What The Bubble Got Right 340
dtolton writes "Paul Graham has written an article entitled What the Bubble Got Right. In recent years the roaring tech bubble has become a byword, yet Paul does an excellent job of articulating what it got right."
Full Text (Score:5, Informative)
(This essay is adapted from an invited talk at ICFP 2004.)
I had a front row seat for the Internet Bubble, because I worked at Yahoo during 1998 and 1999. One day, when the stock was trading around $200, I sat down and calculated what I thought the price should be. The answer I got was $12. I went to the next cubicle and told my friend Trevor. "Twelve!" he said. He tried to sound indignant, but he didn't quite manage it. He knew as well as I did that our valuation was crazy.
Yahoo was a special case. It was not just our price to earnings ratio that was bogus. Half our earnings were too. Not in the Enron way, of course. The finance guys seemed scrupulous about reporting earnings. What made our earnings bogus was that Yahoo was, in effect, the center of a pyramid scheme. Investors looked at Yahoo's earnings and said to themselves, here is proof that Internet companies can make money. So they invested in new startups that promised to be the next Yahoo. And as soon as these startups got the money, what did they do with it? Buy millions of dollars worth of advertising on Yahoo to promote their brand. Result: a capital investment in a startup this quarter shows up as Yahoo earnings next quarter-- stimulating another round of investments in startups.
As in a pyramid scheme, what seemed to be the returns of this system were simply the latest round of investments in it. What made it not a pyramid scheme was that it was unintentional. At least, I think it was. The venture capital business is pretty incestuous, and there were presumably people in a position, if not to create this situation, to realize what was happening and to milk it.
A year later the game was up. Starting in January 2000, Yahoo's stock price began to crash, ultimately losing 95% of its value.
Notice, though, that even with all the fat trimmed off its market cap, Yahoo was still worth a lot. Even at the morning-after valuations of March and April 2001, the people at Yahoo had managed to create a company worth about $8 billion in just six years.
The fact is, despite all the nonsense we heard during the Bubble about the "new economy," there was a core of truth. You need that to get a really big bubble: you need to have something solid at the center, so that even smart people are sucked in. (Isaac Newton and Jonathan Swift both lost money in the South Sea Bubble of 1720.)
Now the pendulum has swung the other way. Now anything that became fashionable during the Bubble is ipso facto unfashionable. But that's a mistake-- an even bigger mistake than believing what everyone was saying in 1999. Over the long term, what the Bubble got right will be more important than what it got wrong.
1. Retail VC
After the excesses of the Bubble, it's now considered dubious to take companies public before they have earnings. But there is nothing intrinsically wrong with that idea. Taking a company public at an early stage is simply retail VC: instead of going to venture capital firms for the last round of funding, you go to the public markets.
By the end of the Bubble, companies going public with no earnings were being derided as "concept stocks," as if it were inherently stupid to invest in them. But investing in concepts isn't stupid; it's what VCs do, and the best of them are far from stupid.
The stock of a company that doesn't yet have earnings is worth something. It may take a while for the market to learn how to value such companies, just as it had to learn to value common stocks in the early 20th century. But markets are good at solving that kind of problem. I wouldn't be surprised if the market ultimately did a better job than VCs do now.
Going public early will not be the right plan for every company. And it can of course be disruptive-- by distracting the management, or by making the early employees suddenly rich. But just as the market will learn how to value startups, startups will learn how to minimize the damage of going public.
2. The Internet
Re:bubble? (Score:5, Informative)
Re:Wish I had a job before/during the bubble. (Score:5, Informative)
I joined the industry in June, 2001, right after I graduated college. I started with an okay salary, a little less than you mentioned, but still good. Since then all my company's yearly salary increases have been around 3%. Three percent barely makes a difference. But for years before 2001, the average increase was around 10%, and good people got 15%! Plus for equity compensation, people who joined in 1998 and were smart made hundreds of thousands on their stock options. But my options are still under water.
So from my perspective, getting a job "before the bubble burst" isn't that amazing. I'm definitely better off than I would be if I were 1 year younger, but the real lucky people are the ones who were in the industry before the bubble.
Options (Score:3, Informative)
For example I have been offered 4000 options at work at $1 each. The company is not public. Also these options take 4 years to vest. That's 0.016% of the company.
Now the number that you need to know is how many stocks exist. (Not outstanding, in Total number of shares) This number is not included in my option package so I had to ask. (It's 25 million).
