Nemo's Dory - Boundless optimism, no memory. Essential characteristics for the Bubbletime
Today was Square IPO's, after re-valuing its business from $15 to $9 a share. As of 3 pm on Day 1 its trading at about 40% above $9, and the Silicon Valley press is positively bubbling over in praise
"Hang on" I hear you ask "didn't they just take a massive haircut last week to go out the gate? They were valued at $15+ last round, that's at least 70% above $9?"
You are right, dear reader, but this is Silicon Valley in the Bubbletime, and that de-valuation was so last week. What is important is that an IPO must "pop" up bigtime, so the hype machine can crank up to full volume. Details like the above de-valuation are forgotten, Dory-fish like
, in the great game of finding Alpha
Given that most Unicorns are way overvalued (the rest are just overvalued), for the bubbling to continue
, first must come the bath. Of course, this screws the employees and later investors without ratchets and preference shares
, but hey that's the breaks, right?
Update - Bloomberg reports that everyone made money
but for the Series D (late, un-ratcheted) its a close call - and they put in the largest lump of the money (40% +) pre IPO - probably not unique to this Unicorn
As followers of this blog may know, we have been watching the current Tech Bubble inflate from 2011 (see our Bubblewatch
series of posts), yesterday the Grauniad asked us
if we thought some of the current high profile de-valuations (Fidelity writing down its Snapchat investment 25% this week, Square's IPO next Monday repriced 30% lower) signalled an end to the current bubble.
It's an interesting question, I made a few rough notes for the chat and thought I may as well turn them into a blog post.
There have been mixed messages about Unicorn pricing for a few months, but that's on the back of a period of extraordinary frothing (Silicon Valley does not like the term bubble
). There were about 10 or so "Unicorns" (venture backed private companies, without real revenue streams or profits) during the dotcom heyday, there are now c 140
, an order of magnitude increase . The dollar has devalued in the intervening 15 years, the digital sector has grown, but not to the level where economic fundamentals explain such a profusion of a once-rare creature vs the dotcom number created, if you recall, in the heights of irrational exuberance.
All bubbles are different in detail, but they follow roughly the same path at the meta level (see diagram above), a number of fairly well defined
Stage 1: Displacement
- all bubbles start with some basis in reality. A technology shift that creates an advantage, or some other change in "Business as usual". Early adopters and investors are active in this stage
Stage 2: Boom
- Once a bubble starts, a convincing narrative gains traction and the narrative becomes self-reinforcing. Fundamental analysis that seeks to establish how underlying values are reflected in prices is put aside, the keys to any bubble is to loosen up lending.
Stage 3: Euphoria
- In the euphoria phase, everyone becomes aware that they can make money by buying into certain stocks/companies, early investors have made a lot of money. This is the period where the "This time it's different" trope is wheeled out, with all the fanfare. The details differ each time, but the siren song remains the same. This is also time when the "weird" becomes the new normal, for example:
- We get 140 privately funded companies, privately valued at over $1bn each, and call them "Unicorns" and everything thinks that is normal, and still think it's normal when only a few months later they are talking Decacorns.
- The number of "tech startups" being funded has increased by 2 orders of magnitude since we started to look at the "Bubbletime", and an entire industry has been built around finding, feeding and watering them - last time round these were called incubators, now they are accelerators, but like building cranes flocking on the skyline signal property crashes, the accelerating bubble in accelerators is a harbinger of the Endtimes
And then there are the more prosaic measures one can use, from looking at what has come before:
- The growing total valuation of the Unicorns / Decacorns / Megacorns et al looks suspiciously like a steep vertical rise, a hallmark signal of the Euphoric phase
Stage 4: Crisis
- Last year, Silicon Valley venture capital reached its highest level in a decade with more than $48 billion dollars invested
- The last time San Francisco house prices exploded, office space South of Market was unfindable, and even Oakland was starting to look cool, was 2000
- Newly minted MBA's forsake Goldman Sachs and McKinsey, and get a plane ticket to San Fran instead (see house prices, bubble in....)
- Old, established VC's start to grumble publically about the newcomers pushing up valuations (it's a given that newer players argue there is no bubble, and this time it's different, even unto the bubble popping)
- At the transition to the crisis phase, the insiders originally involved start to sell. For example, loads of dot-com insiders dumped their stocks while retail investors piled into companies that (eventually) went bust.
So where are we now?
