This Insanity Proves The Tech Bubble Is About To Burst

Is this some sort of April Fool's joke?

Unfortunately, no.

Headline: "Knicks Star Carmelo Anthony Launches Venture Firm"

Money quote:

"Anthony, the two-time Olympic gold medalist, seven-time NBA All-Star, is hoping to leverage a social media presence of over 5 million followers and his Melo brand into success in tech investment."

This makes the Yo app look sane.

Even worse, TechCrunch, which makes security trade mags look like investigative reporters, is filled with rah-rah cheering comments on the fund.

I am not sure what will pop first (American tech or Chinese real estate) but when they do, we're going to have a sizeable recession that will impact everyone including the security industry.


"[Carmelo Anthony] is hoping to leverage a social media presence of over 5 million followers and his Melo brand into success in tech investment."

In a word, Knickstarting...

I am not sure what will pop first (American tech or Chinese real estate) but when they do, we're going to have a sizeable recession that will impact everyone including the security industry.

Agreed, that they will pop and agreed it will impact;

What's your guess of when? < 6 months, 1, 2, 3, 5, 10 yrs?

Even after taking the Anthony harbinger into account, I'm thinking > 3...

Over 3 years? We are now 6 years from the last recession, so that would put the next one at 9 years.

That seems a little long because it appears to be getting very frothy right now, but it's always hard to tell what will trigger a bubble to burst.

I don't know when but it's pretty obvious that zero / negative interest rates have driven people into a lot of stupid, speculative investments (not just melo) that eventually will end badly and in mass.

Btw, for others, a good general insider read on bubble is Fred Wilson's "The Bubble Question", key excerpt:

"The multiple of earnings one should pay for a business is roughly the inverse of interest rates.... Since the financial crisis of 2008, policy makers in the developed world have kept interest rates at or near zero.... Use zero for yield/interest rate, then one would pay an infinite amount for an earning stream. Of course that doesn’t make sense and it has not happened. But valuations are at extreme levels because you cannot get a decent return on your money doing anything else."

Wilson admits this will eventually end, though acknowledges that the going is good for his professional until it does. But it will...

I see Wilson agreeing/admitting that it will pop, but after that you lost me...

George,

In practical terms, let's say you buy a house and are going to rent it out. The total cash annually you receive from renting it (after expenses) is $10,000.

To determine how much you are willing to pay for the house, you need to determine what annual ROI you are willing to accept.

Let's say you want 10%, then you will pay no more than $100,000 because 10% of 100k is $10,000.

However, let's say you are willing to take just 5%, then you will pay up to $200,000 because 5% of 200k is $10,000.

The point is, that as interest rates go down, rational investors are willing to pay more. Today, interest rates are essentially zero. For example, money in my savings account literally pays 0.01% interest. This incents me to take greater risks to get better returns.

Helps? Yes/no?

Yes... it helped me figure out that your reference to a 'Wilson' who 'admits this will eventually end' is actually named Fred. ;)

But I'm flattered by the full response anyway, and do agree. :)

Hey, now, come on. The Yo app has proven quite useful...

From the article you cite:

"Ideally, the Red Alerts should pinpoint the location of a potential attack, but early reports suggest the service has been buggy, or doesn’t provide Yo users with a location at all. "

The fundamental problem with Yo is that it cannot provide any context or metadata beyond the one bit notification - 'yo'.

It's as useful as possible, being that it literally gives all available information;

1) the fact that a missle is inbound, and

2) which city that missle is likely to land on, absent intervention by the Iron Dome.

Remember, inbound rockets only have a 15 to 90 second flight time, so I am unsure wether more information than it actually gives would be necessary or even desirable.

I don't know this for a fact but I suspect that Red Alert simply assigned a 1 bit code to every vulnerable zone in the country, and sends alerts based on the projected landing zone.

In other words, this is a perfect example of "good enough is good enough".

Time enough for...

I disagree a little. Carmelo is just an infusion of money that will be managed by qualified “new blood. These are the type of Venture Capitalists that the Tech Media is looking for. They want to disrupt the male White/Indian/Asian demographic that currently dominates the industry in #'s and to get new blood into the mix…which will add more creative ideas…due to a larger pool of people.

What will hurt the industry is when Venture Capitalists sell their companies…They usually tend to be way overpriced. That is the Bubble part.

Carmelo's brand currently encompasses basketball shoes, drink powder, jerseys, and scented liquid soap.

