This page has been archived and commenting is disabled.
Last Time It Was This Crazy, the Stock Market Crashed
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
It’s anecdotal evidence, but it’s everywhere in San Francisco and Silicon Valley. A neighbor was cooling her heels by the curb, suitcase next to her. She’s going to Europe on a “vacation-thing,” organized and paid for by her company, she told me. A team-building perk. She’s a coder at a startup, her first job out of college. When she moved in less than two years ago, trucks kept pulling up to deliver her latest acquisitions. One day, she gingerly parked a new BMW in the garage. As we were chatting about her trip to Europe, a limo pulled up for her ride to the airport. That too was part of the perk. No expenses will be spared.
This startup occupies super-expensive San Francisco office space that’s way too big for the number of employees. It’s embellished with designer furniture. Free lunches are de rigueur. All paid for with the boundless money it is getting from investors.
But who cares, except for a few wayward souls in the VC community who lament those sizzling burn rates. Bill Gurley, partner at Benchmark, had stepped to the forefront a few weeks ago to warn that “the average burn rate at the average venture-backed company” is at an “all-time high since ‘99 and maybe in many industries higher than in ‘99” [“Excessive Amounts of Risk” Doom Startup Bubble].
Marc Andreessen, founder of long-forgotten Netscape, then warned in a series of tweets: “When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE.” His final and most eloquent tweet: “Worry.”
Some other VCs chimed in when they had a minute, in between throwing even more cash at these companies to drive their valuations ever deeper into the stratosphere: in the first half, they’d thrown $15.6 billion at them in later-stage financing rounds, the Wall Street Journal reported, on track to break the record of $28.4 billion set in 2000, the year of peak craziness as the whole scheme was already collapsing.
So now, 49 US startups that have not yet gone public and have not yet been acquired have valuations of over $1 billion, with five of them in, or nearly in, the $10 billion club. Uber tops the list with a valuation of $18 billion. And Snapchat, one of these $10-billion outfits, doesn’t even have revenues yet though it might eventually by selling ads via its disappearing messages.
Never before have there been that many startups with $1 billion valuations. The prior record was set last year when 28 companies achieved that milestone. In 2000, before it all collapsed, 10 startups had valuations over one billion. A parabolic rise of mega-valuation startups:
The overall IPO market has been whipped into a frenzy this year, with the most startups going public in the first half since 2000. But not the $1-billion-and-over kind; only 7 of them have gone public, including Alibaba that decided to sell its shares to US investors rather than to investors in China where it belongs. By contrast, in 2000, 38 companies with valuations of $1 billion or more were pushed out the IPO window.
They have their reasons for not going public. Some of them, like Snapchat, don’t have revenues, so convincing even exuberant investors to pay top dollars would be a slog. While that may not be a problem for zero-revenue Biotech startups that proffer the hope for a blockbuster drug, it’s a big problem for social media companies.
Other startups have revenues but are spilling prodigious amounts of red ink. That hasn’t kept them from going public, as the Twitter IPO has shown. Hope is a powerful motivator. There have to be other reasons why so many of them remain in private hands.
Turns out, it’s easier for VCs to multiply their paper profits if these startups do not go public. It’s easier because they control the valuations to a large extent. They don’t have to rely on the finicky stock market that has a nasty tendency to close the IPO window and crush these stocks just as the party is really hopping.
Pre-IPO “valuations” are an artifice decided behind closed doors within a tight community where everyone benefits if the valuations are ratcheted up relentlessly. In the current climate of boundless liquidity and near-zero returns on conservative investments, there is plenty of liquidity sloshing around, waiting for the next opportunity to book a paper profit. That paper profit is nearly guaranteed as long as everyone believes that everyone believes that valuations will be higher in the near future.
Look at Snapchat. It was driven from an already dizzying valuation of $2 billion last November to $10 billion earlier this year, with investors putting in an amazingly tiny amount of actual money. That kind of return would be hard to accomplish even in a frothing-at-the-mouth IPO market [read.... How to Rig the Entire IPO Market with just $20 Million].
This game of multiplying valuations and paper profits in the shortest time is so appealing that the startup scene is drowning in liquidity from all over the world. But how will they get their money out? Who will bail VCs out of these sky-high valuations and give them real money?
Two options: A corporate buyout, such as Facebook’s decision to print $19 billion of its own shares to buy a tiny messaging app maker. These miracles of corporate finance are always cool. Or an IPO. But in these mega-valuation startups, potential gains will have been harvested by private investors. And when time comes to go public, retail investors are likely to end up holding a deflating bag.
