Video Of The Week: The Bubble Question

Since the LeWeb video I posted on wednesday was so long (>40mins), we are going with short and sweet today.

In late October, I did an event with City National Bank. For those that don’t know, City National is one of the banks that are active in the tech startup sector, banking and lending to startups. We did a “fireside chat” format which is really my favorite way to do a public appearance. And, of course, I got “the bubble question.”

Here is how I answered it in less than three minutes:

#VC & Technology

Comments (Archived):

  1. William Mougayar

    In other words, bubble “effect” is more important than bubble “symptoms”. We are totally more able to absorb these symptoms as bumps today, instead of crashes previously. Antifragility lives.I wrote a post last August,- Why There Might Never Be Another Tech Bubblehttp://startupmanagement.or…

    1. Semil Shah

      I like the word “absorb” here.

      1. William Mougayar

        Yep. I think the key question is what happens when something goes bad? And who gets hurt the most? If only a few get hurt, and if they can afford to get hurt, that’s fine. The rest of the people and the system are OK. But when a lot of people get hurt, especially those that can’t afford it (i.e. average consumers), then that’s when things can spiral down.Right now, if anything goes bad, VCs and big investors get hurt, and that’s OK. They are used to it, and they totally understand that risk. The worst thing that happens to VC funds that don’t perform well, is they don’t get to raise another one.

        1. Semil Shah

          ​I agree w/ your logic. One example of a worry point could be — when lots of Fideilty-type late stage investing occurs, or from SWFs around the world, as those vehicles hold pensions, retirement accounts, etc.​

          1. William Mougayar

            Good reminder. Hopefully they aren’t hedging too much of their investments in these higher risks class.

          2. Semil Shah

            ​My one worry is that it feels like more private money, not less, is about to come into the system.​

        2. LE

          Don’t forget that also what gets hurt is the rest of us because of the brain drain.There is absolutely no question in my mind that human capital is being deployed in a way such that many of our best and brightest can have a chance at scoring and grabbing the brass ring. And hitting it big.I am not faulting or criticizing them or anyone for doing what they perceive is in their best interest. It’s what I would do. That said they might want to calm down and consider the speculative and useless nature of what they are spending their time on. (Not for society but for themselves.)Think about it for a second. The people who are able to raise money would tend to be the ones with the most opportunity and promise. Likeable, intelligent graduates of our finest schools. Who could be doing any number of worthwhile things with that degree.So don’t think for a second that the money that is being invested doesn’t have other consequences, it does.You know that is happening, right? <— He baits with a question.

          1. Doreen Clemens

            I watched the first five comments. I know what Christine did I watched it happen this morning to.. Lately amazing. know it’s the most amazing thing they’ve ever seen.. Thanks for sending me the link. Although I actually watched as You did. I was in her post when she only had five comments pretty sure you were one of them. I just didn’t say anything. I was too shocked how it took off

          2. Doreen Clemens

            Sorry, Spruce I have been very busy. I’m checking in and I really would like to upload my picture. I can’t figure it out

          3. Doreen Clemens

            And I know your real name I just prefer to talk to you through spurce to keep it private.. Just like you. You were the first person except Mr. Wesley Google to welcome you aboard. Honestly it was a very warm welcome you gave me you carry a conversation trying to get to know me that was amazing of a man of your status.

          4. Doreen Clemens

            Really I guess it wasn’t amazing I did pop out of nowhere. And I am going places good places the good American Way by climbing the ladder. I’m going to have a press release and the next two weeks in Maryland. By accident my name is got everywhere it seems but when I press release comes out everybody will know who I am I guess.

      2. Doreen Clemens

        How about “Absorb The Uber effect”?

        1. Spruce

          Hi. Boy

          1. Doreen Clemens

            This is amazing on. I am only 45 divorced the youngest of my three girls graduating this may. so I’m looking out for my future. I can’t believe when the housing market Took a turn, increasing house price like that high in demand. My fear is the same as yours and I don’t think it’s going to happen. I could tell you everything I understand but I understand everything you do. And 2015 is going to be the most amazing year so many changes I think in the end they’re all going to be for the good. I just hope our newest investors in the next year have heads on their shoulders and I think they do. Because these type individuals had businesses that burn on the books of our IRS. Navigating a chance to be…. Successful!!!!! II guess we’ll see what they do. I myself am trying cautiously and wisely but I want it like yesterday. I have the perfect storm…………. To save humanity

          2. Doreen Clemens

            Well at least for the fittest. I’m just trying to find the right people to help you the right thing if I’m right. United States is a very strong country gotten week our generation is going to pull it back….. It’s amazing how every 50 years United States goes through a major change…. Right on that cusps……… It’s going to be bigger and better than ever… I hope your dreams and hoops are as big as mine…. And by the way I am the most real person you will ever get to meet….. And I hope will meet.