How exactly do you parlay credibility for those products into speculative technology investments?

I'm not hating. I am saying that even if you have an excellent nose for the taste of wine, it does not mean you're qualified to be a good boat mechanic.

If Carmelo gets advice from famous VC Justin Bieber, he'll do just fine.

Yup

""Previously, his investment strategy has been lead by his manager, Scooter Braun. But Justin Bieber is a guy who came up through social media"

I think you missed his main Venture purchase up to this point. That is in Childrens Media. His Venture firm made an investment in Hullabalu. Basically he is along for the ride by investing his money. He has proper people managing the venture side.

It is not about his individual products, it is about him being a Tech Venture Capitalists now. He and his partner invested in a pretty good company and have some qualified people running it. His products are just along for the ride as Tech Crunch thought they should mention his other business...as they should (Journalism).

His initial investment looks pretty good. If they can nail 1 or 2 great startups and keep the failed investment startups to a few, he should make some great money. The Bubble created by this is when these companies are bought (When Venture Capitalists sell them), they go for way too high of a price. In my opinion, this may cause a type of recession in the future.

He is trying to pull a "Dr. Dre". He wants to be "Stranded on Tech Row"

What does Dr. Dre know about technology? Not too much. He just used his money (To invest) and his name (Marketing). Others managed.

What will hurt the industry is when Venture Capitalists sell their companies…They usually tend to be way overpriced. That is the Bubble part.

Which part of the Bubble are you referring to, the puffing or the popping? Sellers can't simply decide to sell at 'over price'. Trying to sell deflates (or pops) Bubbles. IMHO, It's when people are NOT trying to sell that the initial distortion (puffing) occurs. This may be what you meant, but I'm not sure.

Not true - "Sellers can't simply decide to sell at 'over price'."

There are a few tricks they can use to inflate the price. Also, some buyers just have too much money to worry too much about price and/or is relying on a ROI that may not be there ...An example would be "Apple and Beats by Dre". Apple could have bought a better quality company for far less, but gambled with the marketing king "Beats by Dre". Will Beats continue to market successfully with Apple or did the main Beats people get paid and will no longer put in 100% of their effort? Too many variables. That is why it is a guessing game when evaluating price. Right now, the popular consumer tech market is on the side of the seller.

2 Main Points

- Big $ Agents are great at creating an illusion when it is time to look for a buyer.

- Once sold, does the product/service still produce or did they take the money and now put in little effort. Or did the new organization change the way things were done? It is all variables

How did the Tennessee Titans do after paying Chris Johnson? What ever happened to a majority of the Technology/companies that Yahoo bought?

2 Keywords plus an almost keyword

Illusion& Variables

Almost Keyword - Speculation

I noticed you didn't mention the word Bubble in your response, but that's all I was questioning. Otherwise, I think I agree with everything you are saying, VC's play games with numbers, books are cooked, transparency is an illusion and any visibility is murky.

But that is true everyday, no? People pay over (or under) what they should all the time. But that's not what creates the Bubble, the bubble is caused by an irrational surplus of buyers, and a coressponding lack of sellers. This is what causes prices (and bubbles) to rise. Still we may not disagree... So can you clarify what you mean by bubble?

A Bubble is something we humans, yet, cannot 100% fully comprehend, hence, we do not know for certainty the cause of a Bubble and/or even the breaking of a Bubble.

If we did, we would not have so many Bubbles. It is all speculation. Economics and Finance Professors are notorious for teaching as if there were no variables and everything was fixed...Hence why we always see the college student who is currently enrolled in an economics class evangelizing to us, how they can fix the world or run a business better than most people because they know the law of supply and demand as if there were no variables on this earth and everything was static.

Also...it is called Law of Supply and Demand...yet it is only a theory :)

What do "they" know anyway? "They" do the same with the Law of Gravity, yet it is also only a theory, technically.

The cause of this bubble is obvious - artificially low interest rates. This is being 'manufactured' by central bankers (most importantly the US).

The reality is that ambitious people like bubbles because it creates huge surges where participants can run up monster profits in the short term and with, enough luck, time it to get the hell out. These types of people push for the underlying conditions for bubbles.

And the government, in this case, supports the bubble because it delays economic downturns that no one wants to immediately address / rectify.

Btw, for reference, here's the Nasdaq since the last bubble:

It's up 344% in about 5 years. That's crazy.

