Economist Bubble Debate

Quite a good article in the Economist debating whether there is a Tech Bubble or not - as an alternative to my "10 stages of a bubble".

Key points for a bubble from the article from Steve Blank :

Dr Jean-Paul Rodrigue, in the Department of Global Studies & Geography at Hofstra University, observed that bubbles have four phases; stealth, awareness, mania and blow-off. [ see chart above- ]. I contend that we are approaching the early part of the mania phase.

In the stealth phase, prescient angel investors and Venture Capitalists (VCs) start investing in an industry or market segment that others have not yet found. In the case of this bubble, it was social networks, consumer and mobile applications, and the cloud. VCs who understood the ubiquity, pervasiveness and ultimate profitability of these startups doubled-down on their investments. Long before others, they saw that these applications could have hundreds of millions of users with "off the chart" revenue and profits.

The awareness phase is where other later-stage investors start to notice the momentum, bringing additional money in and pushing prices higher. The Russian investment group, DST, is an example, with their $200 million investment in Facebook, at a $10 billion valuation, in 2009. This was followed by another $500 million investment (along with Goldman Sachs) in 2011, at a $50 billion valuation. Meanwhile, the bubble for "seed stage" startups began when Ron Conway's Silicon Valley Angels and DST guaranteed every startup out of a YCombinator $150,000. And it was hammered home with Color—a startup without a product—raising $40 million, at a reputed $100 million valuation, from brand name VCs who should have known better. When they did launch their product, it was compared to boo.com, and entered the dot.com bubble hall of infamy. Meanwhile, smart VCs continue to invest in this segment and increase their ownership of existing companies. The technology blogs (TechCrunch, et al.) start cheerleading, and the general business press/blogs start paying attention. And all of the investors trot out explanations of "why—this time—everything is different".

We have just entered the mania phase. The Linked-in IPO valued the company at $8.9 billion at the end of the first day of trading. It sent a signal that there is an irrational demand for tech IPOs. Silicon Valley startups are falling over each other to file their S-1 documents to go public.

There is no bubble says Ben Horowitz:

A lot has changed since the internet bubble eleven years ago. Firstly, the cost of running an internet application has fallen 100-fold. In 2000, I was CEO of the first cloud computing company, Loudcloud, where the price for a customer running a redundant version of a basic internet application was approximately $150,000 per month. The cost of running that same application today in Amazon's cloud costs about $1,500 per month.

Secondly, developers are more productive. In 2001, Stewart Butterfield abandoned plans to build a massively multiplayer online game (MMOG) after costs became too great; he built photo-sharing service Flickr instead. Now Stewart's new company, Tiny Speck, is again building that MMOG, but today it is working brilliantly. Why? Because Stewart's programmers are ten times more productive than they were in 2001 due to massive advances in programming language technology.

Thirdly, the market is far bigger. In 1998, I was working at Netscape, which owned well over half of the browser market. We had about 50 million users, more than half of them on dialup connections which could not run many interesting applications. Today, there are over 2.1 billion people on the internet, most of them using broadband connections. The true market for internet businesses is about 50 times larger than during the actual technology bubble.

With costs 100 times lower, programmer productivity ten times higher, and the market 50 times larger, it stands to reason that many more internet businesses will work today than did the last time around.

The markets for internet businesses will double in size again over the next five years

International Data Corporation (IDC) estimates that there will be 1 billion mobile internet users by 2013. That estimate will prove to be low. There are currently 4.5 billion mobile phones worldwide; within five years almost all of them will be more fully featured "smart" phones offering better access to the web.

As smart phones become the volume leaders, the component costs for smart phones will fall below the corresponding component costs for low spec "feature" phones—a trend that will eventually render feature phones obsolete. As a result of smart phones replacing feature phones, the internet will double in size over the next five years.

This time it is different

To be fair, Ben is not ruling out the possibility that a bubble may occur....

One may still argue that a bubble is coming. A bubble will almost certainly come eventually—that is the nature of human psychology and of markets. But what is the value of predicting a bubble with no time frame? What does that even mean? If we are approaching a boom and huge growth in technology over the next several years, do you want to miss it due to the eventual bubble? If the true goal of the bubble promoters is simply to encourage caution in investing, when does that advice not apply?

....but he is a bit disingenuous when he says that people are not saying "when" - most are in the c 18 - 24 months frame:

Currently 68% For Bubble, 32% Against.