[Infowarrior] - What Bubble? Silicon Valley's Younger Set Opts for Optimism

[Richard Forno]

(c/o DG)

[ department of those-who-don't-know-history-doomed-to-repeat-it but
with the (unwritten below) note that when these companies go down
they take not just money but data with them ]


http://online.wsj.com/articles/what-bubble-silicon-valleys-younger-set-opts-for-optimism-1414969190

What Bubble? Silicon Valley's Younger Set Opts for Optimism
by Christopher Mims, November 2, 2014

There's a generation gap in Silicon Valley, and it's over a great
deal more than who is using Snapchat versus who is still sending
emails. In tech, the psychological dividing line is whether you
were in the game the last time it all came crashing down.

"I remember the bubble bursting, but only just; I was 14," says Sam
Altman, president of Y-Combinator. Mr. Altman may have yet to see
his 30th birthday, but as the head of the most-influential incubator
of startups in Silicon Valley, he is among the most well-connected
people in tech.

Everyone from Facebook co-founder Dustin Moskovitz to Yahoo Chief
Executive Marissa Mayer guest-lectures in the course on startups
Mr.  Altman teaches at Stanford University. Companies that graduated
from Y-Combinator include Airbnb and Dropbox.

"People have been calling the next bubble [in tech] since 2008, and
it's like they want it to crash," says Mr. Altman, referring to
recent talk about how overheated are the valuations of early stage
startups. I admit I've been among those folks, calling Uber
Technologies' $18.2 billion valuation a "head scratcher," given the
competition it faces now and in the future.

Talking to Mr. Altman brings to mind another generation gap --
between those who lived through the Great Depression and their
children. Major economic crises can scar even the most resilient
among us. The question about what's currently going on in tech is
whether it's different this time.

I realize that is almost always a rhetorical question, but here's
how Mr.  Altman -- and to be fair, many others -- frame it: In the
2008-2009 stock marke t crash, many tech companies that had little
or no revenue were vaporized.  Plenty of those kinds of companies
still exist. Some may even be in the list of 49 privately held
companies currently valued at $1 billion or more.

The good news is that since these companies remain private, public
markets aren't directly exposed to them. Companies waiting to go
public until they mature a bit is perhaps the one lesson that
everyone learned from the last bubble.

My own perspective is that of those 49 companies, there is no way
to know how many could weather the kind of macroeconomic shock that
is inevitable in our cyclical economy. Perhaps most of them learned
from the last crash, or maybe none of them did, in which case a
bunch of venture capitalists -- and more important, their investors,
known as limited partners -- could take an epic bath.

For the average investor, that would be fine if LPs were just a
bunch of hedge funds and wealthy individuals, but public pension
funds are the largest single source of money for venture-capital
funds, representing 20% in 2014. And, of course, there always is
the danger that high-profile failures of big startups, which some
VCs have said are inevitable, would spook the wider markets.

Mr. Altman says companies that come out of Y-Combinator are prepared
for anything. "One of the things we urge Y-Combinator companies to
do is to have profitability in grasp" he says. "If you need to get
profitable before your A round of money, you ought to be able to
do that."

Whether or not companies that can make money when consumers are
feeling confident can continue to make money when they are queasy
about spending is a separate issue. And here's where Mr. Altman's
optimism really comes in.

He allows that "there is too much capital available right now, and
there are too many startups. It's a little crazy right now." But
he also says that "I believe in the future, and to be a good investor
you have to believe in the future."

Thus, the 10,000 applications that Y-Combinator received for its
last class of startups, in the summer of 2014, represent for Mr.
Altman not the cresting of a great wave of entrepreneurial hype,
but the logical result of Y-Combinator's ability to concentrate
power and influence in the valley through its alumni network, in
which companies that graduate are made available to advise new
recruits.

Also fueling record interest in Y-Combinator and other startup
incubators is the increasingly global nature of tech. Forty percent
of this year's Y-Combinator applicant pool came from outside the
U.S., says Mr. Altman.

A recent report by London-based venture-capital firm Atomico found
that the number of billion-dollar companies formed outside Silicon
Valley is growing at a faster rate than the number formed within
it. More than ever, entrepreneurs are coming to the valley to learn
its ways, then returning to their respective countries and creating
their own startup ecosystems, says Mr. Altman.

All of this is good for tech. But is it good for those investing
in tech, many of whom are propping up the valuations of big public
companies whose taste for pricey acquisitions is fueling record
acquisition prices?

This is where I, as a card-carrying member of Generation X, must
part ways with Mr. Altman.

Economists say I'm a member of the first generation since the
Depression to do worse than its parents. I graduated into the abysmal
job market that followed the last tech bubble, and I survived the
downturn that vaporized my own tiny startup in 2009.

The nature of capitalist Darwinism is that markets crash and companies
die. It's a necessary thinning of the herd, and it frees up resources
for the fittest companies: engineers, office space, attention,
everything that is scarce in our age of cheap capital.

The process is good for tech, and it's good for some kinds of
investors -- those with foresight or just luck. But does it mean
there isn't a reckoning coming, even if it's different than the
last one?

Even someone who lacks the muscle memory for coping with economic
free fall wouldn't say that. Of today's startups signing 10-year
leases on lavish offices, piling on employee perks and generally
spending like it's 1999, Mr. Altman says, "If you are dependent on
raising money, you will die."

-- christopher.mims at wsj.com.

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Just because i'm near the punchbowl doesn't mean I'm also drinking from it.