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Silicon Valley's Fantastic "Dry Bubble"
Submitted by Jason Lemkin via SaaStr.com,
The other day, Bill Gurley, who has to be on the Top 5 most successful and smartest VCs, had a few semi-cryptic tweets. Cryptic to non-VCs, at least.
Many of you may not even know what an LP meeting is. It’s where VCs meet with their own investors, the “Limited Partners.” And it might be a bit cryptic what this LP said to him.
But it’s very interesting, and here’s the actual data from Cambridge Associates (Thank You!), the leading industry analysts of VC data — albeit only through the end of ’12 (though as we’ll see below, nothing’s really changed since then):
There is even more VC industry lingo in here, but once you understand it, it’s quite interesting.
The top line, or “TVPI”, are paper mark-ups + cash back out (distributed capital). “DPI” on the bottom is just the actual cash back out. You can see the delta is quite, quite large.
What’s a paper mark-up? Well, some late-stage private market investor invests in my company at a $1 billion valuation. If I invested at a $10 million valuation, I get a 100x paper mark-up. I’m a hero at the firm. I brag. I run a pre-victory lap and tell myself how brilliant I am. That I see the future.
But…
In this scenario, as brilliant as I look with my 100x mark-up…I’ve actually returned nothing in cash. No cash. Not a nickel. It’s a gain, yes — but on paper only. Until an IPO, or an acquisition, no cash goes back out. Sometimes a little goes back out in a so-called secondary sale, but even when it does, this is usually pretty small.
So the bottom line on this cash, DPI, is hard cash back out to the LPs.
And as you can see, there ain’t much cash going back out. In fact, DPI or “cash out” from VC funds hit rock bottom in ’12, and the gap between mark-ups and cash distributed is at an all-time maximum.
Flickr/TechCrunchBill Gurley thinks there is a dry bubble.
Hence — Bill Gurley’s Dry Bubble. It’s a bubble in valuations. But there ain’t no cash. The bubble isn’t an IPO bubble, like Broadcast.com or GeoCities or TheGlobe. No cash is going back out to create the next Mark Cubans, at least not that much. At least not yet.
Now, some great IPOs in ’16 can “cure” this and generate cash back to those folks putting all this money into Unicorns. And many of the best companies are intentionally holding off on IPO’ing, taking time to grow faster without the scrutiny of Wall Street. This delta, this gap, may be temporary. An Uber IPO, an AirBnb IPO, etc. will boost that bottom line substantially. If every unicorn IPOs, all will be right in the world, and the Dry Bubble will become very, very Wet (i.e., cash rich) indeed.
You can see though that even with 2014 data, from this great A2Z prez below, the “gap” between private Unicorn $$$ (75% of investment) vs. “real” Unicorns (from an IPO or acquisition) is still quite high:
With 75% of invested capital trapped in private Unicorns (another way to look at it), that’s pretty dry.
So for now at least — it’s a roach motel. All this money is going in at higher, all time higher, valuations — but very little is coming back out.
The optimists believe it’s just a matter of time. But if you’re say the guy that sold Broadcast.com to Yahoo! for $5.7 billion…you might think this really is the driest of all bubbles, of all time.
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Not to worry, Yellen will keep levitating markets higher with easy money policies and, perhaps, buying stock futures while threatening to raise interest rates at every available opportunity.
Fraud is so effective in levitating markets. And the Fed has so many decades of experience with it.
Look at the Chinese - they have increased market cap from $4 trillion to over $10 trillion in a year.
Bubbles keep the world economy rolling.
Now all we need is a sock puppet selling pet supplies and a baby telling us how easy it is to buy stocks......
I work for a VC funded unicorn. We have real product shipping to real customers and a descent business model. Maybe we are unusual but I don't mind building while we are away from the public light.
It's also worth noting that these Cambridge figures are by vintage year, so the 2012 data is comprised of all VC funds that began investing in 2012. These closed-end funds that typically have a 3-year investment period, and a few years of holding. So these funds typcially don't start returning cash until Year 5 at the earliest when Year 1 investments start to be sold or IPO'd. That said, vintages prior to 2010 should be starting to return capital to LPs by now.
peak startup
Yup. I've worked for a couple as a Lan Admin, the trick to staying employed in that space is understanding the landscape of what will actually work and has a half life longer than a mayfly. The issue with forcing growth in technology is people end up spending the equivalent of a small countries entire GDP to make the profits of a corner grocery store. Of course it's all dependent on where that capital is being spent as well.
Something like Facebook, is it really worth 2 billion dollars? No. Is it worth 100 million. Maybe. It's a data mining trap that has failed to actually make any profit on it's capital investment and does a lousy job at what it actually does (data mining). Or the countless others in the webspace out there that are given 100's of millions of dollars to deliver sweet fuck all in terms of profit.
