So apparently Facebook will be valued at somewhere between $85 to $95 billion during its IPO. For reference, Google was valued at a mere $23 billion during its IPO under a decade ago. Further, Facebook made a profit of around $1 billion last year. In other words, if buying the company outright, an investor would have to wait nearly a century to make any sort of money back on their investment, assuming that Facebook even lasts a century. Naturally, there’s the assumption that Facebook can grow further, but with nearly a billion users already, how can Facebook sustain the amount of growth needed to reflect a valuation of nearly $100 billion?
Yet, just over a decade ago we saw a similar situation, with the `dot coms’ be valued at ridiculous prices, only to see it all come crashing down in the tech crash. What is it about the technology sector (and popular websites in particular) that makes it so prone to these bubbles?
It’s not really tech in general these days just internet companies, and the reason is simply that it’s a young industry. The cause of the first internet bubble was the fact that everyone knew that some companies were going to make billions and become global mega-corps but there was very little experience or skill available to predict which it was going to be. That sort of environment encourages speculation in much that same way as bubbles we have seen in the past.
Personally I’m not entirely convinced that there is a bubble at the moment. I’m not seeing a general overvaluing of all social networking companies, just a few extremely obvious cases. The value of Facebook is idiotic though, I don’t believe they will ever be able to monetise their users well enough to justify it and before too long they will be supplanted by a younger ‘cooler’ service.
We have had one tech bubble and are arguably in a second but I don’t think there’s any reason to say that the industry is prone to it. There’s good arguments on either side whether Facebook’s valuation is fair or not, one line of argument that Facebook is arguing is that advertising is a 400 Billion dollar a year industry and currently only 11% of it is online. This is obviously ripe for a seismic shift and we’re going to see a tidal wave of money flood into digital advertising and Google and Facebook are duking it out for the lion’s share of that market.
The other reason why tech is prone to bubbles is because it’s in a phase of exponential growth and overestimating the exponent by even a little bit can lead to drastically different numbers. Pretty much everything reasonable promised of technology in 1999 has come true, just in 2006 - 2020 instead of 2002 - 2010. In any other industry, being off by 4 - 10 years is minor, in tech, it’s a bubble.
We have a bubble prone economy now. Anything that looks good is going to attract a lot of speculators. Financial investors don’t do much to evaluate individual companies and their potential, they look at trends and averages, using a minimal set of data points, and every pair of points gets extrapolated into a near vertical line. Luckily they’re not speculating with their own money, they just use your 401K.
The issue I have with that argument is that Facebook only provides advertising through Facebook (ASFAIK. I cannot find any acquisitions that give them reach beyond their own garden). Google on the other hand provides advertising across the web and already controls the lions share of that market. And while Facebook is big and gets a lot of views/hits/whatever it’s eventual share is limited by it’s own appeal, something which I am not certain will last as it’s already seen as ‘uncool’ in younger age groups.
But no, I’m not shorting it. Or buying it for that matter
Facebook has reach but it’s other primary asset is information. Facebook knows things about it’s users that no other company knows and it can use that information to gain profit. As soon as Facebook’s figured out a way to get relevance high enough to beat Google on an appreciable chunk of queries, it’s going to roll out it’s AdSense equivalent and compete with Google head to head for display advertising across the entire web.
It’s somewhat easier to believe that some new high-tech innovation will make eleventy zillion dollars than to believe that an innovation in a more mature field will soar that far above the rest. Thus, the bubble threshold is lower in high-tech fields.
Biotech. My professor friends, who have mostly done computer hardware stuff in the past, say that all their students want to study this area. I know there is a thriving biotech industry already, but there was a thriving minicomputer industry in the '70s. When you get to relatively cheap consumer biotech, it is really going to explode.
I have long believed that high tech companies appeal to youth is a factor in the making of tech bubbles. Younger investors tend to take larger risks, while more mature investors tend to look at the fundamentals of a company, and have also seen how bubbles work. When the bubble really starts to build, though, is when the oldsters start saying “I know these kids are wrong, but I want me some of those big profits they are turning.” At that point, the youth driven blip turns into a mountain of speculative trading, and that is what drives all the really big bubbles.