This is the rosy scenario. It assumes that the stock market, perched on top of its own ludicrous valuation, doesn’t get spooked beforehand. But there are signs that it is already getting spooked. Then all bets are off. Corporations get stingy, the IPO window closes, and what does get pushed out, experiences a hard landing, or simply shatters on impact. And suddenly the new money dries up. Startups with high burn rates can’t replace their cash and simply flame out. That’s the scenario Andreessen had warned about. It will be the sort of financial bloodletting people will remember for years.
The Dow was down over 300 points today. IPOs may experience hard landings. It’s suddenly tough out there. Even gold, it has been through heck. But wait – unlike the still prevailing exuberance for stocks, gold sentiment is at a historic low. Read….. The Calm Before the Storm in the Gold Market
»
- advertisements -
Recently released minutes from the last Federal Reserve meeting confirmed growing concern about the pressure a stronger dollar is putting on other currencies around the world. Bottom-line is other currencies are under assault because both economies are weak and countries are buried in debt they can never repay at real market interest rates. When investors become unwilling to buy the bonds of heavily indebted nations causing the bond bubble to burst the values of currencies in those countries will tumble.
While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known. Recent weakness in the value of the Yen, Pound, and Euro must not go unnoticed. The Currency Vigilantes are acutely aware of when a currency is overvalued or ready to be re-pegged and pounce on the weak currency to tear it apart. The article below questions just how stable the currency markets really are and may be a signal that currency trading is about to get very wild. Please note, this may also be sending a signal that the whole system is unstable and the stock market is about to drop like a stone.
http://brucewilds.blogspot.com/2014/10/fed-concerned-that-stong-dollar.h...
Forutnes are going to be made and lost in the FX markets very soon.
US and UK to play financial ‘war game’
"Britain and the US will stage the first transatlantic simulation of a crisis in a large bank on Monday. It is a sign of growing confidence that the authorities can now deal with the failure of large institutions.
"All of the main players who would need to be involved in a failure of a company such as Bank of America, Goldman Sachs, Barclays or HSBC will gather in Washington DC to make sure they would know what to do, who to call and how to inform the public."
http://www.ft.com/intl/cms/s/0/1dd4bca2-508c-11e4-9822-00144feab7de.html...
I cant divulge the company name, but intials were AOL. Advised many individuals that were lucky enough to be hired and work there in the late 90s early 2000s. While many became wealthy, many of the dumbasses ended up with nothing or fractions of the wealth they had on paper. The greed and stupidity was really unbelievable. All many of them had to do was pull the trigger on vested options at the top in narch 2000 and they would have been millionaires many times over. These were 20 and 30 year olds mostly. The dumbasses actually thought it was all for real. They thought march 2000 was the beginning. Many never executted or waited till the bitter end suffering 90% losses from their paper highs.
The value of "something" is not an issue to take lightly. Value is not a constant and can be derived from several factors such as how liquid a market is, supply and demand or utility value, things can spoil or become obsolete making where you invest very important.
Value is not as constant as many people think or always destined to rise. I have discovered that when you start buying things at ten cents on the dollar your money begins to go a long way. This is a lesson many people may soon learn, or maybe not. The article below delves into how values constantly shift.
http://brucewilds.blogspot.com/2012/11/what-is-something-worth.html
https://www.academia.edu/8729492/Smart_Money
Give every $ the vote and uplift to citizen .
https://www.academia.edu/8727245/Ebola_AIs_and_Genius
Ponder your navel if you can .
What does it take to unscrew it ?
Allen key ?
Star point?
Straight ?
Exotic ?
Some day in the not too distant future, alongside the sets of Zimbabwe hundred trillion dollar bills, you will find comparable sets of US Treasury notes on alibaba.com
What to do while waiting for the world to end...
Have a good cup of coffee
http://andreswhy.blogspot.com/2009/07/near-perfect-cup-of-coffee.html
Wonder why the Parthenon is not round
http://andreswhy.blogspot.com/2009/07/why-is-parthenon-not-round.html
Ponder Oetzi and his life
http://andreswhy.blogspot.com/2009/07/bronze-age-credit-cards.html
Search for the frivolous .
http://andreswhy.blogspot.com/2011/11/atlantis-colonies-ii.html
Wolf's a smart guy, I like his blog; he digs out a lotta interesting stuff.
I've been through a few silicon valley startups, one sucessful and a couple of flameouts. I learned not to get to hyped up by thinking I would become rich from any of them. They use that to work ya to the bone.
still crazy after all these years
I was working in Silicon Valley the last time this crap went down and it looks even worse this time around. Magic thinking and greedy VC's and to just make it worse moron lead companies like Facebook that are paying well beyond premium for utter shitholes. The entire area/sector needs to be put under adult supervision.
