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What The Bubble Got Right
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."
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September 2004
(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
This
But seriously - 20 something billionaire yuppies sans business plan?
Before the bubble burst, college kids would be getting 80+ grand/year. Right before I graduated **BOOM**.... good luck finding a job now...
"I think the Internet will have great effects, and that what we've seen so far is nothing compared to what's coming."
That's been my view all along, both during the boom and during the bust. We ain't seen nothing yet. When you create a means of communication such that almost anyone on the planet can interact with anyone else on the planet, great things will develop from it. We saw only the baby steps during the boom, and the bulk of what will develop is yet to come. But it is coming. People love to jump off fads and disavow them. That's especially tempting if you lost money in the process. But the idea of person-to-person direct communciation, and everyone-is-an-author concept, is no fad. People love to communicate, they love to express themselves, and the streamlining that the Net makes possible has, is, and will continue to make breakthroughs in the business world.
Just give it time and we'll see wonders yet unimagined.
His point about the rising power of nerds highlights something of great importance: the "old class relations" that sparked Marxism are essentially dead. In many respects now there is a symbiotic relationship between the large number of white collar workers and the "capitalist class" which allows for an almost give-take relationship.
Now I know that some will look to outsourcing and say, see class exploitation still exists! Yes, but it is the fault of the people of many of those countries. If your government is corrupt and you have a democratic system of government, why are your people systematically voting for political parties that keep your country from growing. America's corruption is bad, but it doesn't hinder growth anywhere near that of many developing or stagnate countries.
People often want it both ways. They don't want to adapt to a new economy, but they want all of the benefits. You have three choices, and these have existed for most of human history. You can lead, you can follow or you can be dominated. America leads, India follows, others are simply dominated because they refuse to follow the leaders' example and try to grow, and cannot lead on their own, thus another country steps in and economically dominates them. It doesn't mean it's right, but it's a fact of life.
The law of unintended consequences will one day come back to haunt corporate America if it doesn't realize en masse that domestic research and development and manufacturing are the safest route. The rule of law in America can be safeguarded, but Americans cannot do so around the world. The lesson of the "rise of the nerd" is that yes, you can start outsourcing jobs eventually to "regain power over the nerds" but what happens when those you outsource to abscond with your R&D results and your domestic nerd base is so atrophied that they can't compete?
The lesson of the modern economy is that businesses need to realize that no part of the company is less valuable than another. Whereas in the past, the rich could safely exploit their employees, they now do it at the risk of their own base of wealth and power.
Click here or a puppy gets stomped!
"What made it not a pyramid scheme was that it was unintentional. At least, I think it was."
I just don't believe that. I remember people talking about how this was bogus at the time -- AOL got slammed for similar practices. If I knew it was a pyramid scheme, I find it hard to believe that the incredibly sophisticated finance types working for Yahoo! didn't.
I used to live in Chicago. When I first moved there, I wondered why none of the aldermen seemed to be honest. The answer, I think, is that the system prevents honest people from moving up.
I have the same impression of wall street. I don't think that honest managers can run public companies in a way that's competitive. A guy like warren buffet is an obvious counter example, but he's unusual and he dates back to a different era.
By the time these crazy bubble scams came around, we were living in a different world with different expectations. Share prices had to rise quickly and constantly, and the only people who could pull that off were scamsters.
I don't think the geek community has ever really come to terms with what happened on the financial side during the bubble, how crooked the people who ran it really were, or how much damage it did to the economy. The google IPO was surrounded by nostalgia for the bubble -- if only the old days would come back!
Almost all of what this guy says strikes me as questionable at best.
The big question here is how you can possibly build customer loyalty if you outsource the business unit which is in charge of customer relationships. This doesn't sound like a wise idea to me.
Under construction: swpat politics overview article
What I was telling people back during the bubble turned out to be true. I basically said "If you think everybody is going to be shopping on the Internet, then don't invest in specific web sites; you'll never predict which ones are going to be profitable a few years from now. Instead, invest in the delivery companies (e.g. FedEx and UPS). No matter where or what people buy online, the delivery companies are going to be more profitable!" I think this is still good advice. From the fact that DHL is now getting into domestic delivery, apparently they think so too.
