In the past month, there have been a plethora of doom and gloom articles about web 2.0, Silicon Valley, the economy, and start-ups. In this series, I address some of the major concerns, arguing that perhaps the negativity is not all warranted.
Part 1
From Amerika.org: The coming dot-com 3.0 collapse: Google, Apple, Facebook, Amazon and Twitter
Everyone has been predicting tech bust 2.0 since 2009, and they keep being wrong. The post-2008 tech boom – which includes web 2.0, Facebook, Google, Uber, Amazon, and Silicon Valley – is more permanent than cyclical or transitory. Like the Bitcoin boom, it has also defied all predictions of it demise. It’s not like 2000 or 1929 where the is going to be a deafening implosion. Instead, the exiting trends that are established, such as valuations going up, will continue. The arguments for tech bubble 2.0 are less convincing than the arguments for a continuation of the boom.
Fred Wilson, in his predictions for 2016 writes:
Markdown mania will hit the venture capital sector as VC firms follow Fidelity’s lead and start aggressively taking down the valuations in their portfolios. Crunchbase will start capturing this valuation data and will become a de-facto “yahoo finance” for the startup sector. Employees will realize their options are underwater and will start leaving tech startups in droves.
As a VC expert, I’m surprised Fred doesn’t realize these markdowns are strategic (possibly tax related), not because of reduced investor demand. There is zero evidence of Snapchat shares changing hands at reduced valuations.
Crunchbase will start capturing this valuation data and will become a de-facto “yahoo finance” for the startup sector. Employees will realize their options are underwater and will start leaving tech startups in droves.
Fred is being sensationalist here. I don’t see any of that happening, except for the deterioration low-quality ‘unicorns’ like Jawbone, GoPro, and Fitbit.
A someone who has followed financial markets for years and written thousands of words and hundreds of essay on the matter, I’m pretty good at being right, at separating doom and gloom hype from reality
In an earlier article about Theranos, I give examples of how the media predicting failure:
Whether it’s Tesla, Uber, Theranos, or or any other successful start-up, the left are like bloodhounds drawn to the scent of failure of the successful, even when such failure does not actually exist. The liberal media is so desperate for the successful to fail that they have to make stuff up, turning molehills into mountains.
There are many more…
In 2005-07, the leftist media dismissed Facebook as a fad like Myspace. After being wrong there, then, in 2012, the left said Facebook was doomed because the stock fell after the IPO, and that Facebook would not be able to monetize mobile users. The stock is up 300% since then, and mobile advertising growth is crushing expectations:
In 2011, the liberal media sensationalized a story about an AirBNB renter vandalizing an apparent. What was overlooked or ignored in the anti-AirBNB sensationalism is that the vast majority of rentals are without incident.
The event happened, which is a terrible blow to the company’s reputation. The confusion seems to be around whether or not Airbnb will compensate her for her losses. The company at first said no, then said yes, and clarified that they made the offer last month when it happened, not in response to the PR storm yesterday.
Terrible blow? lol more like a hiccup. The valuation of AirBNB has since surged 500%. So has growth.
The problem is there is no accountability. Pundits can just shoot their mouths off, making unsubstantiated comments that are later proven wrong and no one calls them out on it.
Google has some obvious weaknesses. Its ad revenue per page has been declining for years because the internet is now coated in ads, and very few people on the internet actually buy anything. This has caused sites to become clickbait in order to draw in enough traffic to get a decent income from the lower-paying ads they now run; this in turn causes a concentration of traffic on relatively few sites. That puts us right back in the place where we were with old media where six big companies ran the show, and this has decreased the value of the internet as a news source.
Google has been unstoppable since launching its ad platform in early 2000, with a monopoly contextual ads and duopoly in mobile advertising (shared with Facebook). Cost per click keeps rising, and it seems like virtually all commercial websites have Google ads. As for ad blindness, what a lot of skeptics don’t understand is that adverting is most effective for 60% or so percent of the general population who have IQs between 80-110 and will keep clicking ads, which is a lot of people and a lot of clicks.
