thoughts on the tech bubble
recently i forwarded an article about the purported tech bubble to a friend. see his thoughts below. needless to say, he’s not a VC :)
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Part of the reason the housing bubble lasted as long as it did was because there was no good way to short it. You could short it indirectly by shorting homebuilders, etc., but what you really wanted to do was short the mortgage of the guy down the street who just bought a $500k house on a $50k salary. Until these crappy mortgages got rolled into CDOs on which institutional investors could buy credit default swaps, there was not a good way to short the housing bubble, and thus it persisted much longer than would seem rational. You have the same dynamics here, because even if we think the valuations being put on these businesses are questionable given the size of their total addressable markets and competitive moats (or lack thereof), you can’t short them because they aren’t public. And, just like the housing bubble was fueled by irrationally cheap financing by banks, this current tech bubble is being fueled by cheap capital from the VC industry. After all, when you’re a VC manager and your job is to buy lottery tickets with other people’s money, you just want to buy a lot of lottery tickets, and you don’t worry too much about which lottery you play because ill-informed “investors” are giving you capital and they want it “put to work.”
It used to be that companies went public because that was the best way to monetize their business. However, when you have a venture capital industry that is willing to throw stupid amounts of capital at any business that can tell you a nice story (and with complete disregard for the amount of cash that business can ultimately reasonably generate, even in an optimistic scenario), there is a natural incentive for businesses to monetize themselves to these “greatest fools” rather than going public. Why would any business want to subject itself to a public debate about its merits when there is a pool of fools who look at everything with rose-colored glasses (and ignore fundamentals and competitive dynamics) and are willing to invest other people’s money accordingly?
That’s a long-winded way of saying that there isn’t a good way to short a lot of the things you want to short because the primary reason the valuations are what they are is the inability to short them.
