By now, you've seen the latest round of stories on the topic. And the shouting on Twitter. I think this is worthy of a smarter discussion.

My view is that this is definitely not a bubble. It's boom times, yes, and all boom times end eventually. But calling this a "bubble" implies this time is going to "burst" with far reaching consequences. I just don't see that. There are outliers (as there always are) but most of the stuff going on now is rational. Yes, that includes the Instagram deal.

This conversation's not gonna have any real contention or debate in it unless this group has some more diverse perspectives. Everybody here is already invested in how the tech industry works today, and has already gotten in the loop enough to have (various degrees of) success. So the answers here will tend to range from "not a bubble" to "not entirely a bubble".

Not only have I seen the latest round of stories on the topic, I wrote one of them :-) gigaom.com -- and I agree with Chris Dixon that while there is some valuation froth out there in certain places, we are a long way from a bubble of 1999-style proportions. Could a venture bubble be a precursor to something like that? Maybe. But there would need to be a lot more public froth than there is now.

For me, even asking questions about a bubble assumes a tech environment that's about investment and VC and funding and other things that are, from a larger cultural standpoint, just a distraction. Are we asking if consumer web/app technology's impact and influence on mainstream culture and ordinary people will decrease? I can't imagine so. Are we asking if a small cabal of privileged technology creators will continue to get disproportionately wealthy? It's only a question of *how* wealthy.

So let's invite more Anil (I would have, but hit the limit of invite in initial seed). Who else do we think REALLY thinks this is a bubble. Bilton seems to for sure. Let's pull in others. Worth debating.

Well, we could invite Dave Winer but based on past experience I don't think he will participate :-)

my previous outbursts & rants aside, i'd agree with MG that while there is irrationality in the market (isn't that always the case?), the far greater trend is towards more rational co's & pricing compared to 10-12 years ago. and Instagram aside, there is SUBSTANTIAL revenue and even profits being generated by a much larger # of companies than ever before. Chris Dixon's article in response to Nick's was a cogent summary, also Semil Shah's piece on TC over the wknd here: techcrunch.com

how about adding Paul Kedrosky, since he was quoted in Nick's piece as being "pro-bubble". maybe also Fred Wilson & Mark Suster.

To Anil's point, I think the only thing that would make this a bubble outside the tech-VC community is if it impacts public stocks and causes a bloodbath like we saw in 2000, and so far there is just no sign of that happening. If anything, stocks like Zynga and Demand are being treated far more negatively than the broader market. Maybe Facebook's IPO will trigger a more widespread kind of bubble-type inflation, I don't know.

thing that pissed me off about Nick's piece was that it was so one-sided in perspectives. sure there are bubble issues worth discussing, but if he's just going to write the "SKY IS FALLING" perspective with no counter, that's BS. specifically: there are plenty of revenue-oriented tech startups these days, recently public and on the way there, and this isn't even worth arguing... it's OBVIOUS. profitable vs not, ok whatever look at AMZN first few years. at least let's have a balanced discussion.

And now we're clearly getting the OTHER perspective :) Seriously, I hope some people who really do think we're in a bubble jump in. There are plenty of smart people out there saying things that many of us don't agree with, I'd love to hear why.

One problem, I think, is the way we ask the question. "Is this a bubble?" and "are we in a bubble?" are hard to answer because they're accusatory — they put the people best qualified to comment on them either on the defensive or in the position of accusing the questioner of being dumb. So, a better question that's more satisfying to everyone's EGOS: Is there a bubble?

That's interesting John. Happy to rephrase it here.

But I think Chris Dixon's point is that there isn't just one capital B bubble -- there are different kinds of bubbles. We might be in a seed-stage or even later-stage VC bubble, but that's very different from a 1990's style public stock bubble.

But I mean, why is that even called a bubble at all? That's the way the world works in all industries, across life really. Calling this a "bubble" is an insult to the people hurt in true bubbles, like the housing market collapse, for example. This is just boom times, almost everything happening is normal.

To answer the "a bubble" question: I mean, yeah??? Success stories like Instagram aren't indicative of a bubble, nor are massive low-revenue companies like Tumblr. It's the smaller-but-still-significant sums of money that are flowing to VERY loosely defined startups that indicate a bubble to me — that's cynical gambling behavior. Mathew, you and CD are right. This is not at all Dot-Com 2.0. But it's something. Sort of my point here: buzzfeed.com

Yes, I read your piece John -- thought it was pretty good for a layman's guide to bubbles. But is cynical gambling behavior in tech or startups any different from what happens in the stock market or any other market every day? Not really.