Second, there are two people who buy ads: small buyers who are looking for a quantifiable ROI (sales, leads), and large buyers that are looking for ‘mind share‘, where the ROI is harder to quantify. An example or the former is someone selling an ebook report or collecting emails, and the latter is, for example, a movie studio buying ads to promote a Summer blockbuster. The studio doesn’t care if visitors buy anything or not (the movie trailer doesn’t have any way to buy anything); they just want to blast their movie promo everywhere, and will pay a lot to do so. Same for those expensive car ads you see everywhere. Ford doesn’t expect anymore upon seeing their ad to immediately rush out and buy a truck, but instead to merely consider Ford as an option when shopping for a new automobile.
Right now, as of February 9th 2016, Snapchat announced a deal with Viacom – a very deep-pocket advertiser looking to spread ‘mind share’. Now we can see how Snpachat will live up to its $15+ billion dollar valuation, which I predict will rise as high as $30-60 billion within the next year or two.
Facebook wallows in weakness as well. It has tons of users because people can access it from at phones or on the job. The problem is that these people, beyond a few product categories, do not represent consumers. They are there to screw around. As a result, while Facebook and other social media have many users, they do not have many buyers. It’s not even clear that ads on these sites attract eyes from people who want to buy the products, which is why the ads are getting more random and more frequent, becoming a genteel form of spam. Twitter suffers the same problem.
Hardly, as I show above regarding Facebook’s huge growth in advertising revenues. Facebook, unlike the doomed Myspace, appeals to an older demographic who have more purchasing power than teens. But even sites such as Snapchat and Instagram, that appeal to younger demographics, are not having trouble finding advertisers, who are willing to spend millions of dollars promoting clothes and other products to this large demographic (mind share). As part of the boom in mobile and video advertising, Instagram revenue is projected to surge:
Also, as I explain above, a lot of online advertising is to build ‘mind share’, with the intent of merely nudging people to consider a brand, not to actually make an immediate purchase.
And from the WSJ: Tech Startups Face Fresh Pressure on Valuations
The one for Square is off only 20% from the private round vs. the Dec. 31st close. It hasn’t moved that much, and it’s too soon to assume it’s under pressure. Most of the valuations gains were made in the years leading up to the IPO, as companies are going public later and later. That could explain why some of the post-IPO gains seem stunted.
The author mentions the worst companies that even I, web 2.0 bull, would never invest in. He mentions box.net but ignores dropbox. No mention of Air BNB, Uber, Snapchat, Slack. Although these aren’t public, there is an investor bias against hardware, but such a bias is warranted given the storied history of once high-flying hardware companies eventually soaking investors due to profit margin compression, competition, or becoming fads or obsoleted, examples being Sony, Atari, Garmin, Nintendo, Sega, Fitbit, Nokia, Motorola, Gopro, Jawbone, Skull Candy, Research in Motion, and many more.
Yeah, there is valuation pressure, but for companies that aren’t very good. This is evidence investors are becoming smarter and more selective, whereas in the 90′s a company like Fitbit would have had a PE ratio of 500 instead of 50, which is what it is right now.
Some more shoddy reporting for the from the WSJ: As Angel Investors Pull Back, Valuations Take a Hit
On AngelList, a crowdfunding site aimed at such investors, the average valuation for a company receiving funding reached $4.9 million for two quarters last year, its highest level in five years. But valuations dropped to $4.2 million in the fourth quarter, the lowest level since early 2012. Dow Jones VentureSource data shows that deals involving angel investors fell by 16% last year.
It seems like a big deal until you realize there is a huge variance in prices and that 2012 isn’t very long ago. The biggest and most successful ones such as Snapchat, Uber, Air BNB, Dropbox, and Pinterest seem to be doing just fine.
It’s easy to separate the potential winners from the losers. As mentioned before, start-ups that deal with hardware and other physical stuff tend to fare much worse than apps, websites, and software. For example, Fitbit, Skullcandy, Jawbone, and Gopro have all performed poorly. Now jawbone got the axe, raising money at half its 2014 valuation. Had VCs heeded my simple strategy of avoiding hardware, a lot of pain could have been avoided. Hardware is just too difficult to get off the ground. Costs are too high, and tangible products are vulnerable to becoming fads of commoditized.
