[andrewjrangel]

I am curious if this will end with a "bubble-burst" or a slow burn like twitter has experienced. Surely the money has to dry up sometime? It is too bad that none of these companies create any kind of net good for society like a startup that pays you over minimum wage to clean up a park or sort recycling.

[johnvanommen]

The thing that was different about the Dot Com Bubble is that it felt like the whole Internet thing might have been overrated. There was definitely a feeling of "perhaps we were all wrong about what the Internet can be."

I think that's a big part of the reason that the crash was so deep and epic; there were a lot of people who felt like it might just be a fad.

Keep in mind that when the bubble burst in Y2K, Netscape Navigator was less than six years old!

In a lot of respects, the dot com bubble was similar to the videogame crash of 1983. In 1983, everyone thought video games were a fad that had passed.

[crazygringo]

> Surely the money has to dry up sometime?

Why? A bit simplified, but think of the money as coming from the profits from the companies that have been successful. It's just how investment works. And when you add up all the gains and losses, it's still a net positive as the economy grows a little bit more year after year.

And what do you mean no net good? The companies create jobs which create huge amounts of income taxes (always) and corporate taxes (when profitable) that pay the salaries of the people who, for example, maintain our parks, or manage a city's recycling systems.

[nickparker]

Jobs aren't intrinsically good. These startup jobs might be, but it's an insanely complex system you're trying to suss a value judgement out of.

If these startups didn't exist, the money going into them would be seeking returns elsewhere. There would probably be jobs involved there too, and the people working those jobs might be doing something better for society than building a short-lived money-losing consumer product.

If the mysterious "elsewhere" didn't create jobs with the money say because it was spent on capital assets, that's still not the end of the story. Wherever it went, someone else has it now and they're probably spending it, perhaps hiring some people with it ie creating jobs.

The simple interpretation of your second line is the broken window fallacy, which is false. The grasping-at-straws interpretation is that paying software engineers to work on junk is a better than average way to route capital through our economy - measured in terms of how much real value the capital produces for people as it changes hands from company to coder + tax man, coder to shopkeeper + tax man, and tax man to public works employees, etc forever. I don't think we could possibly measure the latter interpretation, but I don't believe it.

[hueving]

These companies losing investor money isn't anything like the broken window fallacy.

If I pay a company $0.75 for a $1 widget with a $0.25 VC subsidy, I get the $1 widget and I'm ahead a widget. Nobody had to destroy a widget to make me buy a new one.

The underlying widget suppliers still get the full price so the money is flowing into the economy. The VCs are the only ones losing anything.

So paying people to clean parks is not better for the economy than VC subsidizing blue apron meals.

The mistake you are making is assuming that a company losing money cannot provide more value to society than it loses.

[nickparker]

You're right it's not quite the fallacy in that there isn't any destruction going on. It's something adjacent though:

The whole point of markets is that people decide where to spend their money based on the value they can get for it. When 3rd parties subsidize services like Moviepass or Blue Apron, they break the pricing mechanism that's supposed to lead us to efficiently use limited resources eg seats in a movie theater or space on mail trucks.

If a company losing money is providing more value to the customer than it costs to operate, they don't need to be losing money and they should raise prices. Otherwise, you're arguing these companies have a beneficial externality of some kind, and society at large gains in the transaction even though the company is burning more value than the customer gains from its product. I don't think that's the case for Moviepass or Blue Apron.

It's Bastiat's idea of the unseen alternative, except we're talking about LP money channeled through VCs instead of taxpayer money through the government.

I'm not blindly against VC-, cross-business, or any other kind of subsidies. If positive externalities exist they're a good thing. Eg, Amazon was "losing money" or barely breaking even on its physical goods business for a long time, but that money was strengthening our logistics network (both internal to Amazon and in USPS, FedEx, UPS) so they could be profitable later at the same or lower price points. Healthcare probably ought to be a money-losing business because a healthy labor force has huge positive externalities. I just don't think leisure or mild convenience/lifestyle products are positive on the balance.

[soVeryTired]

> A bit simplified, but think of the money as coming from the profits from the companies that have been successful.