"Freedom means freedom for everybody" -- Dick Cheney
Well there's ebay, amazon, google...
continued at:
What have the Romans ever done for us?
Read Epic the first RPG novel.
Now I can jump up and down and DEMAND a development server and have plenty of examples to back up my need for one.
I'll now be the first person to raise my hand and ask the following question: "So, how will this make money?"
Whenever I hear New - anything - my instant reaction is BULLSHIT!
Those were great times; I wouldn't trade them for anything
I think the lessons learned are worth the pain.
JD
...26 year olds with good ideas will increasingly have an edge over 50 year olds with powerful connections.
now go get me some coffee, b@#ch!
and now back to the fallout shelter...
It's a good article but, yes, it is rather long. The author makes good points. After reading the article I am not sure how to comment on it without regurgitating what the author has already said. However, I do think that there were valuable lessons to be learned from the whole "bubble" phenomena and we did not necessarily learn those lessons.
http://www.busyweather.com/
having gone under with 4 start-ups between 93 and 2001, I think I have scars entitling me to say Mr Graham has hit a couple of nails on the head a couple of years too late. The ideas that were pesuasive to our VC's were NOT persuasive to the folks we thought were our customers. The net result of a venture is the PRODUCT of the value proposition of the business AS STAFFED AND EXECUTED and the depth of the business concept's grasp of the PERCIEVED NEED for the service or product.
Foolish disclosure: I made money on only one of those starups and that entirely by accident. I wish our VC's and senior management had the long term vision, so absent in those days, that is implied in Graham's article.
who put this sig here?
SLASHDOT: news for people who can't concentrate on work or have no life at all and got tired of yelling back at the TV.
OK...so he arrives in California around 1998 and determines that California is the next big thing for the next 50 years??? The next Chicago? Pleeeeeezee...
Where has this guy been?
California has been the next instant source of wealth since well before the gold rush! The bubble wasn't the first time silicon valley became the center of the universe - take a look at the first PC boom/bust of the 80's.
Sorry to be so provincial here, but being a California native I have a bone to pick about the characterization of California. Sure, we are all totally super nice out here and polite and all of that (um - yeah right) - but keep in mind, most of the people from here ARE transplants.
I'm a native of the Bay Area and have lived here all my life - I can count the number of people on maybe one hand who I know can say the same. So the attitude has little to do California or Silicon Valley.
I took a detour to New York for a year and a half in the mid-nineties. While I found that most New Yorkers did have a rough crusty exterior, once you get passed that they are as warm as anyone from CA. Not only that - but friendships (like startup ventures), have a tendency to be somewhat transitory in California. I found the opposite on the other coast.
That said I wouldn't live anywhere else - but to each their own.
The internet, a global thing, is supposed to make it all better, except that I have to move to a single point in space - California - to make that global revolution happen?
That no matter how hard he tries to make himself (or perhaps others) feel better with the following statement:
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.)
He's wrong. Really wrong. I, and others, were able to see through the hype and stupidity during the bubble, and see what companies had real value, which didn't, which were over-valued, and in some cases, which were under-valued. I don't know how much money he lost, but claiming that "even smart people are sucked in" isn't a valid excuse, and no amount of history on how physicists and poets don't necessarily good economists is going to change that.
steve
Oh, you're not stuck, you're just unable to let go of the onion rings.
Marketing is still much more important than substance. It's why VHS won out over Betamax. It's why Microsoft won out over Macintosh. It's why politicians worry more about their hair color than their platform. It's why we're outearned by those superficial beer-swilling fratboys in management.
Sorry, boys, we had our time, and it's come and gone.
The term "bubble" (most often seen in housing markets) applies when there is an excess in the supply-demand cycle, often due to buyer frenzy.
I call bullshit. In 1999, my son was taking an enrichment course in our local school system. The particular unit was on finance -- so Iassigned this then ten-year-old boy to read _The madness of crowds_. He read it and said "Dad, is the current stock market another tulip craze?" Now, granted, he's a really smart kid -- but I suggest that if any ten-year-old can read a book about tulips and the south sea company and recognize that the internet bubble was more of the same, then lots and lots of grownups could, too.
