What to do if a bubble is starting

Bubble? I feel like people who are claiming that we are in a startup bubble weren&#x27;t really around in the 90s. Guys were getting paid $100&#x2F;hour to do HTML. Just HTML. Literally just HTML.<p>The excess was mind-boggling. In contrast, today it just seems like lots of investors have found a good way to pump money into a reasonable risk pool and extract value. Seems fairly sustainable.<p>In the 90s, companies were doing IPOs and their shares were skyrocketing from public investment. For the most part right now it&#x27;s institutional investors who are a lot more qualified than John Q. Public.

I&#x27;ve lived in SF since the early 90s and have been through several business cycles. It feels like 1999 all over again, maybe 1998. A couple months ago I saw an ad on the NY subway for a company that delivers dog food and pet supplies to your door (deja vu anyone).<p>Property prices and rents in SF have spiked 30-40%, in some cases doubled, in less than a year. Same pattern as with the NASDAQ in 1999-2000. This is predictably driving the cost of doing business up, especially for companies that need to pony up for an actual office, payroll, etc.<p>Of course the details are different from 1999, but it feels a lot like that time. As Mark Twain said &quot;History doesn&#x27;t repeat itself, but it does rhyme.&quot;

&quot;... a significant uptick in the number of parties, hot girls roaming bars trying to chat with any guy that looks like he might be an engineer and looking for a job...&quot;<p>Is anyone else noticing this phenomenon? Apparently I&#x27;m not invited to the right parties...

&quot;I was here in the Valley for the original Bubble, and the situation now is nothing like that was. Back then people were saying there was a &quot;new economy&quot; driven by the Internet, and that productivity was going to go up like a step function, which justified higher p&#x2F;e ratios for any company that could claim to be a participant. If you had money to invest you felt like you had to have most of it in the stock market, because money parked in bonds would miss out on all this growth that was coming. Back in the 90s I was sure there was a bubble happening, and was notorious for telling everyone to sell. And yet I remember that even I thought it was dangerous to have money sitting in bonds. I don&#x27;t think that now, and I don&#x27;t think anyone else does either. What&#x27;s happening now is a lot more localized. A few professional investors are paying higher valuations for startups than they were a few years ago. But the number of participants and the amounts of money moving around are both very small compared to the 90s. Plus the companies are better. In the 90s, it was the dumb leading the dumb: smooth-talking MBAs were raising money from hapless LPs and investing it in startups run by other smooth-talking MBAs. Now it&#x27;s Yuri Milner investing in a company run by Mark Zuckerberg.&quot;<p>-pg <a href="https://news.ycombinator.com/item?id=2231352" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=2231352</a>

When you are writing about the beginning of a bubble, you are likely midway through it.<p>When people are starting to think a bubble might pop, likely it already has.<p>This is my third bubble I find they have more opportunity than downside with one major exception: VC&#x27;s in their blind hype turn fundraising into a wicked market where silly unsustainable ideas are highly valued and solid business opportunities are shoved to the side as boring.

The real driver of a bubble is the idea of a &quot;get rich quick&quot; investment mechanism that pulls in rewards out of proportion to risk, which inflates the capital within that investment, which inflates the bubble. Are we there yet? I don&#x27;t see it.<p>When I think &quot;bubble&quot;, I think of two - the old dotcom bubble, and the housing bubble. The housing bubble was driven by those nasty CDOs, which produced abnormal rates of return on AA&#x2F;AAA securities, while leaving their value vulnerable to problems with the sub-prime market. Money pours into the housing market thanks to excessive returns, which both drives up housing prices and drives demand for more mortgages, which reduces proper risk management... a vicious cycle, til the subprimes start defaulting and the prices drop and then the bubble pops.<p>The old dotcom bubble was driven by IPO money from unsophisticated investors, so there was a massive push to get companies public as soon as possible, well before they had solid business models. This drew institutional money into the venture capital market, and again, things got all out of wack, and capital supply was driving startup demand, and weak businesses were getting funding they didn&#x27;t deserve.<p>So the real marker for a bubble now, imho, isn&#x27;t whether prices for early stage startups are going up, but rather whether a lot of bad startups are getting funded. Is that really happening? An increase in price suggests otherwise. Supply and demand, people. Sure, demand may be up, but either that increases price, or the market responds by increasing supply. And since the number of quality startups is basically fixed, supply increase means introducing bad startups.<p>And this doesn&#x27;t even bring in other factors, like pg&#x27;s marvelous observations about how startups need less Series A money these days generally, and the rise of super-angels, angel syndicates, and online tools like AngelList and Gust.<p>tl;dr Demand != bubble

A bubble occurs when prices are driven by view on the future that are implausible or inconsistent. It seems that current high prices are mostly driven by &quot;investment&quot; competition - meaning that startups can raise prices at early stage because there are too many investors.<p>This doesn&#x27;t seem to be happening at later stages (B rounds) or public companies.<p>What this means is that returns for initial investors is going to be lower - but it still might be sustainable. Companies usually will grow past +$15M when they do well.

