Tech Investors Create a Billion-Dollar-Baby Boom

If these startups can command billion-dollar valuations by hacking-out products that are the software equivalent of a supermarket tabloid, then companies that are actually creating useful things (new materials, medicines, renewable energy solutions, etc.) are seriously undervalued.

re Snapchat: "...“I know it’s an ephemeral platform, but my 14-year-old spends half her life there,”

I hope for both your sakes you are exaggerating.

Cashing in on IPOs is the brave new American Dream.

I don't own a smartphone and apparently function perfectly well without one. I

also don't have a crick in my neck from constant bowing to a tiny screen at lap level. I'm proud to say that there isn't one picture of me anywhere online.

I confess I'm of a certain age where posture and privacy is important to me. So is taking walks outside, no matter the weather, with nothing in my ears except the sounds of nature. Likewise reading a good book, with an actual binding and paper pages. I revel in peace and quiet and a good night's sleep.

Obviously, I am not the target audience here.

If memory serves me, one critical indicator that was linked to the demise of the system that led up to the dot-com bubble burst of 2000 was the manner in which all these start-ups counted the same users -- for their forecasts of growth and revenue fed to Wall Street -- over and over again... So as the projections of growth for these companies keeps growing higher, the Ubers of the world keep forecasting billions from the same users as Lyft.... A house of cards ensues.

Technology is great. It allows me to read the NYtimes on my TV connected to my ten year old computer, It allows me to download shows from the British BBC, and have Netflix and Amazon to dull me. I also have five other computers, older, towers and laptops collecting dust, scattered about. It is great because I live in a rural place among trees and forests, overlooking ice thickened lakes ( this time of year). Internet from a distant tower, provides connection to the big wide world. But, as for smartphones, apps, and the assorted lunacies they inspire. I don't get it, nor would Ubber ever visit me. I would have to cross country ski a mile to find them, and I would likely be their driver's only ride that day. The current swirl of smart this and that is dumb, I think. It also does nothing for the human spirit but turn is into worried connected Skinner rats, rattling, racing in the maze, frantically posting, texting, facebooking for approbation and meaningless accolades. So find that next dumb thing and put your money in it. You might make millions, billions, but it will not make you worthwhile nor will it do anything for mankind. PS- this all seems reminiscent of the dotcom bubble.

We have ridiculous concentration of wealth, and hundreds of billions of dollars twitching around for the next short term kill with no really good options for the long term. I'm sure this will end well. Lets elect another cabal of neoconservatives, further deregulate capital, and see what happens.

Why can't the next big things include something truly transformative like Hyperloop and not just another smartphone app?

Its a bubble.

The national economy relies on brod and sustained growth in consumer spending, which requires in turn broad and sustained wage growth. Five year old companies that are worth suddenly tens of billions of dollars with no sustained real economic growth underneath them are a speculator bubble. The US is now a permanent bubble economy because the richest have succeeded in taking all the fruits of growth to themselves.

Too much wealth in the hands of too few people gambling in the hope of making even more, mainly for the sake of bragging rights. This wealth should be captured in taxes and invested in things useful to society, like education and infrastructure.

Ok, so we think this is a bubble, DotCom II, or gambling. We also think that financial resources should be directed toward advancing society, or at least this country, or food, or medicine, or education or making things. And we understand that the next generation sees speculation as the one true virtue. Anybody have any ideas about doing anything good about it? Or did we read this article to get a handle on the next quick buck?

NYTimes - and other newspapers - have written before that kids of the tech billionaires and other tech wizards are allowed to use their smart phones and tablets an hour a day at the most.

My guess is, that it is these kids who will be the next disrupters and innovators, not those who spend half their lives tapping their devices.

In the Dot Com boom we had "pump and dump". Analysts and the media would promote companies prior to an IPO and then walk away. At least now the hyper-valued companies seem to have some chance of being successful, long term.

Only a few people: the Founders, and Wall Street insiders, make money in the VC to IPO cycle. By the time engineers with stock options get to sell their stock, prices have collapsed. The need to keep investors from fleeing the stock leads management to some bad long term decisions. Increasingly founders just cash in and leave.

Mutual Funds should not be in the VC business. What's to prevent them from buying shares with one fund to lock in the gains for the Fund owning the VC/IPO shares. The IPO bump goes to the investment house, and retail investors who are cautious about owning post-IPO shares end up owning them anyway because the're in their 401K funds.