Quit trying to follow the money, and be happy.
I have no patience with people who decided to become software engineers (or doctors or lawyers or golf ball polishers) because they thought/were told/read somewhere/had a divine revelation that "that's where the money is".
People who decide to go after work that they don't enjoy in order to make more money than they think they would at something that they enjoyed, are doomed to be miserable. They will be be miserable IN their job, they will be miserable AT their job, and they will make the people around them miserable, too.
Having a vendor certification/college degree/union card doesn't mean you will be happy at a job, and it doesn't mean you will be successful at one, either.
Find something you really enjoy doing, and then find someone willing to pay you to do it, and you will be happy.
And if you're happy, you won't need to bitch about how terrible the job market is, or how your "investment" in your certification/college degree/union card "is not paying off". A job is not something you can buy from a diploma store, or that you have a right to, having spent some requisite amount of money at one.
I've interviewed a lot of people for a lot of jobs, and I'll tell you right now: I don't hire or recommend hiring people if they don't enjoy doing what it is they are going to be doing on a daily basis as part of their job, and do it well. Other things matter too, but that's the A-number-one gating factor for me giving you a thumbs up.
For a software engineering job, if you weren't one of the people who hung out at the computer lab simply because you enjoyed being around the machines and other people who also enjoyed that, then I don't care that you received straight A's for the Visual C++ work you turned in from your home PC without ever interacting with another human being who was interested in the same type of thing, before you went to the frat party and drank yourself stupid.
Work -- and life -- is not something you skate by on, with the minimum acceptable level of effort, so you can do "something you actually like" after it's over.
You may or may not be a skater -- if you aren't, I'm sorry that you're so bad at selling yourself to prosective employers, or that you love doing something you aren't very good at; either figure out a way to address your shortcomings, or pick something *else* you like to do, and do that instead.
But if you are one of those people who picked their career based on a "top salaries" list, and then skated through college on the minimum possible effort to maintain a nice looking GPA, looking for the high paying job at the end of the rainbow, the world is probably better off if you are stuck asking those of us who didn't "Would you like fries with that?".
-- Terry
I'm not sure I follow this post well enough to say that I disagree. However I do want to point out that progressive critiques of market economies are often driven by more than just identifying class conflict. For example, the mobility of capital was a prediction of Marx and others that has largely come to pass. Its a source of valid concern and has very little to do with whether particular rich people are able to exploit particular poor people. When teams of professionals move vast sums of money around the globe there are real human consequences which accompany those moves. Sometimes the consequences may be reasonable; other times not. To the extent that the decision is based *only* on a private financial rationale, it does not necessarily follow that the results will be good for the public. At any rate, I think Marx might've looked through his time portal and thought nothing more than, Boy, I should've lightened up on the Hegel when I was analyzing class conflict.
I'm laughing at clouds.
The value of options to an employee vary according to the type of options and the ability of the employee to affect the price of the company's stock. Options to buy General Motors stock at today's price don't have any motivating value to the line worker who is unlikely to be able to raise the stock price of a company in long-term slow decline. No matter how hard he works or what brilliant suggestions he makes, by the time he can exercise his options the stock will be below the strike price and the options will be worthless.
Contribute to civilization: ari.aynrand.org/donate
One upshot of which is that the companies of the future may be surprisingly small. I sometimes daydream about how big you could grow a company (in revenues) without ever having more than ten people. What would happen if you outsourced everything except product development? If you tried this experiment, I think you'd be surprised at how far you could get. As Fred Brooks pointed out, small groups are intrinsically more productive, because the internal friction in a group grows as the square of its size.
I know from experience (non-trivial engineering projects} that more people does not necessarily equal more success; sometimes it drags down an effort while the original goal gets lost in "management".
Wow, that was a pretty crappy comment. What is always needed is a leader who knows what he's doing, not a cheerleader who has a vague idea of what's going on, and this applies to software as well as making widgets.
I'll trade 1000 "money-making" employees (after IPO) for 10 people that are focused on the goal.
