Tuesday, June 28, 2011

Tech bubble?

You can read through the Horowitz/Blank tech bubble debate on the Economist website and make up your own mind, but I think it's interesting how neither characterizes how this particular bubble is interesting and different.

I think that Blank's model about how bubbles inflate or deflate is fine, but not particularly pertinent to whether we are in a bubble now. Horowitz, by talking about public valuations (and referring to Google, Yahoo! etc. in particular) misses the point entirely.

The bubble, if there is one, is entirely private, and the valuations, if they are generous, as VC valuations, not public market valuations. If young startups are getting funded at valuations that require exits at dramatically higher levels than they historically have, then it's a bubble. And this is almost certainly happening now as VC funds left over from the last boom seek something, anything to invest in hoping they will get the next Facebook. Wealth angels who cashed out in web 1.0 or web 1.5 are also pushing up early valuations.

I don't know if the bubble will spill over to public markets or if it will cause silent destruction amongst VCs and institutional investors. The well known private companies with strong earnings (Facebook, Zynga) will probably do fine, but I don't know how Foursquare, no longer hip, will ever justify its $500M valuation. Even twitter will lose its luster if it stops growing (which I believe it has). People think Groupon sucks and it isn't even public yet.

After these guys the bench lacks glamour, and both Pandora and LinkedIn aren't anything like the Netscape boom that started the party in 1997.

The defining characteristics of bubbles is that some chump is left holding the bag at the end. In this bubble, the chumps are VCs unless they can trigger a big stock market boom.

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Wednesday, June 15, 2011

Has the internet bubble popped already?

Pandora IPO'd at $20, opened at $25, and then slid down to $17.42.

This should be celebrated as a triumph, as Pandora raised the correct amount of cash from its offering (as opposed to LinkedIn, who left a bunch of money on the table).

That said, this may deflate the bubble which is strong in private markets, but needs greater fools in the public market to keep on going. I've met Tim, and I hope he's not too bummed about what happened today.


Mortgages (2004-2007) are not like normal loans

Megan argues that defaulting on your mortgage is not OK just because your house is underwater. Having the property secure the debt does not give you a free put option.

Ordinarily I would agree, but not for loans made during the housing bubble. During that time, lenders were not concerned about the borrowers ability to repay (see NINJA), but were, in collaboration with the borrower, making a bet on rising housing prices.

Since ability to repay was not part of the loan decision, there is no obligation to pay on the part of the borrower.

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Friday, June 03, 2011

Get while the getting's good

LinkedIn. Groupon. Zynga. Pandora. All rushing for the IPO exit with what looks like unseemly haste.As Dan Primack says
...my unease is not based on the above concerns. I’m already on record as saying there’s a bubble (albeit not as severe as 1999), and I think that Groupon Now shows that the company is able to smartly evolve beyond its core product.

Instead, this is about Groupon’s seeming obsession with liquidity. Remember, it wasn’t too long ago that Groupon raised a $950 million Series E round of which $573 million was used to partially cash out early employees and shareholders. Then there were reports that the company was pushing to go public even without having its bankers in place. Then it files just one month after hiring its #2 to Mason (following the surprise resignation of Rob Solomon). And the S-1 says that some of the shares being offered will come from “selling shareholders” – as opposed to all coming from the company itself.

I buy the broader arguments in favor of founder liquidity, but we’re way beyond “paying the mortgage” here. And while Groupon throws off tons of cash, it’s wildly unprofitable. Were the Groupon IPO roadshow making its way to the home office, I’d simply ask: “Why the rush?” It can’t simply be for working capital, since it could have held some of that earlier $573 million back (or not let insiders sell via the IPO). Then I’d hope the answer doesn’t scare me more…
There's optimism that there are plenty of greater fools around right now.