It's also 58% higher than the top of the last bubble in 2007. Is the economy really better than it was 2007? No, not close.

I called up my broker on account of that queasy feeling you done put in the pit of my belly, sir. Broker man Dan, as he likes it, has not done me wrong, and in the couple years I've known him we've gotten on real well. He said the correction, if there even is one, will only be a blip, like waking up hungover after tying one on the night before, and lasting bout as long. You see because this time its legit, and soundly based on strong fundamentals, and anyway the goverment put the canary in the coal mine this time. That's what he said, scout's honor.

So if that helps you feel any better then I'm glad to be of service. As for me, right now I'm cutting a hole in this here matress, a big 'un.

A very high percentage of valuation seems based on appearances.

If company executives communicate well, look smart, and can convince people they are sitting on an idea with huge growth potential, then investors will throw tons of money at it. They have no real tools to evaluate with, so the 'eye test' is a huge aspect of the process.

Like in this story, bad judgement leads to rash 'me too' investment, and the real winners laugh while Rome burns.

Good article from a Valley insider VC: Venture Capitalist Sounds Alarm on Silicon Valley Risk

In the over 50 years I've been investing in the stock market, I've learned one thing: Take any advice from publications like Barron's, CNBC and the Wall Street Urinal with many grains of salt.

The WSJ is not giving advice here. It's Bill Gurley, who is a well respected Silicon Valley insider.

OK, I'll rephrase that. Never trust any investing advice published in Barron's, CNBC, the Wall Street Journal, etc. The goal of investing media is to lead the lambs (us) to slaughter.

Do you have evidence that the quotes from Bill Gurley have been fabricated or changed?

Short of that, the focus should be on the person making the statements, not the vehicle it is published in.

No, but there is plenty of evidence that investment markets are rigged against the retail investor. Face it, professionals typically don't make their money from other professionals, they make it from the herds. That applies to pundits and "insiders", Investment Advisors and Brokers.

Let's take Stock Brokers as an example. How do they make money from retail investors? Via commissions. The best advice for most private investors is to do your research and pick companies that are well managed, have plenty of assets and low liabilities and are in a growing industry; then basically forget them. Stock brokers typically don't make any money from investors who utilize that strategy since their commissions are based on trades. That's why brokers give bigger "perks" to frequent traders.

Investment Advisors are another example. They make some money from their clients but they also make money on certain commissions. That's why many of them push annuities - the annuity companies pay commissions to advisors to recommend their products.

Any way you look at it, the vast majority of the investment community is out to make money for themselves, not their clients/audience. Some are more blatant about it than others and some even try to help and educate the public but the majority of their emphasis is on "me" (them).

Gurley is speaking against his own interests by criticizing the state of Silicon Valley and the VC market (where all his money is tied up in).

Carl, I get your general concerns but, in this specific instance, this is obviously not the issue with Gurley's comments.

No? So he has his money "tied up" in technical stocks. Is he long or short at this point in time?

Yes, he is very long on technology startups and stocks. His comments, since he is respected, could help undermine his own investments.

Gurley is speaking against his own interests by criticizing the state of Silicon Valley and the VC market (where all his money is tied up in).

How is he speaking against his own interests? He's trying to prevent a crash by letting a little air out slowly. Could it cause a pop? If it does he won't say sorry, he'll say it was unavoidable. Brave? Maybe. A martyr? Hardly.

Also, as you point out, he may be fully invested already, so he is not interested in more competition for his "ponies in the race", with their even bigger war chests. Listen to him whine about competing with new money here:

That's really difficult because if you have a competitor that's going to double or triple down on sales and you just decide, "Oh, well I'm not going to execute bad business decisions, I'm just going to sit back," you lose market share. So, choosing not to play the game on the field doesn't work, so you're left with trying to advise someone to be pragmatically aggressive with some type of conservative backdrop or alternative strategy in case the world shifts. But it's hard.

Poor VC, It's just not fair is it?

That said there is no reason to think he is lying here. But only if he really thinks the market is great, but is telling everyone the bubble is about to pop, that would be 'speaking against his own interests', agreed?

"only if he really thinks the market is great, but is telling everyone the bubble is about to pop, that would be 'speaking against his own interests', agreed?"

No.

His financial interest is to maximize the return on his VC funds invested. Saying negative things about the valuation and future of the companies he has invested in is a clear case of speaking against one's own interests.