As a first time founder focusing on revenue as apposed to eyeballs I'm biased towards bubble. The Instagrams of the world aren't capable of existing outside of this "bubble" that builds up within the bowels of SV. I think that's Bilton's critique.

What do you mean re: Instagram "existing"? That it wouldn't have been made in the first place? Or that it couldn't have lasted this long without revenue? Or that Facebook never would have bought it?

i wish we would stop using Instagram as the example of the bubble -- fer chrissakes, the company was BOUGHT for $1B, not *priced* at a $1B. there isn't any question about it anymore, since the transaction HAPPENED. you may question whether FB overpaid, but it certainly isn't an unsustainable valuation issue, it was SOLD. period, end of that discussion.

Here's another thing I think is motivating pro-bubblers: They (we, whatever) feel like they see the reemergence of a familiar and particularly vile strain of startup culture. Startup DUDEZ can be hard to take when they believe what they're saying; the cynical startup dude, though, is totally loathsome. We MIGHT be compelled to exaggerate the severity of the bubble because we distrust and even despise the people who represent it. The bubble discussion, I think, can be a proxy for that.

the more relevant issue(s) to discuss are: (1) are there companies at incubation, seed, series A/B/C, or pre-IPO being "overpriced" by investors, (2) is that happening at an "unsustainable level" (ie, at some point will it be re-priced lower), and (3) is the trend towards more or less of that occurring now or in the future? let's focus on those 3 discussions. my answers: 1) a little bit, primarily at B & C rounds, 2) no it's not unsustainable, 3) perhaps a bit more frequent, but not rampant.

And that's why I concentrated on the accusation in Bilton's piece that all VCs want to do is flip things -- that is the quintessential bubble mentality. Is that statement true though? Do most VCs now just want to flip as fast as they can and not worry about whether there's a sustainable business? And if so, is that any different than it used to be?

I mean in it's current form. It would have developed a different trajectory.

A bubble is a financial event. I don't understand people who try to discuss it without bringing financial evidence into the picture. In particular, in every bubble in the past, P/E ratios of securities bought and sold by non-professional investors were way higher than the historical average. During the dot-com bubble and housing bubble, P/E's were over 40 (for S&P and housing respectively). Current P/Es in tech are a reasonable 17 (historical average for S&P is 15).

@Dave I'm having trouble connecting private funding round valuations with talks of a bubble. How do you see overpriced seed investments correlating to systemic risk?

But Chris, it's a psychological phenomenon too, no? Which is why I think some are so concerned -- they seem to feel that bubble-like behavior in the venture market will have spill-over effects in public markets at some point, thereby creating a bubble. I don't necessarily think that's true, but I think that's the fear.

Yah, but you're talking about publicly traded companies. I don't think we're in a huge dot-com style bubble either. I'm talking more about early-stage valuations, on which I think we sort of agree?

Sure, all markets are driven by human psychology. But the evidence for a bubble shows up in financial metrics. If there is a fear that there *might* be a bubble at some point, then sure, I share that fear, for lots of markets, not just tech. But that's not the arguments I see. I'd love to see a single argument for a financial bubble that actually cites financial metrics (and not of early stage private companies - those have never been valued by VCs on purely financial metrics).

John - Yeah I think seed valuations have gotten high, especially in SV (not so much outside of SV). But in VC there have always been certain stages of investment that are over (and under) valued. Smart investors adapt and move to undervalued stages. When people say "bubble" they imagine a big crash could come that could destabilize the broader economy. I don't see how this could happen if wealthy, non-levered seed investors overpay. I *would* worry if public market P/Es went way up.

Agreed, Chris -- there is a conspicuous lack of hard evidence. In fact, it seems like the latest round of speculation hinges almost entirely on the Instagram purchase.

When FB hits the fear is that their performance will influence market behaviors and introduce a 99-00 level of risk into the broader market based on the current landscape. Personally, I'd like to see more companies going public sooner, but they can't I assume because their financials don't support it...

Eli - fine, then the arguments should be "FB might create a bubble when it goes public" not "we are in a bubble now".

Yeah, bloated seed investments aren't going to lead to a collapse, but one fears that attitudes will trickle up. +1 on Eli's point about FB. Plus the early chatters on JOBS act stuff just reeks of the late-90s rise of the citizen trader.

*pivots in a full circle, money flying everywhere*

OR MAYBE we're just in a startup bro bubble. I've run into so many young people recently who say things like, "yeah, I just wanted to join a startup." Maybe we just fear the startup bros. I do.

John - Agree- I don't think startup fetishism is a good thing either.

One of the signs of a coming bubble could be seen with the high valuation of start-ups. Viddy at $370 million; Foursquare at $700 million; Pinterest at $1+ Billion. All of these companies, and many others, have very little, if any, revenue. When start-ups reach such high valuations, they are left with only a handful of suitors that can acquire them. If there is no buyer, these companies have to go public, which is where the price-earnings ratios become a problem and confidence can wane.