Maybe the real problem is there is too much venture capital money piled up with no place to go? VC money is the money you play with after all other obligations are settled. Just like high-end real estate , its play money for the 1%.

I sure loved the economy back before NASDAQ burst in 2000. All of the mature companies were paying tremendous salaries to tech people so that their competitors would not get a leg up on them. The spending was blowing and going and I was a beneficiary of that. Then, I decided to buy about $5000 worth of the NASDAQ index fund after the first drop in 2000, thinking I was buying at the low point. Met tech people whose salaries went from six figures to roughly $60,000/year. For almost 15 years, that fund was worth only half what I had purchased it for. Once all the hoopla about FaceBook going public had me regularly checking my fund's price and seeing that it was then at what I purchased it for, I sold it shortly after FaceBook went public and broke even. The best investments I ever made in my life were a multi-family property which I lived in and investing in S&P 500 the first day the stock exchange reopened after 9/11 and selling it a few years later for a $500 gain on a $2,500 investment.

Investors should take note of the connected car craze and realize that consumers may not want all the bells and whistles unless they also get consumer protection. The next wave, beyond the electronic dongles that plug into the vehicle, is a lockout that puts the keys to the data back in the hands of the vehicle owner. Vehicle owners deserve more than federal regulators, Congress or state legislatures have been able to provide. I have the next-big-thing that's already on the market. It is the AUTOcyb - vehicle connector lockout. What's my valuation - zero to infinity. Time will tell.

What I find sad is that most tech start-ups are being built -- just to be sold. Few of today's silicon entrepreneurs really care about building anything for the long run. They just want to get VC money, create some nominal bit of something (did we need another chat app?) and then sell the thing and walk away. It has created a class of people who really think this is the way you do business, and that everything is ephemeral...

This tech-rush is today's equivalent of the California gold rush. And how sweet that this tech-rush is also happening in California!

It's true capital is being invested in tech start-ups again, but consumers are seeing better value. Ubers a great service, and AirBNB is uber helpful. When they're not concerned with outrageously hiking rates during times peak profiting hours, seasons, etc these are services consumers benefit from. I remember when AIRBNB was truly affordable and I didn't get raped by Uber during rush hour or sadly even when it rains. Coincidentally these companies also hold the highest private valuations.

What's concerning is all these virtual products. Snapchat right now appeals mostly to teenagers. Teenagers tend to trend their life around things before they move onto something better. Well, Facebook got past that by engaging adults when teens left, maybe they can do it too.

But all these other companies with no physical product, no truly appealing service. What the hell am I paying for or using that has to do with life? Because you're connecting me by psychologically disconnecting me? Is this modern life? If so, we're looking at a hell of a lot of ADD and unwarranted impulsive behavior in the next generation.

This would also be the generation AI will trick through linguistics as they take over the world. Just kidding. I hope.

Wonderful to see so much of our country's wealth go, yet again, to such worthy endeavors.

This article speaks to the failure of late capitalism to produce any real benefit to the society that system purports to serve. There is too much attention to the quick profits made off the ephemeral surface of technology while the supporting infrastructures continue to crumble, like Rome. Future archaeologists will excavate our dead iPhones and tablets whose bits and apps are long gone and wonder what madness on these screens distracted an entire civilization from caring for its well being.

I can hear the old refrain: "It's different this time..."

Is this all that Americans hope to create and are only good at creating? Is this all the eons of evolutionary progress or our creative brains is to yield?

Then alas our species has no doubt come around full-circle on its evolutionary journey and is now starting to go backward down the same path we came up from.

Maybe when we get back to somewhere around caveman level, we'll finally get a glimpse of what real on this earth and realize that that's maybe where we should stop, keeping in mind the historical fallacy we had to endure in order to get to this moment in time of clarity.

I'm all for innovation, but people looking for meaningful advancements solely for the purpose of selling it right away rather than developing it for the benefit of all and not just a few? We have too many of those already.

Here's hoping we don't have yet another bubble forming here (even though it sounds like we do)

In my experience these private investors will not do what large corporations will do: spend millions to turn an idea and business plan into an asset valued in the billions. What this article describes is actually an ugly, exploitive game: force creators, even if they are seasoned pros with track records of creating ultra-high-value corporate divisions, to work for free or perhaps with about $25,000 to mock up a working public version of the product, before another pittance is doled out. Every round of pennies comes with loss of ownership. Only the very naive or the very foolish, meaning the very young, buy into this life-wasting lottery, which carries odds of success no better than Powerball. These investors hoard money, trillions of dollars. They are the anti-capitalists.

