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<nettime> Christopher Mims: What Bubble
Patrice Riemens on Wed, 5 Nov 2014 18:18:18 +0100 (CET)

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<nettime> Christopher Mims: What Bubble

Back from the 'Generation Equity' dream days and in our 'This Time
Everything Is Different' Department ...

Original to:

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

Living Through the Dot-Com Bust Is a Dividing Line; 'It's Like They Want
It to Crash'

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 market
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

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

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

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

 -- christopher.mims {AT} wsj.com.

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