The only way for me to make money is for my options to vest, and for the company to be sold or go public while I am there.
Let's say that the company is sold. This is what I would get based on the value of the sale.
25M = $0
50M = $4,000
100M = $12,000
1B = $156,000
So if my options are vested and the company sells for over $25 Million I might make some spare change. Considering the fact that I work for a small startup with less then 30 people these options are an insult.
So kids if you're getting an offer from a place with Stock Options; be sure to figure out what they are really worth.
Re:Paul G. is a "one trick pony" (Score:4, Informative)
... which is one more than you've had.
Other things notable about Graham which he can claim and you cannot:
So yeah, I'd give him the benefit of the doubt.
Re:I think Marx would shit a brick if he could see (Score:2, Informative)
[America is more socialist than free market, by the way. America is capitalist, by Karl Marx definition, but Marx has played quite the trick on us, taking the free market, calling it capitalism, and then changing the definition from unregulated market to Market Socialism. You probably won't be able to understand this, though.]
I have to ask... do you realize the continuously increasing amount of welfare accounts and welfare infrascture of these social-democracies that is being outsourced? The Netherlands... Germany... France... They're all slowly growing broke.
It's very funny that you talk of, and post quotes of others referring to, America preaching the evils of socialism and proclaiming that free markets rule, when a public education in America is anything but about a free market society.
Let's discuss your webpage:
Link: "Welfare State and Vacation"
The biggest error here is that American's are without health care. No, there is a large number of America's without health insurance, but not without health care. If you have an emergency, by law, you cannot be turned away from GOOD medical care. In return, you negotiate a payment plan at a later date, and if you could only afford to pay one dollar per week for the next twenty five years, the hospital agrees to it. What they do not do is let people get cosmetic surgery "for free", or let people get free massages or facial creme.
Did you know that when people perceive things as "free", they tend to use more of it? That's why the costs of those socialized health care systems in your touted social-democracies are becoming very heavy, and they cannot hold up over a longer period of time. Outsourcing accounts and infrastructure, as well as harnessing the Trade Bloc that is the E.U., are what is keeping these socialized systems afloat... unfortunately for them, it is only temporary.
Did you know that an ever increasing number of Canadians are coming into the United States for health care? Why? Because when you live in a socialized health care system, you have to get the bureaucracies consent in order to get care. This leads to several weeks, up to several months, of waiting for care -- including such things as serious hip surgeries. Yes, socialized health care is grand.
Link: "The American Prosperity Myth"
I'm assuming your understanding of economics is so limited that you fail to realize how fallacious the "trade deficit is". If you think about it, we all have trade deficits with stores like WalMart or a mom'n'pop store down the street. We buy from them all the time, but they don't buy from us [unless you also own a business]. Trade deficit? Nope. They buy elsewhere.
We might buy more from China than China does from us, but so what? We sell more to other countries wherein the other countries do not sell as much to us.
It's laughable to associate the welfare state with the success of European Union countries. The success of European Union countries is due to opening up of markets. You might try arguing that Ireland, the "European Tiger" or "Celtic Tiger" or whatever the hell you like to call it, only succeeded because of European Union investment, but that's complete bullshit. Ireland's economy has been surging on forward because of the liberalization of the market. It opened up its markets, pulled back layers of bureaucracy and unnecessary regulation, and started becoming an economic contender in Europe. This despite having very little natural resources, relatively speaking.
Link: "SocialDemocracy"
It is unfair to compare America with Scandinavian countries when you talk about standard of living, when you compare the diversity and immigration policies of the United States. to those Scandinavian countries. The Scandinavian countries know, that if they let more than a relatively small amount of people into the country, they'll fall flat on their f
Re:I regret to inform Mr. Graham.... (Score:4, Informative)
As you might guess from the fact that I estimated YHOO to be worth $12 when it was trading around $200, not a lot. I was well aware that the Bubble was a bubble at the time. Friends still imitate me saying "for God's sake, sell."
Re:I think Marx would shit a brick if he could see (Score:1, Informative)
If your manager starts up a business, and it grows, and amasses capital to invest, then your manager will have become a full-fledged capitalist.
As hipsters used to say, it ain't where you're from, but where you're at.
The idea of "class" that you're thinking of is caste, and it is called "class" in England. In India and Japan, it's called caste. Caste is "the people you're from" and it as much about ancestry as your level in society.