To be honest, most of the money is coming from pension funds, endowments, and state bodies (i.e. large institutions with monstrous piles of money). They allocate most of that money to post-IPO stocks and bonds, but they'll hand over a small fraction to 'alternative investments' too.

Post-financial crisis, when interest rates came tumbling down, two things happened. First, bondholders (i.e. large institutions) made a lot of money. Second, bonds became less attractive as an investment, making alternatives like early stage tech look good in comparison.

It's partly accurate to say that the hot money pouring into silicon valley comes from previous companies' successes. But a lot of the money is coming from 'me too' institutional investors who are chasing previous investment performance.

> The companies create jobs which create huge amounts of income taxes...

It's possible to create jobs wastefully. I could pay ten people to dig a trench while I pay ten other people to fill it in. Your arguments would seemingly still stand, but not much of value would get built.

[allenu]

You're right that the money wouldn't necessarily dry up, but attitudes towards the risk might change if the likelihood of success of these startups goes down over time. There may be a point where investors don't want to stomach the risk. I'm not saying it's logical, but investors aren't always rational.

[matchagaucho]

Pressure is relieved from the bubble slowly via acquihires and M&A. Engineers get redistributed once a "winner take all" is proclaimed.

Not as impactful as the dot-com crash... but a RIF is usually involved in these bubble corrections.

[empath75]

There will eventually be a pets.com of the tech bubble.

Something like Tesla or Uber or Blue Apron going belly up.

[dragontamer]

Pets.com is probably the wrong example from the 90s. Webvan.com is a bit better: hundreds of millions spent on actual warehouses, trucks and more.

Pets.com clearly overspent on advertising, but I don't think they risked too many assets on the line. So when Pets.com eventually died, it wasn't a big deal. Its funny, because they had superbowl commercials and huge outreach. But nothing like like Webvan's huge warehouses or fleets of trucks.

[__jal]

I recall Webvan well. Still have a few of their crates holding stuff in my attic[1].

No idea what it looked like elsewhere, but their spending blitz in the Bay Area was incredible. Everywhere you looked, there was their name. For a little while...

[1] When they first launched, they used really high-quality, solid crates for deliveries that were well worth the too-cheap deposit.

[dragonwriter]

Pets.com was a potent and visible symbol that the money for nothing dotcom era was over.

I suspect that the upthread poster picked exactly the right 90s example for what they wanted.

[kuschku]

Or take a look at Cargolifter. They wanted to carry goods with Zeppelins around the world. Their facilities are still the largest free standing buildings on the planet, with an entire tropical resort in the former main hangar.

[michaelt]

Advertising seems like a good description of the subsidy applied by Uber and Blue Apron?

[product50]

Blue Apron going belly up won't even create ripples. They are not in the same league as the other 2 companies you mentioned. Just saying..

[xkjkls]

Also, if you look at the bleak bleak picture of Blue Apron's stock price since IPO, them going bankrupt wouldn't even be close to shocking.

[empath75]

Pets.com only had 320 employees when its IPO flopped.

[product50]

It is a different era now. Top 6 most valuable companies are all tech now. Blue Apron has laid off more employees in the past year than pets.com had in total.

[bonestamp2]

Tesla and Uber aren't going anywhere. There's way too much invested for them not to secure another tiny drop in the bucket to keep going. That doesn't necessarily mean it's a good idea ("throwing good money after bad"), but that's the reality of what will happen, especially since it will probably be someone else's money as they dilute.

[jncraton]

Tesla's financials are terrifying. I hope that Tesla succeeds, and I believe that they can. However, there is nothing about the company that makes an investment in TSLA feel like a sure thing to me.

[lalos]

Look at Ford http://www.businessinsider.com/ford-f-150-truck-production-m...

A fire accident of a supplier of Ford caused this, it wasn't even on their hands. Any freak/unlucky accident plus Tesla being tight with cash and time you do the math.

[bonestamp2]

Oh ya, I hear you. I worked at GM in the early 2000s and I remember personally dealing with an issue where we needed over 100,000 of a particular part for a recall and the vendor could only supply about 2000/month (not including what we needed for current production). Most of the other major automakers also used that part and they needed them for recalls too! It was insane.