By our reckoning this market is starting the transition from Euphoria to Crisis, signalled by the "smart money" starting to attempt exit or at least stabilise their positions. But values still keep on going up for a while in the crisis phase (for about a year in the dotcom era), even as the "smart money" is exiting - typically this is because (i) there is huge industry now dedicated to inflating the bubble and it's not going to stop that momentum suddenly, and (ii) "greater fools" (traditionally the small investor - the apocryphal shoe-shine boy giving investment tips) finally get let into the game.
The interesting thing about this time round is that all these companies are still private, which gives three interesting dilemmas for the "smart money" flow.
- These are still essentially illiquid assets.
- At current valuations, there is probably a limit to the IPOs that can be done, and to the trade sales that can be made. A few will get out early and safely, but 100+ ?
- This level of private ownership structure is not the best place to corral retail "greater fools" into, and apparently the best alternative (pension funds etc) are now getting twitchy, hence all the angst right now - and the writedowns, IPO repricings etc.
This also explains the multiplicity of ratchets and preference shares
being used in the later-stage Unicorn funding deals by the way, so that if it all goes down the plug those Investors get first dibs on whats left. In fact, arguably this also drove the bubbletime valuation - if you are not going to lose money, who cares what you value it at.....until you find there is no way it will sell to many companies except Google or Facebook, nor can one IPO at those values, and there are no greater fools in sight...(yet - one thing to watch for now is the attempts to find them - watch your 40K fund managers like hawks, folks)
(Update - our apologies, we were behind the curve here in 2 ways
- on October 30 2015 the SEC allowed non-specialist invetors (aka YOU! to buy shares in private companies
And don't believe the soothing words about deflating slowly - historically, so far anyway, bubbles have always
As to harbingers of the Crisis, arguably the shoeshine boy this time around is a spotty wannabe entrepreneur with their own startup (you laugh...read here, about 1/3 down below the AOL picture
But in our observation, there has to be an "insanity event" that triggers the crisis of confidence - something so incredible even by the standards of the bubbletime, that it wakes everyone up from the spell and starts the rush for the exits. In the dotcom crash it was the AOL acquisition of Time Warner, and this hasn't happened yet.
Still, its all for the greater good - if you look at Carlota Perez' theory of bubbles
, their purpose is to build a wave of capital that washes away the old so the new can take it's place. In the wake of the wave receding is left the speculative assets are left at bargain basement prices that allow the New Economy to be built on them (the railways, the datacentres and networks after the dotcom era). It marks the transition from the “installation period”, one of exploration and exuberance, to the second, or “deployment”, period - is a much more boring affair as all the quick bucks have been made, so investors prefer to put their money into the real economy.
The transition to Perez's second phase is marked by the bubble popping. The emphasis is no longer on raw technology, but on how to make it easy to use, reliable and secure. Later, this period is also the “golden age” of a technology, which now penetrates all parts of society. The start of this complete value collapse marked by the last phase in Minsky's model :
Stage 5: Revulsion
- Where the press used to write only positive stories about the bubble, suddenly journalists notice the fraud, embezzlement, and abuse that was always there and write about it. Investors who have lost money look for scapegoats and blame others rather than themselves for participating in bubbles. Assets fall to irrationally low prices.
The fun now is speculating on what the event that closes out the Unicorn Bubble will be....and what it will be called. The Unibomb?
If it is the Square IPO that is the event, then that's the bubble popping with a whimper, not a bang.
2 day later update - this is interesting - VC Union Square Ventures' Fred Wilson has just noted this on his blog
that "It’s interesting and noteworthy that when the private capital markets got the benefit of large pools of capital coming in, that came with increasing transparency. Of course it did. We just didn’t realize that was going to happen"
I was prompted to write this post after reading Gideon Lichfield's useful article
on all the different types of systems jumbled up in the term "Digital Economy" and the muddy thinking about it that results. To summarise Gideon first, these are the different types of systems operating up in this new economy, and the reality behind the hype - the expurgation is mine:
Sharing economy - The name is apt for any service that allows a thing previously available only to its owner to be used by other people, thus making more efficient use of resources.
Peer (or peer-to-peer) economy - It’s meant to get at the more direct connection between the people on either side of a transaction, unmediated by a big faceless company, but “peers" economy” is very misleading as to the relationship between borrowers, lenders and intermediary
Gig economy - not a steady job but a series of gigs. But the gig economy could be short-lived: Legal disputes about gig workers’ rights, liability, and so forth could force the creation of a new category of worker that is neither freelancer nor employee.