Or recently in the hardware space. The camera on a stick developed by goPro, the marketspace is packed with gadgets that do the exact same shit for 1/10th the cost not to mention every phone on the planet is now a media studio that fits in the palm of a person's hand. While the gimmick sells, gimmicks don't stay no matter the capital investment. They always flop and end up in the discount bin at the dollar store.
Versus natural growth in technology where the change is nearly unseen and unfelt because the change just 'feels right' and there is proper commoditization of the technology without the insane injections of capital. USB technology for instance. Almost no marketing was done to push the idea. One day stacks of CD-R/DVD-R, next day everyone's got a thumb drive without being told to get one because the technology enabled both the manufacturers to make a decent profit, improve the technology of memory and users found they are just so incredibly handy. In comparison to something like firewire technology that was hyped, pumped with capital and pushed it flopped hard in comparison to the modest open development technology of USB. Capital is never an indication of a technologies success if comparing the staying power of a now usb standard that's both extensible and cheap/easy to make.
In a more conventional arena of poor technology development. The Combustion engine and the oil industry. 100 years of learning how to make fire in a box, like cavemen. The hundreds of other technologies out there that had been bought out, blacklisted and shelved during the past 100 years (cough...GE Capital...cough).
Literally the combuston industry is the only one that is engineered to make a profit and annoy the shit out of people based on poor supply management. Then apply a thick layer of political fucknuts that are dumb as a box of hair playing games that they shouldn't be playing. Mainly because they aren't smart enough to manage proper change management or accept or adopt new technologies because they mistake the change as a bad thing. When in reality the change helps lead a civilzation to 'the next level'. It's in my experience and practice in I.T. that, people that don't handle change management well...get fired and broken professionally. Here's the question: How likely is it that no other technology has been developed in 100 years while the rest of the science and technology fields zoooooms right by? Not likely.
it's odd how youre thesis is that malinvestment is defined by short term gimmickry being clearly SHOWN to be a gimmick by medium term fallout of fads and foolish investment, ------------------and then
THEN you follow on by shitting on a long term success of a a very wide birth of various technologies that together are called the modern day internal combustion engine.
i mean, your very same original thesis could be easily used to say elon musk and solar energy and using LIPO batteries for home 'storage' are a complete scam as well.
your overall theme about corrupted INCENTIVES is clear, however if you cannot look at 100 years of success of various technologies surround the ICE and at least point out some of it was USEFUL INVESTMENT, than i think your earlier point on GIMMICKRY is stupid.
there have been many GIMMMICKS in internal combustion engines. for example --turbo fan injection has been a big gimmick for most of the past as its uneconomical, tends to break, and simply isn't NECESSARY in 99% of average consumer vehicles that aren't racing cars.
however, newer r&D into how to make forced air systems MORE economically useful are being done all the time.
your problem is perhaps that you aren't also explicating the reality that INVESTMENT REQUIRES RISK WHICH REQUIRES SOME LARGE MEASURE OF LOSSES BY THE MAJORITY OF INVESTORS IN A TECHNOLOGY SPACE.
in the history of technoloyg, there MUST be more losers than winners . a product/tech doesn't simply POP out of nowhere being economical . no, the kernel of technology must be developed by many people at great expense in many different permutations in order to achiefve the right final outcome of a historical moment for the technology to SCALE.
consider the bicycle.
the bicycle was around in its earliest form for OVER 40 YEARS before the first GIMMICK scaled succesfully. the bone shaker was the first popular bicycle of any kind ---and it's popularity AS A TOY only scaled some 40 odd years after the first "drasine" was created.
think about that. that's 40 years until the bicycle made it's firt mark on the world as a 'bone shaker' which was a 2 wheel FIXED WHEEL PEDAL device., no freewheels let alone bottom brackets or whatever other else.
the popular 'penny farthing' was AGES away from becoming popular at that point.
as a lover of bicycles and a lover of technology , i think the history of the bicycle is enlightening.
https://en.wikipedia.org/wiki/History_of_the_bicycle
the " who killed the electric car' philosophy that EVERYTHING is industrial espionage and technology supression, simply becuase of a few well known cases of the rubber/gas/asphalt industry teaming up against batteries and trolley/trains---------------is bullshit.
you cannot just judge what's possible as being EVERYTHING IMAGINEABLE, simply becuase there are some existing cases of technology supression and conspiracy.
in fact, many cases of tech supression stories, if not MOST< are calculated lies about the ROSSI -E CAT or somet other such perpetual energy nonsense. the nazis' themselves are known to have invested in some VERY STUPID lies about super weapons that simply don't exist. the floating 'bell' and time travel nonsense secret weapons are all garbage lies.
yes yes, secret wepaons do in fact exist. but the problem is , the more you believe in CONSPIRACY as the motivating factor behind technological development, or lack therof, the less you take it as IMPORTANT to understand that technology HAS ITS OWN BALANCE OF SCIENCE/ENGINEEING/AND ECONOMICS that make technological stories possible. and as such, you need to be looking at the overall themes of what is possible .
we are no longer living in the dark ages where we believe it possible that a king could simply control everything. (and even that is a bit untrue) .
there are powerful people and they may at times supress technologies. but in the long long run-------they will genenerally be unable to supress any meaningfully capable technology, or fall prey to those other powerful people who defect to embrace superior technology, ----
z
Something is eerily wrong here. If a company hasn't achieved equity recognition yet (sale, not so much IPO), then it may be too late and they will die. Darwinism for tech.