It is good to see such a robust venture capital market in the US, by far the deepest such market in the world.

Less encouraging is the "tunnel vision" the V.C. market in general (and its biggest players in particular) demonstrate: the big money overwhelmingly goes to connected Silicon Valley startups that have demonstrated a greater ability to gather users than generate revenues.

If the V.C. market in general had a more open mind, and realistic, long-term investment horizon (like Mr. Ellenbogen), more geographically diverse and less homogeneous startups would get funded. Not every unicorn-in-waiting is going to come from Silicon Valley, and not all will have oodles of well-connected board members and angel investors to grease the wheels of their endeavor. Lesser known, geographically dispersed and not-as-well-connected start ups, even with truly novel, IP-secured and proven service models (e.g. https://liberationmedical.com/ ) can find it difficult to attract the notice of the V.C. world. This is less than ideal for these non-Silicon Valley startups, but also for the V.C. marketplace itself- they very well could be missing out on the unicorns they so expensively seek. Diversifying their investment portfolios by including promising, novel and non-Silicon Valley startups would seem a wise play for some V.C. firms.

The US is a large, diverse and dynamic place, and hands-down, the very best place to raise venture capital for a startup- if it is from Silicon Valley.

All these tremendously valued tech companies with incredibly important social media applications worth billions. How am I surviving without ever having laid a thumb on snapchat, twitter, facebook, uber, lyft, or pinterest?

Good story. But didn't the Wall Street Journal have the same article yesterday (with awesome graphics accompanying the article)? http://www.wsj.com/articles/meet-the-hottest-tech-startups-1424308076

More evidence that the financial market is little more than a gigantic Ponzi scheme, in which valuation is defined in terms of the ability of the huksters to talk up the price of otherwise modestly worthwhile assets. The process works solely because of the greed in all of us, coupled with the herd mentality.

In any enterprise such as this, there will be winners and losers, and as an investor one can never be sure of the outcome. But one thing is certain: the pedlars of this froth will make large sums of money because of the way they structure the market.

I don't understand many of these valuations. The barrier to entry is so small; any company could create a similar product.

Of course social media is addictive. Of course this entire lunacy of endless tech toys in lieu of paying for infrastructure, social services, housing, basic survival. No, it is very perverse, and silicon valley has created its own perverse world, where we are led like sheep. And people do it-the latest and greatest, like children people line up for the next new gab gadget. So that young people can look voyeuristically at the world, bemoan their own popular culture, and see/be anything with the click of a button. May not be real, but it sure is hot.

I'm struggling to understand what makes this different or better than the dot-com boom in the 90s. In fact, giving these massive valuations to social media companies strikes me as even worse. During the dot-com bubble, many of the companies that went under or crashed were ones offering actual services or delivery of products, like pets.com, GeoCities or Cisco. Now we're giving even higher valuations to sites which offer nothing other than the potential for advertising.

Social media has its uses, and it's true that having a critical mass of userbase is some protection against people leaving for a new service. But it can and does, and will continue to, happen. Consumers, especially teenagers and young adults, are notoriously fickle. It doesn't even necessarily matter if your product is better or faster or more secure; if it's not new and shiny you're going to start losing members. Facebook is already losing more young adults and teenagers than it is gaining (and not simply due to aging out of categories - they are actively leaving).

Amazon, Google and Ebay have survived by offering actual services and products to customers. What will Facebook, Snapchat, Pinterest and Twitter do to remain viable in the long term? There is only room for so many tablets, phones and e-readers on the market. I have a feeling these investors will be in for a very rude awakening in a few years. If so, I hope they actually learn something next time. One can dream.

I have to wonder if there is a catch-22 here: with people squandering do much time on ephemeral things like snapchat, is there enough seriousness left in the country to remain a first world nation? Although renewable energy had rates of return and time to return much too low hold silicon valleys interest, that would have been far better for the world than it's current direction.

It is time that it is widely admitted venture investing today is in fact venture BETTING. The myth that all these big name venture capitalists make sophisticated decisions in which ventures they invest based on careful analysis and understanding of the marketplace is pure nonsense.

As one of these "expert" investors states here why did his firm decide to make a major investment in one company "because his 14 year old daughter seems to spend half of her time on their app."

Case closed and God help us.