I just hope that the previous bubble (the only one we've actually witness so far concerning tech) has taught people the definition of an early stage company. It would be a shame to let our fears become a self fulfilling prophecy. Anyway, if you're going early, why not get in pre-IPO? Angels and VCs are really in the best spot to extract value imho

I agree, Nick -- if all of those companies go public at those valuations then we would have a problem. But is there any indication that this is actually going to happen? Lots of companies are valued at high multiples and then never go public. And if Facebook or Apple or Google buy them instead, where's the harm in that?

Nick - You are focusing on a small subset of companies. There are thousands of VC-backed companies, the vast majority of which have straightforward business models e.g. B2B software companies, transaction-based B2C companies. In the cases you cite, VCs are betting that new business models will emerge, not that they will flip or IPO the companies w/o revenue. The history of the internet suggests this isn't an unreasonable bet (see e.g. Google).

Mathew isn't that a sick form of validation for the whole lot?

What Chris said above is exactly right. It's a mistake to think all of these companies will *never* monetize in a meaningful way. The same could have been said about Google up to the point where you'd look like an idiot if you said that. I'm not suggesting all of these later stage companies will be Google, but even being 1/10th of Google (in terms of revenues) would be very, very impressive. We're at the tip of the iceberg when it comes to revenue models.

Chris: while i agree SV seed valuations have gotten much higher in last 12 months (particularly YC companies recently), the overall trend for seed valuations outside SV isn't crazy, and with the advent of AngelList our investments have become much less SV-centric. it's still prob 50% of our deals, but non-SV/non-NYC are likely at least 30% of our deals now... and becoming more so especially intl (Brazil/LatAM, India, UK/EU, East Asia).

what i think is probably more of concern is that B & C round valuations might be getting a little overheated (what Nick was citing for a small # of companies), and because larger VC have an incentive to put lots of money to work, there is substantial pressure on many of these companies to reach for higher & higher outcomes. but this isn't unusual, and many of them actually DO have revenue and are kicking ass (AirBnB, Yammer, Dropbox, Box.net, several e-commerce plays, etc). hardly a bubble.

Okay, you people are having a nice time without me, and I"m lost somewhere in Los Angeles, but Mcclure invited me, so I'm going to chime in briefly.

In short, four things:

1) Bubble has become largely meaningless as a tech descriptor. It is a fast-twitch fiber response to economic paroxysms with which people disagree for reasons that they cannot articulate more empirically: It is the financial equivalent of a garbage-can diagnosis, right up there with chronic fatigue syndrome and Morgellons.

My four things continued:

2) There does seem to be more activity at the early-stage than is justified by outcomes, & it is frequently happening at higher valuations than would seem prudent. Having said that, the costs are low, so, in the same way the Cambrian explosion led to most modern forms of life, cheap speciation (with high die-offs) is an unsurprising ecosystem response to incident energy.

My four things continued:

3) As Chris Dixon has said, there does seems to be less money available at Series A than one would expect. But again, this is hard to judge given a) we are still on backside of VC over-investment in 2000 (the ten-year GP cycle) and b) excess company creation at seed level will always give the appearance of under-investment at Series A level.

My four things continued:

4) I do not think we are in a bubble (sic). Yes there is irritating me-too-ishness, & too many journalists turned VCs, & yes, everyone seems to have a seed fund. But, again, lower company creation costs and a more liquid startup market are changing the nature of startups the way decimalization changed capital markets. There will be more activity and lower profits.

Thank you, Professor Kedrosky! Although I know virtually nothing about the Cambrian era, that metaphor of cheap speculation and a high die-off rate seems like a good one for the low end of the VC market. And for what it's worth, I have both chronic-fatigue syndrome *and* Morgellons syndrome.

so @NickBilton: do u think u only modestly misinterpreted @PKedrosky, or SUBSTANTIALLY distorted & misrepresented his perspective in your bubble article?

One aspect no one is talking about involves "quality of revenues." A 98-00 issue was VC money essentially powered revenues btw startups - eg StartupX raises $10m & spends $3m on "user acquisition" buying ads on StartupB. Both startups' models based on incorrect or unsustainable assumptions. When investment spigot stopped, the rev story unraveled.

Do we see this today? A few co's took hits as LivingSocial pulled back on local spending. Other examples positive or negative?

That's a great point, Hunter -- but I think one thing people seem concerned about is startups getting large valuations who have no revenues at all to speak of: Instagram, Pinterest, etc. In that sense, the VC investment is their only source of revenue.