From the New York Times: Expect Some Unicorns to Lose Their Horns, and It Won’t Be Pretty
Haven’t we been ‘expecting’ this since 2012, yet the biggest, most successful unicorns keep going up in value.
For all the hype and doom about Square stock, the price is back to where it was when it began trading a month ago, although it has fallen 20% in recent weeks.
But this is a good opportunity for employees to understand the risks of stock options, but it’s not like the world is coming to an end. Such risks have always existed.
My prediction is by the end of 2016, we’re still going be seeing record high valuations for the top unicorns.
‘The EU Is on the Verge of Collapse’—An Interview
I’ve noticed a trend recently of sites on the ‘right’ legitimizing Soros by linking to his commentary, almost in agreement that, yes, economic crisis is inevitable, as Soras says it is, and crisis is ‘good’. Soros, like most leftists, seeks crisis so that Communism or some sort ‘collectivist’ government can be enacted during the rebuilding phase, as has happened after the Great Depression, October Revolution, and other examples in history, and even recently in 2008 with the election of Obama. The ‘right’ could be delusional to believe that they will accede power should there be a ‘reset’ and not the left. Historically speaking, economic crisis and upheaval has always benefited the left.
From my earlier Soros article, Soros: It’s the 2008 crisis all over again:
If civilization falters or completely fails, what makes the right certain the left won’t take over, creating something worse than we already have?
Also, Soros, like most liberals, has a really bad track record at predicting stuff. Another liberal, Krugman, as some may have forgotten, predicted in 2011 & 2012 that the Euro would fail, which has yet to happen.
As for the US economy, yes, the labor market is weak, as it has been since 2009 and will likely remain due to automation and other factors, and oil is low, but the rest of the economy isn’t that bad. GDP will also remain slow, and it would not surprise me if eventually the 30-year treasury yield falls below 1.5% an then 10-year yield below .5%. But due to strong consumer spending and exports in spite of weak GDP and anemic job market, multinational companies will continue to print cash, and that bodes will for stock prices. In the past week, Bank of America, Goldman, and Jp Morgan crushed earnings estimates for the 24th time in a row, as far back as the recovery began in 2009. Netflix also crushed earnings, and I expect Google, Facebook and Amazon to also beat earnings, as they always have… The new Star Wars movie has officially grossed $2 billion. Too many people are expecting or want a repeat of 1929, 2000 or 2008 again, but it’s just not in the cards, sorry.
However, many disagree. From Forbes: Why ‘The System’ Is Rigged And The US Electorate Is Angry
Then in the 1970s, something went wrong. It was as if a strange new economic disease began to infect everything. Firms focused more closely on making gains for themselves and stopped passing on gains in productivity to their workers.
Along with the infamous chart that shows how real hourly wages have stagnated relative to productivity:
There are a few things to keep in mind:
1. Living standards have surged. Technology, as well as very tame inflation, has made many things cheap and affordable, compensating for the decline in real wages. If CPI-based inflation is close to zero, does it matter that real wages are also flat?
2. Entitlement spending is also surging – services such as medicare, education, welfare, social security, emergency room treatment.
3. Non-wage compensation has also surged. Companies are paying more in benefits such a healthcare.
4. Although we’re seeing a hollowing out of the middle, there also also been a gain in upper-income jobs.
It is true that Pew’s analysis shows that the number of households that fit within their categorization of middle class has shrunk by 11 percentage points since 1971 [from 61% to 50%]. It is true that the proportion of households that are classified as lower class has increased from 25% to 29%. But it is also true that the proportion of households that are classified as upper class has increased from 14% to 21%.
That is to say, part of the reason that the middle class is disappearing is that they are succeeding and jumping to the next bracket. And a greater number of them are moving up than moving down. Be wary of the assumption that the drop in the middle class is a sign of a crisis.
Coincidentally, Reddit seems to agree with #1, in a recent ‘Shower Thoughts’ post that went massively viral: My standard of living is far greater than that of a king in medieval times.