You may certainly feel free to disagree but please send me an email to debate this.

the guy can talk all day against his own interests, but i wouldn't want this guy looking out for my interests, he is predicting failure, waiting for failure and wanting failure. (i paid $2 to wsj to get depressed)

WSJ: "So who loses? Who is way ahead of themselves? Name some names."

Mr. Gurley: "That's obviously loaded. I do think there is a high likelihood that we'll see some high-profile failures in the next year or two.

I actually think that could be healthy for the ecosystem. You remember in March when the IPO window closed for like three weeks and everyone thought that the world was coming to an end? Like you really have to work hard to remember it because it reversed itself so quickly.

I think having events like that can lead to sanity."

maybe hes losing it

Here's another prominent VC (Fred Wilson) reiterating the same concerns: Burn Baby Burn.

[UPDATE:] Carmelo Anthony Makes His First VC Plays

Apparently he thinks Lyft > Uber.

Getting closer....

Joe Montana launching VC Fund

Gurley brandishing the hatpin again.

Dead unicorns everywhere? A grim warning for tech

There is absolutely no fear in Silicon Valley right now, a complete absence of fear... I think you'll see some dead unicorns this year.

Appearing uber fidgety and at times even agitated, Bill says no one took his last warning to heart... Anyone who believes in body language (or unicorns) will be on the phone with their broker before the video is over.

Even the insiders are starting to freak out: Mark Suster about how absurd things have gotten.

Even Silicon Valley cheerleader types are now saying a bubble is obvious. But don't worry, according to this VC, the only downside is that valuations will fall 50%.

Since this bubble has been 'about' to pop for close to a year now, can you give us a timeframe in which to expect it? Is there still time to get in, get out and get rich?

Do bubbles ever just deflate?

Since the bubble has inflated a lot in the last year, with the rise of the unicorns, it has further to fall.

What specifically will cause it to pop and when, I do not know. Something will shake confidence (whether that's interest rates rising, or a major company failing or war / terrorism, etc.) and the market will unravel quickly.

Getting closer...

Negative Gross Margins

Same stuff that blew the market up the last time.

Related: 14 Facts About the Absolutely Crazy Internet Stock Bubble

... the company’s February 2000 IPO (which was backed by Amazon.com). Pets.com raised $82.5 million – but nine months later it folded, due to major recurring losses. Part of the reason for that was aggressive advertising, but the company also lost money on virtually every item it sold. In the third quarter of 2000, Pets.com reported negative gross margins of $277,000. (The second quarter had seen a $1.7 million margin loss.) That same quarter (its last full quarter as an operating entity), the company lost $21.7 million on $9.4 million in revenue.

Yes, from two years ago...

All of these tech bubble folks have customers that are paying money so it's not without legs. Chinese real estate also will continue to be strong with fluctuations like all products have. It's always easy to dismiss things that you aren't heavily involved in or invested in especially if you missed the boat.

"All of these tech bubble folks have customers that are paying money"

The it 'has revenue' argument? A bubble is about valuation relative to revenue, profits and growth, more specifically that the valuation is way too high to justify those 3 elements.

"It's always easy to dismiss things that you aren't heavily involved in or invested in especially if you missed the boat."

You really have no idea who Fred Wilson (author of the Negative Gross Margins post) and Mark Suster (author of the Why I Hate Unicorns post)??? These are two of the most respected investors and richest people in the tech industry. They made a ton already off investing / the bubble.

Magic Leap, a quadra-corn (4.5 billion), but still with no announced products.

Unicorns now getting big valuation cuts. The most absurd is Zenefits, cut 48% by Fidelity. So weird, I dealt with Zenefits a year ago, hyper aggressive sales person, very questionable value proposition, the euphoria that would make a company like Zenefits worth $4.5 billion (now cut in half) in less than 3 years is bizarre.

What will be interesting to see is how these companies fare now. Often you start getting valuation cuts like that and the whole thing collapses as investors realize such companies are unsustainable without massive burning of more capital to grow revenue.

Funny bubble popping story:

"SpoonRocket had reached a positive contribution margin — it was selling meals for more than it cost to cook, package, and deliver them. But due too..."

San Francisco Landlords Gird for Slowdown as Startup Frenzy Ebbs

The city’s office-vacancy rate jumped in the second quarter by the most since the last recession, while the amount of space available for sublease almost doubled, according to a report to be released this week by brokerage Cushman & Wakefield Inc. New lease deals have tumbled so far this year.