          3. Spruce

            Boy. Names

          4. Doreen Clemens

            By the way???? I don’t like to give people my children’s names. Just by make sure you don’t want them. Their names for the wrong reasons…. My oldest died two years ago in a car accident she was 22 gorgeous outgoing amazing.. She was my best friend in the world. And now my guardian angel.

          5. Doreen Clemens

            Jennifer Tedore my oldest that died search her name. You will fumble upon two amazing videos of my daughters life with me as her mom.. Please let me know what you think. I’m trusting you. My girls are my life’s possessions there everything and no one or anything come between us never. Because love conquers all…. I love all my girls and I want them to always be safe. Even when you’re not with me. I trust her judgment I raised with morals I never lied to them about nothing nothing because I didn’t want them to have a easy door to lie to me.. Honesty is the best policy when raising kids but I’m not so sure when it comes to the business aspect….

          6. Doreen Clemens

            I am just stepping out there just placing my name here and there. But I’m looking for true friends maybe true business partners because I really do have an amazing Idea. But honestly no disrespect I can start this business on when you’re financially and from experience. I just thought I’d give it a try to meet some people and see how things went… I guess time will tell Right Spruce…. I’m real not fake… I am as real as it comes…… I guess you can take it or leave it but look up my daughter and you’ll see how happy she was… Because she was like my twin

          7. Doreen Clemens

            yesterday was the most amazing learning experience in my life…. Seriously all I can do is laugh. Because why be upset… Or embarrassed!!! Yesterday was the most amazing day of my life truly. You can’t change the past you can always change the future. Thank you for the warm wonderful welcome to Google Doreen

          8. Doreen Clemens

            Gmail just tried to take all my photos from my phone and hard drive iPhone. I hope they got what they’re looking for..

          9. Spruce


          10. Doreen Clemens

            I’m sorry where part of my conversation to you got posted in the wrong place. Still can’t figure out if everybody seen it. Even if they did nothing I said was wrong. I would still like to post my picture on my profile. Talking with you has given me the ability to learn a lot. I’m surprised how much I already knew. I guess if you try in life to close your ears out to all the negativity you can hear all the positive… Conspiracy theory say in the next five years 37 states in the United States will be without water…. Anyway Spruce could you please tell me exactly how to upload my picture I do not want to open my whole photo album up to Google and that’s the only way it seems that I can do this… Did you take the time to look at my daughter Jennifer Tedore if you read what I wrote she died 2012 five days after 22nd birthday. You did ask my kids names

      3. Doreen Clemens

        And you know what the one who said “absorb the Uber effect” was me Doreen Clemens………ask Mr. Mougayar… He truly stands back and looks and watches and observes and absorbency everything before he makes one single statement. That is a true honest man..

    2. Vivek Kumar

      Like the way you describe it. We are not even close to irrational exuberance and hype of 2000. Additionally we don’t have significant amount of general public investing in tech to the extent they did in 2000.

    3. Richard

      Another way to say that is we are in a long secular phase that without question is as important as the industrial revolution. There is no bubble here. Within the secular environment exists cyclical bubles. These can last 12-24 months. The good news is that with so much of the funding being done the private markets, the cyclical events will be short and isolated.

    4. Doreen Clemens

      And that’s exactly why I said absorb the affect. It’s like taking your toe and dip it into a cold pool of water… Just feel if it’s too cold to jump in. And if it is pull back the reigns a bit. Adjuster strategies. And then jump back right on that horse out there. And take that bubble of fact and place a small pinhole in it. Let the air drying out slowly. Just to make sure other has the right and the exact clientele that it wants…………

  2. Rick

    Agree. Compared to previous “frothy times” this time is less about business model speculation much more about valuation multiples. As more companies raise large rounds, the issue will be maintaining a culture of thrift despite a large amount of cash on the balance sheet. If companies have the discipline to get and maintain being fully financed, they will be able to ride out any down draft and grow into (and hopefully beyond) their current valuations.