I was working there when we didn't know it was supposed to be called Silicon Valley; on vacuum tube equipment for the US Navy contracts.
Everyone still pushing their "hockey sticks"?
someone who knows VC: +100... what's this about Crowd Funding?
Muppet bait mostly. There are some good one's but the butt clowns are piling on now.
Another problem, at least in my mind, with these absurd valuations is that they are not companies that have paradigm changing, products, business models or innovations, they are simply more of the same.
When Apple first came out it produced a paradigm changing product as did Microsoft. Facebook, Twitter and the new darling Ello produce nothing. Unfortunately the government through over regulation has made it all but impossible for an entrepreneur to start a paradigm changing business.
good point, Apple was a flop in the first tech revolution (90s), but in the second revolution their tech products became the leader. i would say government through under regulation allowed microsoft to control pc technology. i would call the microsoft business model a quasi government agency to regulate personal computing, self described, because washington didn't understand the technology and didn't want to get involved. the failure that surrounds microsoft is monumental, they destroyed new computer technology, created an archaic robber barron empire, and now they trickle out a few billion to poor african children to sooth their conscience, (and those who have to buy their product) if bill gates had been one of the twelve disciples he would used his knowledge to sell jesus burgers.
I hate the smug hypocritical SOB too. I only use Linux.
Betting against the Fed is unwise... BTFD.
yes, but do you know where your Fed is tonight?
Already done.
Didn't you hear, failure has been outlawed along with gravity?
good luck everyone.
Tech bubble 2.0.
Thanks for keeping it real Wolf.
NASDAQ -1.60% as of 10:30 EST.
Great insights Wolf and very informative.
Today the NASDAQ and all its finance is pulling the markets down.
The Dow and S&P tried to keep their head above it all...and then tech pulled it down.
Shorts are winning now.
Small bounce, but NASDAQ won't find any support until 4000 (8% lower).
Friday Freefallin'. (Tom Petty)
http://www.youtube.com/watch?v=T3phscjgc_A
Given that there are a small number of people (sort of) who have decided (or maybe are still deciding, but I doubt it) when they will make changes for maximum effect, speculation based on past history and assumptions using free markets are useless.
One should probably try to project based on the assumed goals they want to accomplish and then determine the most logical path to get there.
Your first statement was dead on.
However, your second one, citing "logic" as a way to accomplish investment goals is as dicey as throwing darts at the thousands of securities and derivatives out there.
Projections are useless, no better than tea leaves, chicken entrails, and voo doo.
There is only one way to have a goal and reach or exceed it: LUCK. (and picking the right hedge).
Oh, I was going to explain to you why you were wrong; then I noticed you're the guy who can't figure out gravity so I decided not to waste my t ime. Yeah, you're right; for you it 's much too complicated.
next big fad..... splitting up profitable companies.... to be followed next cycle with merging them back... then do it again... meantime the real economy is non-existant... 3% growth... dont think so ... perhaps 3% inflation buried by govt doublespeak and govt statistics... oh and just in time for elecitons there is 5-6% unemployment while labor force utilization is 68% and companies want to flee the socialist parasite shithole...ussa...ussa...ussa....amerika
What is this "risk" item you speak of?
ill take xom at usd68
The force of gravity 100 kilometres (62 miles) above Earth is just 3% less than at the Earth’s surface.
Not that I doubt you but i have asked this question off and on for years and never got a definitive answer. Most say there is no difference at many more than 62 miles.
Have you proof of it? Seriously, I'd love to know.
The proof is Newton's law of universal gravitation:
F = G * ( (m1 * m2)/(r2) )
Where:
F is the force between the masses.
G is the gravitational constant (approximately 6.673×10-11 N·(m/kg)2 ).
m1 is the first mass (that of Earth which equals 5.9736 x 1024 kg.
m2 is the second mass (your body mass, in kg - lets say that you weigh 177 pounds or about 80 kg).
r is the distance between the centers of the masses. (Earth's center of mass is 6,371km from the surface. Add that to your distance from Earth for r)
You can now calculate the difference on your own...
N
what a useful fact!
Tie a whale to a steel cable. Flop it back and forth faster and faster. Very soon the tail breaks off and the parts fly asunder. Viola!
A crash in the making, or a mere 8,000 pt correction? Or QE forever (and who picks up the tab? is there a tab? what tab?)
I hate TAB. It tasted like crap. Like cheap coke made with shit sugar. Can you still buy it?
my shadow is huge when the sun sets...
Perhaps I haven't got enough munny to retire. The grabmint may have to increase my compulsory contributions.
When GPRO crashes I will agree with you