Here is the most up-voted comment, which was also ‘gilded’ in approval:
I think people are taking OP overly literally saying that he doesn’t have the powers of a king.
What he means is that in our modern world we can eat food from almost anywhere we please, we have modern healthcare that can cure diseases that would have been fatal in medieval times, we can travel to other lands quickly and safely. All of this would have been out of reach for even the wealthiest people in medieval times.
This is true. James Altucher also expounded on the ‘deflationary’ effect of technology:
Think about computers: your price per speed and functionality in your computer has gone down every year since they’ve been invented.
ANOTHER GREAT EXAMPLE OF INNOVATION AND DEFLATION
Think about lighting your house. In the 1880s you would have to work for 15 minutes to pay for an hour of kerosene lamp usage.
Today you have to work for 1/2 a second to get an hour of reading light.
Ditto for cars. For clothing (as a percentage of your income) and even for food (as a percentage of your income – food costs have gone from about 20% of your income in 1969 to about 3% of your income. )
However, class envy plays a major role, as someone on Reddit astutely points out:
Many/most people are more concerned with relative status than absolute progress. This makes evolutionary sense. My genes want to make copies of themselves and this is more driven by where I stand in comparison to everyone else than how high my standard of living is.
When people discuss income inequality, this is the factor driving their concerns. Because it’s a deep-seated emotion, people frequently do not realize relative status is the reason they care about inequality. They then engage in motivated reasoning and generate alternative reasons, like the rich are taking from the poor. While the stated reasons for being concerned with income inequality are frequently illogical, the underlying sentiment that causes them is not.
Bernie ‘wealth spreader’ Sanders’ whole campaign is about pitting the poor against the rich. Rather than celebrating wealth creation and technological progress, the left wants to take away the fruits of labor from the most productive, fanning the flames of class warfare.
I’m sure you’ve heard this Marxist slogan, ‘From each according to his ability, to each according to his needs’. Although communism promises to end scarcity, the result is an abundance of nothing. Everyone is equal, but worse-off as a result. Without incentives, there is no production.
But that doesn’t mean capitalism isn’t entirely shielded from criticism, which is that capitalism, especially in the increasingly competitive winner-take-all post-2008 economy, requires a lot of debt, effectively making it ponzi-like in nature. To succeed in post-2008 capitalism, due to the exorbitantly high costs and competition, you need to convince someone to write you a blank check, and then that ‘someone’ also needs funding from someone else, ad infinitum. As opposed to multinationals that can borrow at next to nothing, borrowing costs for small businesses are too high and the failure rate is also very high, leaving the entrepreneur financially ruined. The implosion of the banking and housing sector in 2008, and, in 2014, the implosion of the energy sector, brought to light the risks associated with debt and leverage. But capitalism still works and is the best of all alternatives. This is because while the failure rate is very high, as are the initial costs, the expected value over many iterations is still positive.
And from the New York Times: What’s Our Duty to the People Globalization Leaves Behind?
What is often forgotten or ignored are all of the people globalization helps lift up. By several estimates, free market capitalism has pulled over a billion people out of poverty.
To quote Peter Nixey:
In addition to that, in the the last 50 years the world has become a much better place to live. Health, wealth and education are up across the board. That’s happened because our economies are more efficient and effective. The people who run the businesses that drive those economies have benefitted proportionally. Is it really such an issue if a few people get rich so a lot of people can wealthy?
No it’s not, and many Americans agree. Onine, it’s a different story, and it seems like everyday there are at least a couple articles about wealth inequality and tangentially related topics of capitalism, technology, and globalization…that just goes to show how important of an issue it is to many people (online that is). Offline, it’s not really such a big debate. Sports tends to dominate offline discourse. This is an issue that affects everyone, and solutions are hard to come by, and that’s probably why it’s such a heated debate, with participants ranging from economists to average people. Some have considered it to be the defining issue of the century. Maybe.