  3. Semil Shah

    I think this traces back to your post on this round’s excess being in the late stage. So while fundamentals are strong, what’s potentially weak this time around is the availability of very hungry, late-stage private capital. If that capital gets burned, the losses won’t be widespread (among the population), but perhaps that’s what will start to push valuations back down a bit.

    1. William Mougayar

      Exactly. These big funds get hurt, and that’s ok. Greed without knowledge or experience will eventually lose.

  4. Liban Mahamed

    Fred, you are a great observer of the economy and the technology sectory, your insights are lucid and on the mark.But on the question on valuation clearly we are beyond any rational valuation metric.There is a full blown aasett bubble in both venture capital financing and stocks of many tech companies.As a prominent industry observer you probably can not be blunt.I base this on simple price to earnings relationship.Anytime you have p/e ratios in the hundreds and beyond there is no logic it is pure herd mentalityI worry many small investors may end holding the bag at the end in the case of publicly traded tech companies.Benjamin Graham in his book warned about stocks with multiples above 20, and considered them speculative. Clearly, markets forgot about fundamental analysis.

      1. Liban Mahamed

        I agree with you some companies will achieve high growth rates and justify the valuation, My sense is those will very few with exceptional product and service. But we have many companies with very high valuation Some are even 10, 15 year old, I am not sure if they qualify as new growth companies.One final note, I am not convinced on Ubber, I think this is just the begging in transportation sector, also insurance and labor cost will be huge headache for Ubber.I like Sidecar, and City Buggy model better.

    1. Matt A. Myers

      All investments will be speculative, some may warrant a multiple of 20x if they are on such a projected path and simply needing resources to get there. It becomes a problem when those resources are going into companies who have no chance of reaching or maintaining such a scale.

    2. pointsnfigures

      I think a bit differently. I think it relates to investor’s appetite for risk. Is their more risk in Uber or Sidecar? Same or similar target market. The herd will pile into Uber. They feel safer, and they can justify the investment (CYA investing).Suppose you are a fund of fund manager. You are meeting your investors and you tell them you invested in fund that put their money into Sidecar? What’s their first question? Maybe, “How come we aren’t in Uber?” Then they pull their money.As companies grow, make it, it’s much easier for them to raise money. The competition changes from the investor perspective too. At early stages, much easier to get into deals because it’s harder to raise money. At later stages, much harder for investors to get into deals and it’s easier for entrepreneurs to raise money (though never a cinch)

      1. LE

        I agree as a generality with the law of business behavior which is “nobody ever got fired for choosing IBM”. And I think it makes more sense than it doesn’t.For a while, IBM was the standard choice. If you chose IBM and it didn’t work out, well, it was a reasonable decision and people would just blame IBM. But if you deviated from the norm and chose something else that didn’t work out, people would blame you for it.It’s also an explanation of why large companies (IBM, Oracle, Microsoft…) are successful in the enterprise despite having higher prices and, often, worse quality. It captures the “common wisdom” of the field. It was also a really brilliant marketing tagline for IBM :).By the way “worse quality” is not totally quantifiable in the way the paragraph seems to indicate. Quality involves a total eco system. Vendor “X”‘s hardware could be better and their price cheaper but if there is less of a labor pool to hire and/or if the labor pool that exists costs more than the quality doesn’t matter. (As only one example). [1]I think it’s obvious that has branding and marketing issues that will hold it back.[1] For example, all else equal, I’d rather have the 2nd or 3rd best car in a category if the dealer network is larger and more established as an example. (A reason (among others) that a Tesla is a non starter for me.

  5. John Ciasulli

    Is it possible that with the lack of transparency around pricing, the inefficiency in deal circulation (club deals), and the broader heard mentality of the industry we will always find ourselves in bubble cycles..? Maybe the better question is not “is it a bubble?”, but how do you invest in order to fade the variance of the bust cycle?

    1. Liban Mahamed

      Marvelous point, that is the trillion dollar question. There may not be an answer for it in this planet of ours, human factors greed, rumor, etc, will win the over rational dry analysis.

    2. JamesHRH

      Every industry is a bit of an echo chamber. People listen to people that they listen to. So, yes.The Bartender is a noteable exception to the rule.

      1. jason wright

        bartenders have a unique perspective.