@mathew - if we're just going to look at a handful of companies & extrapolate across the tech sector, i'm getting off this branch :)

I think quality of company revenues is meaningful because it factors into the P/E argument folks are making about public market valuations. If you believe Zynga's revenues are going to go poof, then you believe 15% of FB revenues will disappear, which calls into question not Pinterest but FB, an entity perceived of being a "real business" already.

Pkedrosky - I think everything you say is pretty reasonable. I think we need someone who is an all out bubble believer on this thread!

Most financial bubbles happen because some combination of financial and technical innovation results in the creation of almost infinite credit. In the late 1990s, the version of this was investment dollars coming in, buying users and generating sales for other companies, and then monstrous multiples on users and sales to then raise even more capital.

I have to admit, though, when I see companies that are effectively pre-revenue, but compared publicly purely on a "price-per-user" metric, I get a bit queasy.

I think it is also important to look at human resource factors when thinking of this. Some of you on this thread are responsible for convincing very young people to pursue entrepreneurship, arguably WAY before they are ready. They are taught some basic skills, given a little grooming to make them attractive to follow on investors, and sent to try to run through a wall. The tiny few that succeed are placed on a pedestal and hailed as gods, while the rest are left to fend for themselves. cont>

cont > It is getting harder and harder to find engineers that want to join a company, as all are being sold that they should be the ones that are founding the companies, creating a dangerous dynamic.

In the seed stuff, the variety of responses as to whether there is a bubble are easily explained by how big a standard deviation there is in terms of pricing. On one hand, I've had two-person startups that are just 10 weeks post-founding and still pre-launch demand a note with a $12.5mm cap. In contrast, I did a deal in the last two months with a company that has 15 engineers, a launched product with broad adoption, paying customers, and we closed a priced stock round at $7.5mm pre.

Pkedrosky - Can you defend this statement? Because, really, this is nothing like the 90s public company valuations as a multiple of revenue fuckfest.

"Indeed, this madness was invented in the late ’90s and helped perpetuate the first dot-com crisis. “Mark-to-mystery was developed as a large part of the last bubble, but it’s gotten a lot worse this time around,” Mr. Kedrosky said."

Nick Bilton - regarding "When start-ups reach such high valuations, they are left with only a handful of suitors that can acquire them." - A lack of buyers is an excellent indicator of a not-bubble. The greater fool theory assumes there's always someone dumb enough to pay more.

It's easy to moan about valuation creep on the seed stage deals, and I cringe at some of the entitled attitude I see around these days. However, for all the whining, I will concede that two of my best performing deals ever, Twitter and Instagram, were done at roughly $25mm and $30mm pre respectively. So, what the fuck do I know?

As you guys know, I am also a very active late stage investor. Business on that end is entirely different than in the 90s when I first got to the Valley. Facebook, Twitter, LinkedIn, etc are all real businesses with CAGRs that would make a hockey stick blush and reach for the Viagra.

First, I am pro "very close to a bubble, and here's the final drivers on the horizon":

wallstcheatsheet.com

The final blow off top will come from continued ZIRP, the last of the late Institutional Investors adding "early-stage exposure", Facebook IPO halo, and the grand finale of sheeple adding the last wave of demand via legalized crowdfunding.

The term "proof of concept" has become radically looser since 2008. TechCrunch feels like a stream of deja vu with all the Nth copycats clamoring into the same "hot spaces". How many can really scale and win?

There is too much money chasing too few GOOD ideas and TALENTED teams. Ever rising caps on notes are evidencing this simple supply and demand. The bell curve's top ideas and talent will exhaust at some point.

Yes, it's not 1999 yet, but probabilities for winning seem to be diminishing.

Incubator Bubble? - venturebeat.com

When lower quality entrepreneurs and ideas see solid demand, it's the same as lower quality houses seeing an unreasonable price for value. I've seen two pitches this week for 2-3M pre-money valuations on apps fresh out of beta produced by completely inexperienced entrepreneurs. Really? How many more to-do or fitness apps does the world really need?

Who thinks public tech companies won't lose demand for shares if investors lose money on early-stage bets? Isn't it all tied together? Shit, housing cracked, the debt bubble popped, and the whole world froze.

Which of the Angel/VCs on this thread have stats on the realistic amount of disposable income available for capture by new startups? If you account for currently allocated household and business budgets, how big is the pie for startups? When there are too many startups chasing too little disposable income, we will see some serious down rounds. Could be a couple years, but the destructive side of capitalism will crush redundancy and inferiority.

Also, I think it's safe to say this conversation is debating whether there is a bubble in early-stage companies. Clearly, the Nasdaq is nowhere near 1999 valuations ...