On-demand economy - this is where the venture capital money is: services that offer cars, food, home-cleaning, and other services at the touch of an app button. [My note - and it relies on "Gig-economy" labour]
Platform economy - a digital platform that, whether through algorithms, a rating system, or some combination of the two, serves to connect customers with providers of goods or services.
Networked economy - See “Platform economy.”
Bottom-up economy - the newfound ability of small businesses and freelance workers to find customers or band together with other workers from all around the world.
Access (or Rental) economy - services that let you pay to use things like cars (Zipcar), movies (Netflix), or music (Pandora, Spotify) without owning them. Been going on since long before the Ubers of this world came into being,
Uber economy - "Uber for X” has become an easy shorthand, but it’s simplistic—the Uber model is only one of many
Read Gideon's full article for the satirical asides and pointing out that We Have Seen All This Before notes
But what this summary really made clear to me is that all these "Next Economies" (possibly with the exception of a Bottom Up collaborative system) is that they like to use the impressive (and more neutral) term "Economy" whereas in reality they are just good old Markets - either simple ones flogging something, or two sided markets
matching a buyer and a seller via a mediator.
What has apparently changed is a new mediator (the "Digital Platform") has seemingly been invented in the last few years (I know, I know....). Now there is no question that digital technology reduces transaction costs, makes it easier to find buyers and sellers, will allow new entrants, threaten incumbents, shift market power etc etc - but this is hardly "new". Yes, in the chatty social media world, it's far easier for markets to be conversations
. And Blockchain woo will hopefully make it easier to pay and harder to be cheated.
But they are all still, at the end of the day, just markets. And this is hardly a new feature of the digital age (I am reminded that many "vertical markets" and "e-market" dotcoms were proto-Unicorns until the dotcom crash, and its hardly as if the last 15 years haven't seen a lot of new digital markets emerge).
In reality, much of the extra benefit of this "New Economy" over the last few years so far seems to have come from new providers arbitraging the regulatory costs of existing labour, financial, safety and consumer protection laws and "capturing the surplus" (aka pocketing the difference), but once everyone is on the same playing field (either via re- or de- regulation) those advantages will be gone - and in many of these markets (taxis, renting spare rooms, delivering food et al) there is precious little barrier to entry - or margins, for that matter.
(An aside here - there is a whole related issue to this "New Economy", about the "Future of Work" - both are driven by the same digital technologies, and there is also a lot of muddling of the two effects, but in my view so far the biggest discernable impact of the New Economy on the Future of Work has been the more efficient exploitation of low paid people (or "peers", to note the Newspeak) but that is for another post - though here is a first shot
How this simple and millenia old function (the oldest human profession?) has acquired all these various "new economy" terms, never mind a lot of the idealistic hype (see picture at top of article) that surrounds it all, is the mystifying bit. I guess "e-Markets" is a bit passe, and you can't tack on a whole lot of utopian dreams, nor justify the valuations of a crop of Unicorns who are flogging the same old stuff mankind has bought since forever, on old bottle labels.
Time to decant the same old wine into new bottles.....
Twitter has replaced it's "favourite this twt" star icon with a heart - which is odd, as it shows Twitter fundamentally misunderstands how people use the system
. Which is also odd, as it wouldn't have taken more than a cursory glance at their own system to work that out, this is not some deeply hidden arcanity. People use "star" to log stuff that looks useful/important/etc, not just because they "love" it.
But the "heart" fiasco points to a deeper malaise, in my view that started when Twitter started a scorched earth policy with its own developer ecosystem a few years back. But then, when you have a management that changes more often than a comic-book Banana Republic government, its not entirely surprising it doesn't really understand how it's service creates value to it's users, nor have a longer strategy to create value apart from trying new ways to flog Ads to people that don't want them.
Speculation is that the main reason for the ongoing silliness is investor pressure to produce more growth - it "only" has 300 m users - nor real profit (it still loses $2 for every $ of revenue) But this is again odd, the point of a bloody big IPO like Twitter had is to give it the runway to sort its business model out without resorting to short term desperation tactics
. Twitter is not Facebook, it's eventual business model will not be "Facebook Lite".
Now in recent months its started to be a bit more reasonable in its treatment of its own ecosystem, which is a Good Thing, as nearly all the real innovation on Twitter since the original concept has come from that community. What emerges succesfully from the developer Darwinian Soup is far more likely to help the service grow and expand than any internal brainwaves like replacing a "star" with a "heart".