I've been in automotive ever since and worked for a number of the major automakers and I currently do a lot of consulting for one automaker (not Tesla). So, I understand very well how one tiny thing can really throw a wrench in production (or sales, or service).

But, Tesla has an illogical amount of goodwill right now and they can't seem to burn through it. So, until that goodwill really starts to dwindle, there are going to be investors willing to take preferred stock.

[pwinnski]

There's a chance Tesla will not exist as an operating company this time next year. Given their published financials, it wouldn't take much at all.

There's a chance Tesla will last a century, and people will point and say see! I told you they weren't going anywhere!

[ironjunkie]

You got it exactly right.

What is beautiful with this is that whatever happens next year, the "winning" camps will say that they knew this would happen.

It is a game of Statistics and chance at this point. Both outcomes are possible, but once the outcome is clear, the ones that got it right will dismiss it is based on luck and chance at this point.

[allenu]

This reminds me of the quote that the four most expensive words in investing are "this time it's different".

[toomuchtodo]

Hooboy, it only takes a bit of loss of confidence for a corporation to liquidate. Never underestimate the difficulty level of refinancing corporate debt in a shaky macro environment.

[bobthepanda]

Isn't this what we said about the housing market a decade ago?

[skinnymuch]

Blue Apron stock is barely holding on. It going away won’t do much really. Not compared to the other huge examples.

[autokad]

from the article: “The fact that Google and Facebook were able to generate such enormous profits and growth does give hope to some companies,”

IF the bubble bursts, companies that seemed profitable might not remain so. companies like Facebook have made a fortune in advertising on things such as mobile (80% of its revenue), which to my knowledge really doesn't work. likewise a lot of desktop adds don't work, but many of these cash burning entities spend a lot on adds. so that revenue will disappear, then other people who want to sell adds can negotiate better prices or simply choose not to do so.

[namanyayg]

I am curious, why do you believe that ads do not work? Why would large entities continue spending on them otherwise?

I ask because I operate a few businesses that have ROI > 1 on FB ads. I assume larger corporations, especially those like Amazon, Newegg, Fashion Nova, etc would be profiting off of them too.

[autokad]

I have talked to CEO's of ad companies. They use to try and prove how much ROI their adds where. What they found was their large clients didnt want to know. An exec at a large firm would be given a huge add spend budget, and they got that no matter what. Getting numbers that their add spend didnt work would = budget cuts, but a fancy power point presentation with an arrow pointing up so long as sales are good doesnt get questioned.

What did the add companies have to say about mobile? most of the time, if something gets clicked, its because they were intoxicated and accidentally did so.

[namanyayg]

I agree, many companies do not care. I know a guy who does online advertising for a Middle Eastern airline. Many of his campaigns do not work out, he's blown large budgets due to simple mistakes and no one cares, and he's given a budget that he just _has_ to spend. However, campaigns do work; many of the viral content you see has been carefully engineered and propogated by clever ad agencies.

I have to disagree on your opinion about mobiles. Mobile e-commerce is very intuitive and fast for many users (see Kim Kardashian). Consuming and sharing of media on mobile has led to clickbait and some brands have earned big money from that (see Buzzfeed). People scroll through mobiles addictively, and the invention of the "feed" by Zuckerburg combined with targeted advertising has users doing exactly what ad companies have want them to do, whether it be sharing, consuming, or purchasing.

[marcosdumay]

Next time you use some ad supported app, take notice on the share of the ads are are for some other ad supported company.

That is the share of the market that will vanish in a bubble pop. On my experience, it's something around 90%, but YMMV.

[georgeecollins]

That's a bit like the dot com thing, where companies spent a lot on banner ads, to get people to come to their site that made money off of banner ads. I'm exaggerating of course. But it is good to think about which VC funded companies may depend on other VC funded companies for clients.

[skinnymuch]

What makes you say mobile advertising doesn’t work? Google makes a larger and larger portion of their revenue and profit from mobile as well. I’d assume the same is true or going to be true for distant third place player Verizon/Oath.