Options were part of my compensation when I first started my current job back in '99. We went IPO in Spring '00. About a dozen of the higher-ups became millionares at the opening bell. At the height, my options weren't worth anywhere near millions, but it was fair chunk o' change for a 1-year-out-of-college grunt. Unfortunately, I wasn't vested, so I couldn't excercise any of my options...
I just reached my 5-year anniversary, and my initial option grant is now fully vested. It is also fully worthless. After being delisted from NASDAQ, even if I could find someone OTC to buy, the share value is but a fraction of my excercise price. Now I do know people who worked for larger companies who have made, and continue to make, a decent return on their option grants. It is a great incentive to both keep the employee productive (his production has an impact on the stock price) and loyal (encourage him to stay with long vesting periods). But there are just as many of us "survivors" who took a lower salary with option grants who got burnt on the deal.
Xenon, where's my money? -Borno
Like p0rn isn't still the biggest driver of the net nor the one least disrupted by the bubble?
/.'s regular featuring of Paul Graham's essays. There really isn't anybody better going around at the moment.
The moderators must be suffering a severe case of literalism.
And I for one celebrate
-- Our systemic servants do not good masters make.
you wrote:
His point about the rising power of nerds highlights something of great importance: the "old class relations" that sparked Marxism are essentially dead.
No, they are not dead. Maybe you are just isolated from them. Or maybe you just see what you want to see....
SO many Slashdotters seem to think that everyone is making 80K a year. The facts show that is not the case at all.
year 2000 Average After-Tax Income by Quintile:
80th-100th percentile:$141,400
60-79th percentile: $59,200
40-59th percentile: $41,900
20-39th percentile: $29,000
0-19th percentile $13,700
You can see that the bottom 40 percent take home 29K, and that was at the HEIGHT of the longest boom in a long while. It has gone downhill since then for most people. No class warfare, huh? Well, there should be....
In many respects now there is a symbiotic relationship between the large number of white collar workers and the "capitalist class" which allows for an almost give-take relationship.
Ohh, man. The word is not "symbiotic", but "parasitic". The capitalist class parasitizes the rest of us. And they feed us baloney about how they are the innovators and creators, etc. yakety yakety yak.
What really galls me is that these scumbags take credit for the cumulative effect of scientific research adn engineering. They point to all the electronic consumer goods laying around and say it is all because of the free market that these things exist. Ah, no. Engineering and science improve incrementally because of stored knowledge that builds up over time and leads to improved products. Our improvements in goods are mainly due to that, and not predatory capitalism.
Now I know that some will look to outsourcing and say, see class exploitation still exists!
Oh, yeah, that "exploitation" stuff, it be a thing of the past, dontcha know....
Yes, but it is the fault of the people of many of those countries. If your government is corrupt and you have a democratic system of government, why are your people systematically voting for political parties that keep your country from growing. America's corruption is bad, but it doesn't hinder growth anywhere near that of many developing or stagnate countries.
Absolutely. It is always the fault of those lazy, scumsucking poor people. A few lashes will improve their morale.
Say, didn't I meet you in a prior life? Weren't you the foreman on a Roman slave galley? Or was it that cotton plantation in 1804?
People often want it both ways. They don't want to adapt to a new economy, but they want all of the benefits. You have three choices, and these have existed for most of human history.
The little scum. They can just suck it up....
You can lead, you can follow or you can be dominated. America leads, India follows, others are simply dominated because they refuse to follow the leaders' example and try to grow, and cannot lead on their own, thus another country steps in and economically dominates them. It doesn't mean it's right, but it's a fact of life.
Oh, pardon, i think i feel a vomit coming on....
eat shiat and bark at the moon
If there's one thing that I think no 26 year old will ever have it's the ability to navigate politics. Deciding what to build next is trivial in comparison to having the gumption to stick with it to get it done. And that requires people motivation skills. That requires tuning out all of the other hype and distraction. Are 26 year olds capable of this? Of course! But the 26 year old who can do this is exceptionally rare. The VAST majority of people only learn these skills over time... and come to realize them in their 40's and 50's.
This is why there are so incredibly few successful companies lead by 20-somethings. Say what you want about corporate america, but in this case, their greed reveals them. The "old boys club" can't motivate nearly as well as the bank. The fact that there are very few 20-something CEO's indicates that, except for the very rare case, 20-somethings don't yet have what it takes. If they did, there'd be no shortage of people following them to the bank.