When Twitter IPO'd, we opined that the service had far more long term potential than Facebook, but Twitter's revolving-door management structure was its weakness, as compared to the ruthless determination of the Facebook team. Now, let's see how fast Twitter can U-turn on this mistake. That will be an acid test of it's ability to succeed going forward.
Update - we tweeted this post, as we always do - and got a few favourites, with stars again. There is hope yet...
Update 24 hours later:
(i) The hearts are there now
(ii) Twitter, after barely 1 week of hearts operation, claims they have a higher uptake
with hearts than stars. Bit early I'd think....
This is a summary of my more detailed article on the Agile Elephant
I was at the IOM Conference
in Cologne last week, which is mainly concerned with the "Human" side of the Future of Work that the Digital Transformation will bring. The focus is really on how white collar, mainly fairly knowledge oriented workers, will do their work in future. It's all about improving human potential - expanding knowledge, increasing collaboration, co-ordination, engaging, enthusing, a move from hierarchy to flat organisations and teams. It's an optimistic vision, a Human-centric model. What's not to like?
But here's the rub - The Humanist, People-Centric approach is just one exposition of possible "Futures of Work" currently ongoing. You don't have to go far before you find three other very different futures being created as well as this Human-centric view of the Future of Work:
- Automation, ie using ICT to replace human work (See McAfee & Brynolffson's "The Second Machine Age" for a starter)
- Digital Offshoring - moving skilled work to lower cost, less regulated environments (this isn't necessarily to low cost country - a lot of "Mechanical Turk" work is done by underemployed people in rich countries it's not called the Digital Sweatshop for no good reason.)
- "Uberisation" (for want a better word) is partly automating the process (the App) and partly commoditising the process provider - the use of self employed (often unregulated below-minimum wage workers) for just the fractions of their time required, with no payment of their costs of working, nor any form of employment benefits. Read the "Work - The Future" set of essays to get a good idea of the thinking in this arena. Ditto the increasing use of "fractional assets" - rented private rooms on Airbnb, pop-up shops etc.
The people impacted by these worlds are going to have a very different experience from the happy human-centric vision painted in the Human-centric model
But what is interesting - reading all these various sources - is that there is very little intersectioning or consideration of the other models by any one of these models, the pundits & thinkers of each all seem to operate in Silos (Silos being something they all decry in the Current Ways of Working, ironically).
In essence the answer to the question "What is the Future of Work" is "All of them" - but in different combinations depending on industry, location, role and time. I put more detailed analysis in the other post, if anyone wants to look at Value Chain Analysis and Product/Process matrices, but in essence history suggests a hybrid will occur in most cases (just as manufacturing best practice today incorporates offshoring. lean production & worker cells, automation and elements of business process re-engineering).
For the Human-centred fans, there is the second rub - a lot of those impacted will be those people that thought they were slated for the happy, hierarchy-free world of work. How so? Well, if your job can be:
- Automated (even partly), you can be replaced by an AI and an apparatchik, or
- Sent to a cheaper person elsewhere (And this will happen to everyone - Legal work once down by qualified professionals in the OECD is being sent to India), or your time can be
- Bought in small slices when required. The IT Contracting market is already like this - right now it can be a good living as there are still relatively few doing it. When there are far more people doing it as their full time jobs disappear, per diem payments will plummet for most).
The Future of Work, in short, may not have you (or me) in it. And that is something less often mentioned - the Future of No Work.
The discussion about how the next shift will play out politically, economically socially is also not considered by many enthusiasts, but - for now - a quick look at the Industrial Revolution is instructive in thinking about the next 50 years. During the Revolution, while it is true that the changes created new jobs, better lifestyles and a better world for those countries that went through industrialsiation, it was not an easy transition:
- It is also true to say that it took 1-2 generations, and the transition was not pretty to live through- mass migration, impoverishment, starvation, riots & massacres, smashing of factories, appalling pollution, alcoholism, what we would today call "mental health" issues. Many thinkers do not believe a modern democracy would survive the riots, starvation, massacres and huge movements of people that happened the last time round, so for example some leading economists propose a basic citizen wage to buffer people from the worst of the shift to this Future of Work.
- Things only really got better when this new Working Class organised itself as a movement to prevent the excesses of exploitation and gained political power. Marxism, Unions and other Labour movements, Labour Days worlwide seem a bit arcane today, but that was the way most of your great-grandparents ensured they captured some of the benefits of that New Way of Work transition. We can expect soem fairly radical resistance from workers again, but this time with social tools to back them up.
Interesting times, and we are now living in them
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