Advertising has stuck around on TVs and all sorts of formats that can’t be tracked at all for this long, online or mobile advertising not being at the pinnacle of efficacy doesn’t mean it doesn’t work.

[Mahn]

Your knowledge is wrong.

[arcbyte]

> Surely the money has to dry up sometime?

Yup, this fall. By the close of 2018 all the world's central banks will be in quantitative tightening after having spent the past 10 years perpetuating an unprecedented level of quantitative easing.

[irln]

Three data points:

Fed Balance Sheet https://fred.stlouisfed.org/series/WALCL Fed Balance Sheet hasn't been reduced in any meaningful way.

Bank credit: https://fred.stlouisfed.org/series/TOTBKCR Bank's have themselves continued increasing the money supply.

Worldwide debt: https://www.iif.com/publication/global-debt-monitor/global-d... Random snippet from Q32017

[RhodesianHunter]

1. Does not account for inflation, which would show a 5.8% drop between 2014-2018.

2. Viewing this chart on a logarithmic scale as it should be, or viewing the same data charted as year over year percent change, paints a much less intimidating picture. https://fred.stlouisfed.org/series/TOTBKCR

3. "This publication is available to IIF Members only."

[johnvanommen]

Well that's the stuff of nightmares.

[dragonwriter]

QEs been tapering off for a long time (US QE ended in 2014); there's very little reason to believe that it's global final (for now) end will do much to capital markets.

[StanislavPetrov]

This only means that the FED hasn't been increasing its purchases since 2014. It has maintained an over $4 Trillion (trillion with a T) balance sheet, and it continues to roll this money over. Ending QE would mean stopping repurchasing and letting the balance sheet shrink - quite different in substance and effect than tapering.

https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

This also ignores the fact that QE purchasing has continued to accelerate at an unsustainable rate in many of the world's largest economies, such as Japan.

https://tradingeconomics.com/japan/central-bank-balance-shee...

In addition, central banks are (and have been) purchasing stocks directly to prop up the markets. The Bank of Japan spends over $800 billion yen a month buying stocks and ETFs, resulting in the central bank owning a massive 75% of ETFs in the entire market.

https://asia.nikkei.com/Business/Markets/Bank-of-Japan-s-ETF...

If you don't understand the problems with central banks owning three quarters of the market and what that means in the future (near and far) then you don't understand markets. Nobody knows when the "extend and pretend" strategy employed by central banks around the world for the last decade will fall apart, but everyone informed understand that it won't last forever. The longer we keep our heads in the sand the worse the problem will ultimately be.

[Veelox]

If you think the bubble is going to pop you should take out some options and you should be able to make a killing.

[StanislavPetrov]

There's no question its going to pop - the question is when. It could be tomorrow, or it could be 5 years from now. Certainly central banks are going to do everything in their power to prop up the markets with continued equity and bond purchasing to delay the inevitable as long as possible - which will make the pop that much louder when it does come to pass.

Free markets are based on price discovery. Central bank purchasing destroys price discovery by artificially creating demand. Its simply a matter of basic logic. Either central banks end their purchasing and demand falls to its organic level, or they continue to accelerate their purchases and increase the artificial disparity. In addition, as the share of markets owned by central banks increases the liquidity of markets decreases, meaning that when there is a crash those running for the exit will find the door much smaller.

[danharaj]

If you blow a bubble, I won't know how long it'll float around before it pops. But I know it's going to pop.

[arcbyte]

Yes easing has been tapering off, but the balance sheet reductions are a whole other beast that only started in ~November and only from the Fed. Once the ECB starts, and potentially the JCB (although I think they've changed direction now), there will actively be a drain on the world's economy instead of the artificial faucet.

Don't quote me though, I'm several months out of date on following it super closely.

[dweekly]

Can you provide data to back that specific claim around timing?

[resource0x]

For how long? My conjecture is that they will re-start "easing" as soon as some index drops by 10%. And this new easing will exceed in scale all prior "easings" combined. Just a pure speculation :).