It’s easy to grow quickly in the tech industry, and the barriers to entry are very low. Putting up a website is trivial, and if you begin to see interest in your website, it’s a relatively simple matter to increase your ability to sell your product. There’s no factory to limit your supply-in-stock, there’s comparatively little overhead in terms of equipment to buy, and you can run a very, very popular company with very few employees. Fast growth is not a sine qua non for bubbles (witness the U.S. housing bubble) but it sure helps.
The entire mythos of “Silicon Valley startups” and the tech industry in general contributes to bubbles. The story typically goes something like this:
“A couple of young, entrepreneurial, unconventional thinkers drop out of Stamford, Harvard or MIT to focus on building this website/app/technology they started in their dorm room. They work out of their garage for a couple of years, living off angel investor and VC funding. Their product takes off and proves to be tremendously disruptive to the status quo of whatever industry. Our young entrepreneurs appear on the cover of Fast Company, Wired, Inc, etc as the hot new thing. Soon they do an IPO and retire multi-millionares/billionares.”
The problem is that the vast majority of startups never take off. But no one knows which ones and barriers to entry are low so VC firms and investors are willing to throw money at them. And everyone has this mentality that they will all get rich and are “changing the world” or “the old rules don’t apply” so reason and common sense goes out the window.
This. To take just one aspect of a very large field, the cost of sequencing DNA has vastly out-paced Moore’s Law. The difference in the cost of sequencing DNA today compared to just 10 years ago is similar to the difference in the cost of RAM between today and 1980. And the whole field is advancing at a similar rate - I’m looking into inserting green fluorescent protein into an ale yeast so I can make beer that will glow in the dark. That’s genetically modifying an organism to make it glow green. And I’ll be able to do it in my kitchen. Granted, I have access to a microbiology lab, but still. That’s something that would have been tantamount to magic 40 years ago, and now I can do it in my kitchen.
It won’t be actual at-home biotech, but rather industry will start producing amazing things with biotech. Bacteria that spit out any drug (or other chemical) you can think of. Algae that secrete lipids that can burned in an engine. “Artificial” organs grown from your own stem cells, ready to be implanted. This is all stuff that we are on the cusp of developing: there are people working on it right now, and it will be online sooner than we think. But in 30 years, the most incredible uses for biotech will be things today’s researchers haven’t even thought of yet.
Imagine a world where we can type up a whole genome on a computer screen, just a long string of A’s, T’s, C’s and G’s. Then we send that off to a lab, and they synthesize a completely man-made ring of DNA with that sequence. We then inject that material into a “blank” cell that has been wiped of it’s own genetic material, and watch as our completely man-made genome boots up the dormant cell and starts respiring, reproducing, living. That has already happened, two years ago in fact. It took them about 10 years and $40 million, but in a few decades it will take days, be automated, and cost a few hundred bucks. In 30 years we’ll look back at today and think at-home DNA tests are as quaint as the idea people in the 70’s had of home computers costing tens of thousands of dollars being used as kitchen appliances to organize recipes.
There will be home DNA analysis kits before you know it. When I was in college DNA sequencing was very controversial, and there was a lot of discussion whether Harvard and MIT should be allowed to do it. My daughter did some for freshman biology. So, who knows?
When the VCs get a pitch about a great new modification of a really original idea, fifty other VCs are getting 50 other pitches for more or less the same thing. I suspect all their business plans don’t take into account the zillions of startups pushing for the same market, and most of them flop.
Nothing to do with college kids. The same thing happened in the '70s with minicomputers. Digital and Data General did well. so everyone and his brother built and tried to sell minis. I used one in grad school built by Lockheed of all people.
During the bubble I knew all sorts of people who joined startups that I didn’t think had a chance (and I was right.) The optimism is amazing.
Not only is the optimism amazing, it is a strictly enforced groupthink. In another thread, someone posted a values and mission statement deck from Netflix. For all the “freedom” and “collaborativity” they espouse, they can be ruthlessly harsh on anyone who doesn’t share in that irrational exhuberance.