  6. pointsnfigures

    There are mini bubbles all over the place. The oil markets certainly were in bubblicious territory and now are probably going too hard in the opposite direction. Overall, I can’t disagree that ALL markets are in somewhat of a bubble because we are going on 5 years of 0% interest rates. Central banks all over the world have cut the cost of money to 0. That has fallout implications. I certainly hope there isn’t a dislocation when central banks move the other way.

    1. Liban Mahamed

      The flood of money from central banks is the elephant in the room, this was the source of 07-08 real estate bubble. My feeling is eventually they will pull the lever up, I hope the economy is in sound footing then. Too much money chasing few assets. ASSET INFLATION.

      1. mjkagan

        The source of the capital for the 05-07 bubble was NOT central banks. It was the appetite among investors for slices of securitized home loans, which allowed banks to make risky loans and quickly flip them to investors (basically, pension funds) without bearing the risk themselves.

    2. Richard

      the cost of capital for the govt is essentially zero. Why shouldn’t govt lend at the same rate?

  7. Dale Allyn

    I agree with your premiss of durability. Today, we are far more dependent, even addicted to web/mobile services and products than was the case in 1999-2001. Today web/mobile serves “essential” services for consumerism, commercial communication, big data, etc. We will likely see some bumps, including some companies implode, but Internet/Web/Mobile is now an essential part of our lives, not a trendy curiosity.

  8. jason wright

    the interview wardrobe?

  9. LE

    I think this is a great answer and a great video.However with respect to “the foundation is stronger and stronger and stronger” one thing that isn’t stronger, and in fact is much weaker and more vulnerable is internet security.No comparison now vs. early 00’s. Threats are much greater and they will grow over time.USV needs to be invested in this area both because it is (and has been) exploding but also as a hedge.The only (announced) [1] security (related) plays that USV has are possibly cloudflare, siftscience and maybe maybe maybe returnpath. You should do more with this if you can.[1] From descriptions on this page: doesn’t include investments that haven’t been announced or in the pipeline.

    1. William Mougayar

      But you know LE, they are investing in decentralized models.The new decentralized models of marketplaces have inherent security barriers because everything is just about decentralized. It’s easy to attack a center, but much more difficult to attack 10,000 decentralized nodes that are loosely connected. If you attack one, you only inflict 1/10,000 th damage, and the nodes immediately notify each other and shut or hunker down.New paradigm in the making.

      1. LE

        I get your point and yes it’s valid.However I don’t think we will have a situation where Sony exec’s emails or Target credit cards are going to be stored in a fashion that makes them hard or impossible to hack into. People will continue to try and there will continue to be data that can be gained by unlawful means and an industry that tries to minimize the damage. Crime will never go away. Especially this type of crime.Internet and/or security related offerings have and will continue to have huge potential. Just like healthcare. Even with the scenario that you are suggesting. And (as just one example) nobody has come close to scratching together a solution in the SMB market whereby they could easily collect $100 per month or more just for providing extra “peace of mind”.

        1. William Mougayar

          Give it some time…. These situations you described are exactly what can be prevented, in the long term.

      2. Vasudev Ram

        >The new decentralized models of marketplaces have inherent security barriers because everything is just about decentralizedNot too sure about that. Do you have any strong foundation for saying so, or is it a guess or hunch? One could counter-argue that a centralized system is easier to protect, since more highly skilled security resources (humans, i.e. security experts and their expertise) can be allocated to it, which is not so easy in a decentralized system (due to logistics and cost).Edit: To make my point more clear:>but much more difficult to attack 10,000 decentralized nodes that are loosely connected.Not necessarily the case, if they are poorly secured _and_ connected.Having said that, of course, security practices in many modern (centralized) startups range from poor to nearly non-existent. As anyone who reads the tech news knows, there have been many security lapses and hence break-ins in prominent startups (and also in now established companies – some household names – that were startups some time earlier) in the last several years..

        1. William Mougayar

          Well, decentralization is how Bitcoin works. Try to take it down at its center, and you can’t, because I doesn’t have a center. Re: your other point, see this excellent post from Nick Grossman on how companies are putting bounties to solve security holes via crowdsourcing:

          1. Vasudev Ram

            >Try to take it down at its center, and you can’t, because I doesn’t have a center.Yes, I do realize that. But what I meant by this:>Not necessarily the case, if they are poorly secured _and_ connected.was that if the decentralized nodes are not well secured, and since they are connected, malware could spread rapidly from one to many of them, thereby potentially taking down or even subverting a large part of the overall system (even there is no center). And having the necessary resources (human, etc.) to secure so many nodes is a larger and more difficult task (logistically) than to secure just one central server.Thanks, I’m checking out Nick’s post.

