Last week’s Economist included an article about one of the neighbors. Y Combinator is an incubator/startup boot camp/venture capital provider in Mountain View that has become the poster child for people who think entrepreneurship can be reduced to a simple process capped with the standard rich and famous contract at the end. Go read the article, I’ll wait.
Back? Good. Let’s go:
1) I find it singular that of the half-dozen “unicorns” the article cites, not one has gone public or been acquired. These are all privately held companies whose valuation is based on what some entity was willing to pay for a percentage. In 1999, the exit strategy for your company was to go public and cash in with a breathtaking IPO. In 2009, the exit strategy was to sell out to Google, or Facebook, or Apple, or maybe Amazon or Microsoft, or if you’re really desperate, Yahoo. Now, in 2015, the goal seems merely to be to get the highest possible valuation by enticing one VC firm or another to give you the most money for the smallest percentage, thereby “valuing” your company at some astronomical sum. The problem is, not one bit of that is liquid. AirBnB is the highest-valued of these companies, and it certainly seems to have a viable business model and generate revenue from same (legal issues around people using it to go into the hotel business notwithstanding*). But the question becomes: who, if anyone, is going to pay $25.5 BILLION dollars to acquire them? And if they go public, are they really going to offer a hundred million shares at $255 a share on opening day? There are an awful lot of unicorns, so-called, whose expansive valuation almost certainly could not survive exposure to an open market.
2) We’ve defined the tech-sector down to “anything that has an app.” AirBnB is a short-term rental company. Instacart is a food-delivery logistics company. Stepping outside the Y ecosystem, Uber – maybe the poster child for the current bubble – is a taxi company desperately trying to pitch itself as actually being Tinder for cars rather than a taxi company. It’s been said before and better by smarter people than me, but the current model really seems to be one of “think what your mother doesn’t do for you anymore” -> replace all normal communication/commercial infrastructure with smartphone app -> SWEET SWEET FILTHY LUCRE FROM THAT DICKHEAD ANDRESSEN. Nice work, if you can get it.
3) Way way WAY too many of these ideas are a product of regulatory arbitrage, loophole-seeking, and sheer bloody-mindedness. AirBnB is NOT your hotelier. Uber (and Lyft and Sidecar and Gett) are NOT taxi companies. WeWork is NOT a commercial real-estate company. DraftKings and FanDuel are NOT wagering. Instacart and DoorDash are NOT in the food business. If you get work via Uber or GigWalk or Fiverr or TaskRabbit or (fill in app-based task-driven contract-labor service HERE), you are NOT their employee, you just happen to have contracted with this other private party. So we have a bunch of companies which are worth way more than the sum of their profit and assets, surviving on the steady intravenous drip of VC money, dependent on a workforce of people who are absolutely not their employees. How the hell is this supposed to be a viable economic model?
And in the meantime, here is Y Combinator, which the article openly says that “aspiring entrepreneurs clamor to attend…as much for what they learn there as for the stamp of approval and network they can claim when they leave.” As much? Y Combinator has managed to out-Stanford Stanford, and an industry that supposedly scoffs at legacy ideas of credentials and old ways of thinking about pedigree now instead throws an automatic seal of approval behind whoever comes out of this particular three-month boot camp. And it’s desirable enough that two guys from Brazil will spend thirty hours in transit – each way – for the sake of the single ten-minute interview that determines whether or not they will get accepted into the ranks of the Elect. Ten minutes. My scholarship interview for a no-account liberal-arts college in the Deep South took longer than that. But that magic Y is now so coveted that it’s worth spending two and a half full days, round-trip, for the sake of ten minutes to see if the golden finger will bless your idea.
If that isn’t a bubble, I’ll kiss your ass.
* AirBnB is one of those things where they keep pushing the original model, i.e. “let out the spare room and meet people while making a little extra scratch.” We have actually done this. It has worked out well. The problem comes when somebody buys a building, evicts all the existing tenants, and turns it into what is functionally a hotel administered via AirBnB. This was a big part of the backlash that manifested as a couple of voting propositions earlier this month in San Francisco, and I expect it to continue to be an issue in any market where housing supply is constrained and former private accommodations are converted for AirBnB use full-time.