Something is eerily wrong here. If a company hasn't achieved equity recognition yet (sale, not so much IPO), then it may be too late and they will die. Darwinism for tech.
Do any of these Unicorns have actual/projected revenue or are they all crossing their fingers of hope for the IPO/acquisition fantasy?
imaginary revenue is the way to go these days.
Still waiting for the network premiere of "How Ben Bernanke Saved the World."
Here you go http://www.netflix.com/WiMovie/70289294?trkid=13462047
Understandably he only made it to Netflix...
Still waiting for the network premiere of "How Ben Bernanke Saved the World."
You would need technology and network architacture and IT infrastructure for 94 million sitting at home doing nothing because? Yeah, tech bubble indeed.
Stop with the bullshit, the IoT is just the same gimmick that Nortel & Cisco tried to sell in 97. Manufacturing demand for something 99% of the world will never afford, or support.
Pull a FitBit prospectus, tech use & attachment rates are in freefall all over the sector. Hell, not even snapchat can keep up recurring user rates.
Is that like a dry hump?
Wait until the world sees that dollar assets are just like these unicorns. You can put all you want into them and you can show your friends how rich you are but you just can't spend it.
The Chinese already know they can't spend their dollars, not on anything big or real, so they put their money they are allowed to spend into whatever they are allowed to.....houses, artwork, wine and VC projects.
Ask one if he was allowed to buy a large quantity of gold or a big American industry....nope.
Well, you can stick a fork in Uber. It's done if this takes hold.
CA court rules Uber drivers are employees.
http://www.engadget.com/2015/06/17/uber-drivers-are-employees/
I guess a driver had enough of having to pay all of his own expenses and tolls while making $6 an hour after all is said and done.
Uber had to reimburse the driver for all tolls and pay the $.56 per mile federally mandated reimbursement for using a personal vehicle for business purposes. It also means Uber will have to pay benefits and cover the commercial insurance cost of the vehicle as well.
If this goes national Uber won't be worth $.05. No wonder they are trying to have self driving cars.
I disagree with one point--There's PLENTY of money leaving. Out of these assholes' pockets and into the pockets of slumlords and landlords in the Bay Area. $3,000 a month to rent in fucking Mountain View, Palo Alto and SUNNYVALE??? GTFO.
I'm trying to remember which one of those is a 24/7, vibrant, world class city.
Another bubble this time .biz bubble.
I found very interesting take on Silicon Valley madness at:
https://sostratusworks.wordpress.com/2015/01/08/smell-of-silicon-madness/
A very righteous take, from someone who hasn't closed their real eyes and replaced 'em with digital ones. I do real R&D work - embedded and otherwise. JavaScript is a toy language to me, and I find that most of the Webby/Appy/Phon(e)y fags who get paid twice as much can't express or fathom half of the basic engineering principles that are required for making quality, maintainable products in software, let alone hardware.
Also to be considered is the plateauing of technology - more and more systems are created by gluing black boxes together. The skill sets of those who glue are quite limited in comparison to those who can actually make things from scratch. We really don't get too much of that around here anymore.
Gold is cheap, everything else is nonsense. Those trying to carry wealth into some future system will curse themselves for not seeing this simple truth. Stocks are overpriced, bonds are a Greek lie, commodities spoil or get trounced in a depression as no one can use them to make a profit.
Paper substitutes keep the gold price low but a day is coming when those with small quantities of the real thing will look like the geniuses we now think these VC guys are.
If that day comes land, food, guns, ammo will make gold just a dense, colorful metal
Gold is cheap, everything else is nonsense. Those trying to carry wealth into some future system will curse themselves for not seeing this simple truth. Stocks are overpriced, bonds are a Greek lie, commodities spoil or get trounced in a depression as no one can use them to make a profit.
Paper substitutes keep the gold price low but a day is coming when those with small quantities of the real thing will look like the geniuses we now think these VC guys are.
I hope they can 3D print some water in the Valley.
Good documentary about the Silicon Valley, and you can see how far apart DC and Silicon Valley "really" is...and both can't seem to meet in the middle..there's pros and cons to both sides...
http://ducknetweb.blogspot.com/2015/03/cybertopia-dreams-of-silicon-valley.html