However, as I discuss in Paul Graham: Economic Inequality and The Refragmentation, there are no obvious or simple solutions to people who are displaced/disenfranchised by globalization and or automation, and none without major limitations. We’re probably going to be seeing more ‘gig’ jobs, more entitlement spending, and a lower labor force participation rate. As mentioned before, cheaper goods offsets lower real wages, since globalization helps keep costs low by exporting inflation. Historically speaking, new jobs tend to be created to replace obsolete ones, and globalization may also spur job creation. Simply getting rid of globalization may introduce more problems than it solves.
Maybe we need to come to terms with the fact that the meritocracy is one stratified by IQ, with some having the cognitive potential to produce more merit than others, and those smarter people will tend to rise to the top socially and economically, too…But in return, we (average people) get new technologies, job creation, and higher standards of living owing to the creations of the cognitive and financial 1%.
Boris Johnson is right in that the economy has been ‘shaken’ and all the ‘high-IQ’ cornflakes are rising to the top of the ‘cereal box’ that is analogous to the economy. The outrage over his comments was predictable, as million of people want to believe they have free will instead of having their fate largely determined by a number, IQ. That doesn’t mean we need to do away with merit or get mad, but instead offer economic conditions for everyone to succeed within their cognitive potential. You can’t raise society and the economy by chopping down the smartest, the most successful, which is what Paul Graham was getting at in his essay. Class warfare is analogous to Animal Farm where the uprising makes things worse for everyone. People who are rich should not have to prove they are sufficiently empathetic to the poor. There’s a saying, ‘offence is taken, not given’.
Another argument you’ll commonly hear is, why do the rich need so much money? Couldn’t it be spent better elsewhere?
Even leaving aside rich using their status to solidify their position, consider this: are the policies that maximize GDP and lead to high wealth inequality the same policies that maximize the prosperity of the middle 50% of the population? No economic rule I know of guarantees that to be the case.
Wealth isn’t created in a vacuum. Wealth can only be created in places with a high level of social order. That social order isn’t created by exceptional individuals, it’s created by the behavior and attitudes of ordinary people. Given that, why should societies not structure themselves to maximize the prosperity of the majority?
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What you have to keep in mind is that the fed. govt. is typically really careless with money, and many govt. programs have a negative ROI. Yes, TARP and Tesla are two examples of govt. intervention working, but then you have the Obama Stimulus, which the majority economists concede was a failure, costing between $400,000-$2 million per job created. And out of control entitlement spending for low-ROI things like disability, food stamps, healthcare, and so on. The war on terror and Iraq, while possibly necessary, was too expensive and laden with waste. I would support a high-IQ basic income, more gifted education programs, more funding for tech start-ups, and a eugenics program, but instead we (the govt.) keep throwing money down the drain on people who are net-negative to the economy and society. We need to get over this ‘muh liberties’ BS and understand that your liberties and freedoms go out the door if your survival is dependent on my taxpayer dollars.
Also, capitalism is about incentives. When you create a negative incentives, it creates externalities, possibly in the form of companies moving overseas, job loss, and economic stagnation. Second, is it fair for someone or some entity to confiscate what is not theirs, beyond taxes? Third, capitalism is expensive. Venture capital is funded by wealthy, an example being the Space-x and Blue Origin rocket programs, both very costly and funded by billionaires Musk and Jeff Bezos. If taxes were much higher, such programs may not exist.
Most venture capital is private:
High corporate tax rates create an economic incentive for companies to move factories and offices overseas through ‘inversions’ to get a lower tax rate:
http://www.economist.com/blogs/economist-explains/2015/08/ec..
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Relative to most developed countries, America has a very high corporate tax rate:
It’s a rock-solid fact that the U.S. corporate statutory tax rate is the highest among developed nations and is significantly higher than the average. According to 2014 data from the OECD, the combined federal and state statutory corporate tax rate for the United States is 39.1 percent. The average of the other 33 members of the OECD is 24.8 percent — 14.3 percentage points lower than the U.S. rate. Weighted by country GDP, the average for these 33 countries is 28.3 percent — 10.8 percentage points lower than the U.S. rate.
Rather than attacking the rich, who create jobs and technologies, another solution is to make life easier for millennials, such as by chipping away at credentialism, which is creating a feedback loop of higher tuition. The problem is disparate impact and quotas, which hurt job seekers, students, and employees.