Policy, Politics & Culture
The first word that popped into mind here at Via Meadia headquarters upon the announcement of Facebook’s eye-popping $1 billion purchase of the photo-sharing company Instagram started with B and rhymed with trouble. Long a Silicon Valley darling for its tasteful design and impressive user base growth, Instagram nevertheless had no income and had announced no strategy for converting eyeballs to dollars when it was bought. How deliciously frothy and light; how gleaming and insubstantial.
As the NYT Bits Blog reports, there’s a perverse logic at play here, and it’s the sad norm in the tech sector: no business plan means pesky numbers don’t get in the way of stratospheric valuations when the company is sold.
"It serves the interest of the investors who can come up with whatever valuation they want when there are no revenues," explained Paul Kedrosky, a venture investor and entrepreneur. "Once there is no revenue, there is no science, and it all just becomes finger in the wind valuations."
When small start-ups I've spoken with do make money, they often find it difficult to recruit additional investment because most venture capitalists "” and often the entrepreneurs they finance "” are not interested in building viable long-term businesses. Rather, they're interested in pumping up enough hype and valuation to find a quick exit through an acquisition at an eye-popping premium.
Getting acquired while producing no revenue is like performing a card trick without the deck of cards: the magician simply explains how magical the trick is, never actually showing it. (And we are supposed to step back in sheer awe.)
For start-ups, fewer numbers in the equation mean a projected valuation can be plucked out of thin air.
This all points to deeper problems in the global economy as a whole. The world is awash in excess liquidity, with huge pools of cash around the world restlessly seeking higher returns. And because there don’t seem to be enough promising real investments, we get continual bubbles even as other bubbles, like housing, deflate.
When companies like Apple are sitting on a cash hoard of $110 billion (enough to fill 50 Olympic-sized swimming pools with dollar bills) and can’t find a way to make money with it, that’s a sign that the world economy at a basic level is still not back to real health.
Bubbles don’t just signal problems in one particular industry, economic sector or country: they are a sign that something much bigger is out of whack.
There are plenty of promising real investment opportunities in the world today, but most of them require large quantities of two things that are perennially in short supply: patience and due diligence.
Most of these opportunities are in real assets, infrastructure projects, and emerging market (ie beyond BRICs, in countries like Indonesia and Myanmar) companies.
But researching those things is hard. So much easier to buy junk IPOs on Nasdaq.
Unbeknownst to me pundits may be putting forward the idea that lack of economically viable investments is causing excess liquidity to create bubbles – but I haven’t heard it before. It certainly is a credible description of the dotcom bubble. I would add that there is another factor pretty common in bubbles – what I think of as the MacDonald’s effect. That is once a successful idea is proven it gets replicated ad nauseam until it no longer represents value. This effect is also what has caused the cost of higher education to rise faster than the rate of inflation.
“The world is awash in excess liquidity, with huge pools of cash around the world restlessly seeking higher returns.”
Liquidity, thy name is China.
With China, numbers swamp everything. A thugocracy to boot. What are we doing there?
When companies like Apple are sitting on a cash hoard of $110 billion (enough to fill 50 Olympic-sized swimming pools with dollar bills) and can't find a way to make money with it, that's a sign that the world economy at a basic level is still not back to real health.
It’s more that Apple has a significant amount of profits from overseas operations that it can’t bring back to the US without incurring a significant penalty in taxation. It’s one of the reasons why they’ve been pushing for a tax repatriation holiday.
As the NYT Bits Blog reports, there's a perverse logic at play here, and it's the sad norm in the tech sector: no business plan means pesky numbers don't get in the way of stratospheric valuations when the company is sold.
I don’t see what the problem is. Even if the vast majority of start-ups would amount to nothing on their own due to no business model, consumers still get to benefit from their services – and from the services of the profitable survivors. Think of how the Dot.com bubble destroyed a lot of start-ups, but left a few behind that changed the world for the better (Amazon, Google, etc).
“The world is awash in excess liquidity, with huge pools of cash around the world restlessly seeking higher returns.”
This is just wrong; businesses wouldn’t be holding cash, if deflation wasn’t making that cash worth more. The Law of Supply and Demand is just as valid for Money as any other product or service. The Risk and Return on Investment of holding cash, is clearly the winning move for most businesses at the moment. If all that capital could find a higher return elsewhere it would have already gone there and wouldn’t be sitting in banks drawing little or no interest. Ask yourself this question. Would these businesses be holding all this cash in an inflationary environment? No, they would already have used it to buy back their own stock, or invested it in a profitable opportunity. But they don’t see anything more profitable in a deflationary environment than holding it as cash. As for Facebook, they may have done something strategic, or they may have just made a mistake, I don't know. What I do know is that this is no Bubble, as you don't see any other businesses doing anything but holding cash, so cash must be getting them the highest return.
@Jacksonian Libertarian:
“businesses wouldn't be holding cash, if deflation wasn't making that cash worth more. ”
Kindly back your assertion with some facts and data.
Try to show deflation (Real Estate excluded) for the USA where official inflation is 3-4% and food and energy are in double digits.
Or you can follow the storied tradition of Via Media of simply waving your hand as substitute for data.
Jacksonian@5: Without endorsing your thesis, I note that the following could be used as corroborating evidence: some companies with large cash reserves (eg Google) are selling bonds.
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