of lending). Instead, the money finds its way into the public equity and debt markets, which reflects in a) lowered bond rates and b) higher equity premiums. Both low bond rates and high equity premiums are the fuel for private investments through a number of factors (wealth created by the public market looks to reinvest, private money wants to buy an option on a impending IPO by buying late stage, low bond rates creates an aggressive private equity market, etc., etc.).

What happens in Wall Street does not stay in Wall Street
So with this orgiastic money-love fest on Wall Street, you get a situation like this chart in the private company space:

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(Source)

That’s Series A valuations. Yeah.

As one VC told me a while back: “The exits are great. The entries are tough”.

Okay, there’s controversy.
There are plenty of statistics one can point to either way. PE ratios are way too high for comfort. The bubble proponents all have their theories — Bill Gurley and Michael Moritz (it’s these late stage companies — the unicorns), Mark Cuban (it’s the explosion of angels), Jeff Reeves (look at post-IPO performance) and Adam Lashinksy (the subjective reality, just look around) are all raising the alarm.

I was a professional investor between 1999–2002, working at a hedge fund and investing in private companies. I lived through that last tech bubble intimately. This one is different. There were complete douchebags with no business sense starting companies that were ridiculous. And there were idiots like me investing in them.

Subjective reality
However, I’m seeing the signs:  The age of unicorns (I mean, come on! This isn’t something to be alarmed about?) Billions raised in crowdfunding, with virtually no oversight. The explosion of angels. The explosion in the cost of living and doing business in the valley and the city. The incredible challenges hiring new people. And, oh, it’s starting to get really hard to get a hotel in San Jose (not as hard as in 2000, when I literally stayed in a bug-ridden “motel no-tell” as my only option).

It’s simple to observe that as more money chases fewer deals, deal quality goes to crap. Just because some dude with a lot of cool talk is launching a tech company does not mean he has a clue as to how to actually run the tech company (something many learned very painfully back in the last bubble).

I got a lot of flack years ago when I wrote a similar blog post about oil prices. I was right then, maybe I’m wrong now.

The San Francisco effect
Several years ago, the “center of power” in tech moved from the Valley to the City. This has resulted in some fairly astounding increases in rent and housing costs.

In addition, we see the center of creative power moving from Hollywood to San Francisco. Who sets the design trends now? Not Hollywood, but San Francisco.  Instagram, Twitter and Facebook can have more impact on a trend than the latest movie. Our design philosophy has even become bay-area centric. Look at sites like Canva: the designs are all SF. Ugly stock photos are now replaced by hip (and free) sites like Unsplash.  It’s like the world is awash in misty mornings and cloud afternoons looking over the San Francisco Bay.

Case-Shiller_from_1990

This factor is squirreling the discussion, because people still keep talking about “the valley”. It’s not the valley anymore, it’s the city. 

Now, the good news
The tech economy goes through massive secular disruptions every 20–odd years. In corporate America, the age of the mainframe went to the age of the minicomputer in the 70s, which went to the age of the microcomputer in the 80s , which went to the age of LAN networked PCs, which went to the age of Windows NT-based systems, and to now, what I call the age of heterogeneity. This is an age where devices are dislocated from each other in many ways: people bring devices of whatever type into organizations; people are working on various devices throughout the day. Consumer trends have been similar. There’s a freedom and there’s a whole new world of technology around it.

This is a major disruption and great companies are being built minute-by-minute.

It’s not a disaster and I’m still optimistic. But it’s bound to end. The problem is one runs out of buyers. All bubbles end in a parabolic blow-off. Perhaps we are in the parabolic blow off. Perhaps not. It’s possible, as past history has shown, a correction will hit in the fall. Who knows.

Just watch for when people just go into a frenzy of buying, believing it’s not going to end.

Because that’s when it ends.

3 thoughts on “Of course we’re in a bubble. Duh.”

  1. This is so true it’s a truism. Of course we’re going off a cliff, and perhaps it’s probably late stage because people literally can’t live in the City. But – never underestimate the power of a bull run to go far past the prognostications. It’s when the bears finally turn bull.. well you know the rest.
    I actually disagree this is the age of heterogeneity. It is exactly the opposite, homogeneity. The platforms *don’t* matter. I switched from an Android platform to an iPhone for a slightly less masochistic user experience… other than that, the apps are the same; just that the hip ones are appearing on iPhone first (like Robinhood).
    The real game is to find every aspect of human experience and create an app for it. Robinhood is a great example: the world of stock brokerage accounts was ripe for creative destruction. And there’s still so much more out there to be transformed. Which says that, perhaps, this bull run has a ways to go.

  2. If history is any guide, the bubble will burst in October of next year when the 1% realize that despite the billions they’ve poured into the elections the Republicans once again failed to field a serious candidate and Hillary Clinton is going to be elected President pretty much by default. Then, despite the fact that NAFTA was passed under her husband and the TPP will have been fielded under her predecessor, enough of them will whip themselves into a dither with fantasies of Hillary having an economic menage a trois with Bernie Sanders and Elizabeth Warren they will lose confidence in their bright future of continuing to siphon every possible loose penny out of the American worker forever. Boom, stock market tumble, recession, etc.
    This will then be blamed on Clinton forever despite the fact that she won’t have been in office yet when it occurred. Millions will be unemployed, the recovery will be even slower than this one, and the 1% won’t return to their previous levels of wealth for about six years, at which time they’ll comment upon those terrible years in 2016-2017 when they almost lost everything, meaning the time when the value of their stock portfolios dipped by 30%.

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