          2. Vasudev Ram

            Speaking of decentralized, and unrelated to our other discussion, saw this on Hacker News:YaCy: Decentralized Web Search (…

          3. William Mougayar

            yes…i saw that too. thanks.

    2. Vasudev Ram

      >However with respect to “the foundation is stronger and stronger and stronger” one thing that isn’t stronger, and in fact is much weaker and more vulnerable is internet security.Great point, and clearly observable to anyone following tech news. Security breaches have been increasing in recent years, with many well-publicized instances, including of prominent companies – see my nearby comment.

  10. Emily Merkle

    brevity, an underrated virtue.

    1. Richard

      Maybe, but I’ve never found a great book that I hadn’t wished were longer.

      1. Emily Merkle

        Interesting point. I have, one. Have you read Einstein’s Dreams? Beautiful, and relatively brief. any longer would be overkill.

  11. JamesHRH

    Bingo.Rising tide raises all boats.

    1. LE

      That’s a great saying of course but a rising tide doesn’t raise boats with big holes in the side and/or no power to run the bilge pump. They will sink. Also doesn’t account for bad weather and what happens with that.The other side of that statement is that a company founded during a period of a “rising tide” will tend to spend money as if the tide will always be high.Here’s an example of this. There is a title insurance company in the complex that I am located in. Back in 2006 (ish) they were asking their neighbor (a dentist) if they could buy his unit to expand because they were so busy with closings. That would have been very expensive (the dentist would have to relocate. The deal never happened. Not sure why.Now advance to 2014 and it turns out they are many months behind on their condo fees. Which really aren’t that much money for the unit of their size. So they can’t even pay that fee because real estate activity for them isn’t what it was back in the days of easy money. And they have had to lay off people no surprise there.Can you imagine what would have happened if they expanded into the extra space? As if business that they had would last forever?Same thing happened with a real estate broker that I deal with. Expanded into the space next door then had to scramble to sublet that space after the real estate market crashed.These are the types of things that happen (contraction) frequently that you never read about.

      1. JamesHRH

        Nope, but they raise boats with dipstick captains, no real set course & a useless crew, as long as the hole are above the water line.

    2. SubstrateUndertow

      A rising tide may raise all boats but the falling tide tends to lower them every unevenly.That inflation-pump cycle is largely what facilitates the “Rich getting Richer” and the “Poor getting Poorer” economic function.

      1. JamesHRH

        Sinking tides separate the sailors from the bailers.

  12. Salt Shaker

    The VC biz is highly speculative in nature. Without (hopefully) getting too personal, how would you characterize your own investment strategy? Are you fairly aggressive/conservative, risk adverse, etc.? I can envision VC’s having a gunslinger, shoot for the fences type mentality or conversely being fairly meek with their own individual portfolios.

    1. fredwilson

      I swing for the fences hard as I can. But I keep a lot of cash too. I’m a barbell if there ever was one. I don’t like anything in the middle

      1. mjkagan

        This is a really interesting piece of insight. Thanks for sharing, Fred.

  13. SubstrateUndertow

    There may not be a tech bubble regarding what is clearly an actionablly-real blue-sky potential for network-effect investment opportunities but on the tech-consumer side there is a peak-attention bubble building.Consolidating key/sticky App data-feed-utilities into a better tech-consumer slipstream that makes the whole personal-data-mesh more efficiently transparent to our real/visceral world lives feels imminent to me ?

  14. Alex Murphy

    The most concerning thing there was hearing you say at the very end “there is no way it comes down now … ” As a participant in this digital tsunami, I hope you’re right. As a pragmatist, that creates pause.

  15. Kimberly Klemm

    The world will not be changing….the economic projects can become harsher or more favorable, but I have to agree that the foundations for the Technology/Entrepreneur sectors are not disappearing even in market fluctuations.

  16. trchat72

    Think about it for a second. The people who are able to raise money would tend to be the ones with the most opportunity and promise. Likeable, intelligent graduates of our finest schools. Who could be doing any number of worthwhile things with that degree. sohbet chat She was my best friend in the world. And now my guardian angel.