If there is a bubble, it&#x27;s most certainly not starting, it&#x27;s ending. With the Fed tapering imminent, and interest rates starting to rise, there&#x27;s no way that a bubble will be starting at this point. If anything, it will pop a bunch of near-bubbles, like Bay Area real estate, rent prices, stock market, etc.

Thinking back to about 2007, I remember the frothy fervor surrounding all of the new &quot;web 2.0&quot; companies that were coming on the scene back then. I thought for sure that the tech industry was about to see another apocalyptic event as the web 2.0 bubble popped. Thankfully, that bubble never popped (although another one did in &#x27;08).<p>I think it&#x27;s healthy for people to be paranoid of another bubble forming ... it helps potentially keep it at bay. At least, that&#x27;s what I tell myself :P

Thanks Sam. I love your posts!<p>I think the rise in startup valuations, even at the early stage, while a bit frothy (and definitely more so in the bay area) is driven by some structural changes (i.e., the leverage allowed by the new tools which make development cheaper&#x2F;faster) and access to much bigger markets (mobile, anyone?).<p>&quot;Hot girls&quot; at the bar looking for a job are probably doing so because tech is one of the few non-sucky sectors for young people.<p>Founders investing their capital in other startups doesn&#x27;t strike me as so weird, given how Angel List and Funders Club, etc. are making it ridiculously easy to put a bit of money to work. Founders with disposable income used to invest in public equities and bonds if they wanted to. Now, startups.<p>There are trillions of dollars still sitting on the sidelines chasing growth. Not even a tiny fraction of that has been deployed to VC (mostly because the returns, in aggregate, are still pretty bad). Should that happen, I might begin to be a little apprehensive.

This is why I firmly believe in living within ones means and not taking other people&#x27;s money. The only times I&#x27;ve seriously worried about money is when I was deeply in debt. As soon as the debt was gone, I... became a much more difficult person to work with... to put it one way.

Bubbles are usually preceded by some regulatory or legislative change(s) that fuels them. This legislation usually has good intentions but falls victim of unintended consequences. For example, you can trace the housing bubble to the easing of lending standards through the modifications of the Community Reinvestment Act in the late 90s [1].<p>Legislation that creates new investments opportunities, coupled with cheap capital is a dangerous combination. I would not be surprised if the new JOBS Act [2] provides the spark and the Fed&#x27;s loose monetary policy provides the fuel that creates a startup bubble (quickly).<p>Companies like Angel List [3] and Wefunder [4] have been quick to recognize this and take advantage of the new demand pockets the JOBS Act creates. Just check out their home pages.<p>As Sam mentions, there may be some time before it bursts, but it&#x27;s very tough to figure out when it will be...and early stage company shares are not liquid.<p>[1] <a href="http://en.wikipedia.org/wiki/Community_Reinvestment_Act" rel="nofollow">http:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Community_Reinvestment_Act</a> [2] <a href="http://en.wikipedia.org/wiki/JOBS_Act" rel="nofollow">http:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;JOBS_Act</a> [3] <a href="https://angel.co/" rel="nofollow">https:&#x2F;&#x2F;angel.co&#x2F;</a> [4] <a href="https://wefunder.com/" rel="nofollow">https:&#x2F;&#x2F;wefunder.com&#x2F;</a>

Great post. It was last year that there was a lot of chatter from everyone, worrying that we were in a bubble. Since then the talk of bubble has apparently decreased but the real signs of a bubble have accelerated, in particular, crazy living costs.<p>Very worried to read that this is still happening:<p>&quot;Companies raising money at $15MM+ plus valuations with no traction and no real vision...&quot;