According to the article, snapchat only just started bringing in advertising revenue last month, and it's worth 19 billion! Lol. I've got some disappearing underpants that must be worth that much too. I'm thinking IPO! So, not only is it not making money, it's using technology that's been around for a while, and how much discretionary spending money do 13 year old girls really have anyway? How much do their virtual piggy banks really hold. Facebook, according to my never-not-hip millennial writing students, has become as fashionable as AARP. These are fashion companies and need to be valued that way; next year's shoes are certainly reason enough to throw out this year's. But certainly the owners of these carnival shows will laugh all the way to the bank

I guess it beats actually creating something of lasting value.
I feel like our economy is caught in an endless road-show remake of 'Gamesters of Triskelion' with brains in vats betting piles of quatloos on which combatant in a series of meaningless grapples will be the last slave standing. (At least the original had some decent witty dialogue, pretty girls, and a happy ending. And it was fiction.)

I usually don't "not get" stuff. I'm super savvy. Despite downloading Snapchat three times.. I've deleted it three times. People send the most lame stuff ever over it. I predict its demise, I'd say in two years. I would totally accept being wrong.. sure, this is just my guess based on the lousy lame pics people send me.

These preposterous tech and app valuations are the beginning of the end.

Two things worry me.

1. Because these are all private transactions, there's no liquidity, so the price is set by a few small transactions (unlike the public markets which set prices through millions of transactions). Because they're private, they also lack transparency.

2. The valuations break the laws of finance. If Snapchat is worth $20b, even at a 20x multiple, you'd want $1b of profit a year. I can't imagine a world where Snapchat can generate that based off of teenagers sending pics to each other. (For comparison, Twitter, which has a far larger user base than Snapchat, is only expected to generate ~$300m in profit in 2015). I don't care how many users you have if you can't monetize them eventually. The laws of finance state that you only pay for something if you expect discounted future cashflows or future enterprise value to equal the price. If future cashflows don't get you there, then you're counting on duping someone else into buying it. Eventually, you'll have trouble finding someone to sell to...

You add both of the elements above, and you've got a bubble, but one that isn't transparent because they're no public market that tracks it. With pension and mutual funds now digging into the early stage investments, it looks like a lot of people are going to lose a lot of money chasing a unicorn.

Remember, for every Facebook, there are at least 10,000 failed startup companies. That's a lot of investments to make before you catch a real unicorn.

Topical, retread article on the possibility of dot.com 2.0. Bill Gurley, Benchmark, has been raising the valuation and out of control spending issues for awhile, but nevertheless, Benchmark continues to make large investments in just such firms including Uber, who one can argue is the poster child of over valuation. Benchmark also hold Board seats in some of these companies and can directly address the spending issue yet it continues. As for the article itself, it fails to mention a key difference in that the investor today is not Joe Public; its the VC's; hedge funds and big investment houses, and they're playing with their own $ not yours. As for those of you worried about the mutual funds losing your 401K, you are protected in many ways including the FDIC and these funds are limited as to how much of your $'s can be invested in different risk categories. Your post IPO concerns can be simply addressed, don't like the stock, don't buy it.

"Many of these investors, according to those on Wall Street and in Silicon Valley, are willing to invest at huge valuations because they plan to sell their shares soon after start-ups go public."

Exactly. This boom is driven mainly by the quest for the quick buck which invariably relies on duping someone else into buying these companies at these unrealistic valuations. For the majority of these businesses, these valuations are not just aspirational, they're pure fantasy. Pinterest is worth billions? How, exactly, will it generate the profits to justify that kind of valuation? I hope the folks managing my 401(k) don't fall into the trap of buying into these companies during their IPO's because that's when the inside money will be cashing out.

Cloud/Imagination/Market (always risk) expand.

The more I read about these companies, the more I think that social media will be regarded in the future as the addiction of our times. Despite the noble purposes it can be put to, there is mounting evidence that using these sites and apps are profoundly detrimental to physical and mental health. Meanwhile, these companies are valued in the billions not on a product margin or even any revenue stream, but in many cases entirely on their user base, just like cartels in turf wars.

Hunger. Inadequate education and health services. Low-income housing. Collapsing infrastructure. Fortunately, our brightest and richest are chasing the next killer iPhone app.

I guess all I can say to this is that there better not be any bailouts or rescues from Washington if the market crashes again. And, if investors are "creating" anything having to do with billions, the crash almost seems inevitable.

With so much money chasing so much garbage, money is clearly being debased. No good can result from this.

Your fourteen year old "spends half her life there" Is that good or healthy for anybody?