$.02
Key to financial independence: Spend less than you earn. Save and invest the difference. Do it for a long time.
1. the "old class relations" that sparked Marxism are essentially dead
2. The lesson of the modern economy is that businesses need to realize that no part of the company is less valuable than another.
The class relations are alive and well, it's just that statements like the above prove that the class war has been won - by the bosses. Only the working class is convinced there is no working class. Hint: management will never think that "no part of the company is less valuable than another." They spend most of their time attending seminars and classes to reinforce their worth and importance. Where have you been?
You need to read or travel more. If you think class is dead, you have never left the US or your first world comfort, or you have never worked, or you are just talking shit.
This article leaves out the biggest effect of all: The Internet Bubble started a wave of manufacturing globalization which will forever change the United States economy. This is neither a bad thing or a good thing -- those who play the change right will make millions in the next 5 to 10 years, those who cling to bubble-era techtopia will crash and burn.
I was a founder/director of a New York webshop which I started and later sold for stupid amounts of cash to a bunch of guys who then still believed the "up up up" mantra of the day.
Our company built all kinds of supply-chain mgt. tools, extranets, inventory systems, etc. -- some of which was good, and some of which was thrown together from pieces of code I'd be embarrassed to post here.
The crazy thing is though -- that sh*t really did change the planet.
Two years ago (post bubble) I started a small (very small) manufacturing business building (we'll say "widgets") in China.
I was instantly struck by the fact that sourcing a manufacturer, monitoring production, sourcing raw materials, shipping, tracking inventory, selling and fulfilling are *ALL* internet enabled now -- by similar tools to the ones we had been building for the past 6 years. Not to mention the fact that if you know how to build/use those tools, you can beat the pants off businesses that are 10 times your size.
Now I have a slowly growing manufacturing business (struggling more than growing most weeks) which could not have existed pre bubble.
On a larger scale, this is a huge trend. The fact that the little guy can find a manufacturer overseas, produce widgets (literally anything you can think of), and go head to head with billion dollar manufacturing businesses is a fantastic degree of empowerment. And its completely a result of our "failed" internet bubble.
Anyway -- my two cents -- the time for building the tools is over. The time for using them is here.
Peace.
... 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.
Oh get a clue.
In the real world real people need money to do real things. Try fucking tell me that I don't need lots of money and I or anyone else should be happy working my arse off earning shit wages the next time their son/daughter/husband/wife needs an operation, or when you want to send kids to school. For that matter if you want to own/rent a decent home you can't go to your bank manager and tell him see I'm not a sell out and expect to get what you need in life. See what a difference $100k will make to a kid's education and then tell me to go do something I enjoy for $30k a year.
If you were doing it for fun and didn't care about making money at it, it'd be a hobby. I'm not saying you should go and do something you absolutely hate for an extra $10k/yr. But if you can make a decent living chances are it won't be fulfilling some passion. You might write business software instead of scientific software for example. Basically you do something RELATED to what you enjoy and realise that to some extent you're going to burn that something as a passion/hobby, because after doing it so many hours a day for so many years you might not be as passionate about it.
People who are only passionate about their work are just as bad as if not worse than those who have other interests outside of their work. They get obsessed with their craft and don't see the big picture, and when something goes wrong at work they have nothing else to keep them happy. That's a one way ticket to bad health, both medical and physical. That's the kind of person that gets suicidal when they leave their job.
The phrase "work-life balance" is one that's often paid only lip service when times are good, but it is absolutely crucial.
IMHO most recruiters, employers and HR departments are clueless. I don't know how many fools I've talked to that just go out to find a candidate that will meet some narrow limited criteria. (You know the kind that wants a candidate who's a fool that'll work 80-120 hour weeks and just happens to have experience with the same goddamn J2EE app server the customer is). The same recruiters wonder why these people act like arrogant asses. The ins and outs of a particular piece of technology can be learnt. Its much harder to break the habbit of being too narrow and focused an individual.
These posts express my own personal views, not those of my employer