I think it&#x27;s a bubble in terms of the people, many big egos. In these times you should how to not have an no ego at all, if you don&#x27;t have an ego, no one can leverage that to make you do things.<p>The actual founder-founders, the inventors of the ideas however, are totally aware of that situation and let the startup people with the big egos do the CEO jobs while pulling the strings in the background.<p>It&#x27;s not a bubble in terms of the actual startups, because it&#x27;s all based on users that actually use the apps a lot. The more usage an app has, the harder it is to kill.<p>After the whole solomo, photo sharing hype, investors have become very cautious, so I don&#x27;t actually believe money is cheap now.<p>However, it&#x27;s an ego bubble right now, startups get press before being ready, pursue vanity metrics that actually will kill the company, their own startups are growing over their heads.<p>So it&#x27;s maybe a people&#x2F;ego bubble right now, which could turn into a full bubble, but time will show.

There are articles talking about the possible bubble and they are easy to be found. I would like to add just one thing: we are still in the biggest recession and fiat money is printed like crazy. There has to be some places those money flows into. And given the quickly shifting age, industries seem to be broken in one way or another sooner than before. I agree with the author that bubble is here. However, it might take longer than expected to burst. As long as what we do actually delivers better value to customers, I believe we can still survive.

Sounds like solid advice to companies - what about advice for young engineers?

Very interesting to read his advice to be wary of hiring the day after his post on the importance of hiring. These two posts aren&#x27;t contradictory at all, but those who read his piece yesterday and responded well to it should definitely read this as well.

It seems to me to be a bubble of sorts, although a strange one. It mostly seems to be centered around AngelList in general and the seed stage universe in particular, where valuations of very early stage startups with cool videos are totally out of whack with where they should be in my opinion. But because the amount of money moving around at this stage is still pretty small - it is early stage after all, so each deal is still tiny in absolute terms - there is less of a bubble effect than one would expect. Reality might be harsh for those startups when they come to long for bigger rounds in future though.

&quot;a significant uptick in the number of parties, hot girls roaming bars trying to chat with any guy that looks like he might be an engineer and looking for a job&quot;<p>That is a pretty bad strategy to hire from founder&#x27;s perspective. Will reasonably smart engineers like these strategies?<p>On a related note, a friend of mine was telling me that he saw someone (on OkCupid) mentioning about contacting her only if you are engineer since her startup is hiring engineers. Ha!

Oh man, I have these exact same concerns. There are people out there creating start ups with useless products that only have value because someone invested in them.<p>On the other hand, most of the start ups are expected to fail. The ones that succeed generally have a big enough pay off that all the failed ones can be shrugged off.<p>I think we are in transition where we could go either way. Investors know this and that is why money actually has been tighter.

A permanent, secular rise in the maturity of the tech startup ecosystem (and of &quot;software eating everything&quot;) would exhibit many of the same signs of high growth, or the same collection of Verhulst growth curves in disparate indicators, as a bubble. Dev salaries, SoMa rents, and MBA hanger-on density are probably useless in distinguishing between the two.

Every bubble I believe gives opportunity to a selected few who can stand out in terms of competition and competence. Definitely there&#x27;s a lot of people who will make a lot of money and get successful very fast..the billion dollar question is to identify those companies among a 100 others which will fail or do only meagrely well.

Would anyone mind elaborating on how the current bubble could compare to the DotCom bubble? I could see them being similar because they are both related to tech, but for some reason I don&#x27;t feel too scared right now (the DotCom bubble popping was pretty bad, right?).

While I&#x27;m cautious to call anything a &#x27;bubble&#x27;, right now tech is looking a bit over-valued, and the internet startup space is way too crowded... I&#x27;d personally avoid investing in anything tech related, with a few exceptions.

It would be more interesting if he could talk about how to take advantage of a bubble

We are already in the middle of a bubble, it&#x27;ll shortly translate to huge salary increases, you just need to job hop :)<p>This year average salary is up at least 15k from last year.

If you are a startup and you think valuations are peaking, wouldn&#x27;t it be smart to raise as much money as you can while valuations are still high?

Have you seen the ads purchased by Lumosity on cnn.com<p>This indicates to me there might be a little too much loose money floating around.

I shall bookmark this discussion and get back to it in a couple of years :)

&gt; And no one is talking about a bubble anymore<p>Another great poster stopped reading HN.

or feed it like wefunder.com will do .

from the article:<p>&quot;hot girls roaming bars trying to chat with any guy that looks like he might be an engineer and looking for a job&quot;<p>suddenly understanding the attraction of living in SF&#x2F;SV