Wolf Richter: Signs That the Startup Bubble is Totally Maxed Out

Yves here. Wolf’s longer original headline to this post focused on how gobsmacked he was to get glossy mail pieces to promote supposedly hot Silicon Valley startups. Apparently, the deemed-to-be-transgressive communications medium (by West Coast standards) was a way to cut through the new venture clutter. But what I found more surprising was how obviously lame these ideas were, yet they’ve all already gotten multiple rounds of funding and have eight figure investments so far.

In the height of the dot-com mania, the promoters were better able to mask the lack of a sound business idea by talking at such a high level of abstraction and using so much jargon that it was just about impossible to know what they were intending to say. Having done tons of meetings through translation, as well as dealing with people who ofter reverted to tech talk that was over my head (both computer technology types and derivatives mavens), I know what it’s like to be party to a conversation you don’t fully understand. But at least it was clear real communication was happening among the other people in the room, even if you didn’t get it all. By contrast, I’d emerge from hour-long dot com meetings reasonably certain that nothing, or at most two ideas, had been presented in that time, but the bright young Internet enthusiasts had managed to cow or anesthetize their audience into not disabling their fog machine.

By contrast, here it is blindingly obvious that there is no there there in these ventures, yet they keep attracting more investors. So are these companies trading sardines rather than eating sardines?

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

As I was finally cleaning out the junk receptacle that my mailbox has become, I found a thick, nearly black envelope among the wadded-up fliers. It was sent to “Resident” and titled “San Francisco Offers.” Kudos. Whoever was trying to get through to me, made it.

It contained six glossy, multicolored sheets, each for a different company. It must have cost a bundle. I was getting ready to toss the packet when I recognized one of the names: these were startups!

But why would startups that plan to disrupt entire industries, invent new paradigms, take mankind to the next level, and make the world a better place for all … why would they resort to expensive, wasteful, dead-tree, old-school junk mail?

Was it a reluctant admission that this old, low-tech stuff works?

There are now 48 pre-IPO startups valued at over $1 billion. Uber, which is currently getting tarred and feathered even on NPR, is sitting on top of the heap, with a valuation of $18 billion. But there are thousands of smaller startups, and they’re all scrambling for money and attention and love.

Their valuations too have been soaring. In 2014, the median Series A valuation – the first major VC money after friends-and-family rounds and seed money – has hit $19 million, which surpassed even on an inflation-adjusted basis the median Series B valuations 10 years ago, according to Tomasz Tunguz, a partner at VC firm Redpoint Ventures. And Series B valuations now exceed Series C valuations from 10 years ago. Everything has moved up. Big money is gushing in all directions.

Some of these millions are for startups not to develop a better mousetrap that would disrupt, but to buy other startups. So messaging startup Kik Interactive just announced that it had raised an additional $38.3 million, for a total of $70.5 million, and that it would blow some of this money on yet another overvalued messaging startup, Relay.

Much of the remaining money is spent, not on building the newest mousetrap, but on advertising. Facebook is the biggest beneficiary of this VC-funded money flow to the point where Mat Honan at Wired suggested that “if the app bubble pops, Facebook’s money machine could seize up – just as it had happened to magazines a decade before.”

So I look through the glossy sheets of paper from another era. On top, a delivery service called Minibar that delivers wine, spirits, and beer “in 30-60 minutes.” Perfect for those desperate situations when you’re too plastered to make it to the store yourself. The inducement: “$10 off your first delivery.” Its seed round – the angel investors that get you started – wasn’t $100,000 or so, but a whopping $1.8 million, a month ago! They’re already blowing some of this money on glossy flyers.

Then there was on-demand home-cleaning and repair service Handy. It has racked up $45.7 million in four rounds, and some of it was plowed into two acquisitions. Handy is currently in the news, not for inventing the next big thing or disrupting something, being a latecomer in a very crowded industry, but for being already tangled up in a class-action lawsuit over a whole laundry list of alleged labor law violations and other claims. Unperturbed, the coupon promises, “Only $29 for your first 2-hour home cleaning.”

And another delivery service. Food. They sprout like mushrooms. A while ago, Google was partnering with our local Costco for a similar thing. Amazon is dabbling in food delivery. Heck, Safeway has been doing it for years. OK, this one is different…. Blue Apron delivers a recipe and the required ingredients all together. So, two eggs, a pinch of salt…. It received $58 million in three rounds, including $50 million in April!

And another delivery service. This one for your pooch. You choose a dog size and a plan, and you get a BarkBox “of treats and toys” delivered every month. The eponymous company received $21.7 million in four rounds, including $15 million in July.

And another delivery service. Enticement: “Get $20 off $80 on your first order.” Boxed, an “online wholesale club,” received $7.6 million in two rounds, including $6.5 million Series A in May. It’s as if the money-spigot had been opened all the way this year, and no one can figure out how to shut it.

The last sheet shows a very pretty girl dressed in not a lot of clothes, sitting all by herself in the middle of the glossy sheet, looking longingly and with a mysterious smile right at me. There is no text. A girl delivered to my house? They got my attention.

I flip the sheet over. First thing I see is a “$50 credit.” I have to go to Casper.com to claim it. Then I see it, on the left, the word “mattress.” I re-check the front. Sure enough, the white surface the girl is sitting on is a bare mattress.

Casper received $15 million in two rounds, including $13.1 million in August. Money sloshing all over the place this year. None of these companies invented anything that hasn’t been done before. There are no barriers to entry, and anyone can jump right in and offer the exact same thing. None of them are tech companies though they have apps and websites. This is how they’re going to disrupt. With glossy junk mail.

And who put all this together? In tiny print at the bottom of the envelope, there is a URL, mailisback.com. Turns out, this is a nearly information-less website that lists the firm’s eight clients – the six startups in this mailer plus two others. The URL appears to be three months old. It doesn’t say who owns it. But it appears to be another startup, probably flush with money like its eight startup-clients, ready to disrupt, but this time the old-fashioned way, with junk mail made of glossy dead trees.

Hence the meme of startups raising money to blow on advertising, while other startups have formed to take this advertising money off their hands, and the money goes around from one startup to the next, and ad-tech startups offer their services, and much of it ends up at big media companies like Facebook. And when these startups run out of ideas, they buy each other. And all of this at valuations that make otherwise sane people shake their heads uncontrollably. This is what a bubble looks like after it has been inflated to the extreme. It’s a lot of fun – till the money dries up.

There’s a new meme about the markets in a crummy global economy where everything is overvalued. Read…  It’s Official: Party Now, Apocalypse Later

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  1. ambrit

    I can’t help it. About the time I finished this, I started humming “Springtime for Hitler” under my breath. I can totally see Zero Mostel, Gene Wilder, and Kenneth Mars standing on the stage doing a TED talk about IPO investing. “Prisoners of Love” anyone?

    1. RepubAnon

      Yes, when sure-fire investment opportunities are showing up in bulk mail addressed to “Occupant”, it’s like the end of a party where the last person leaving gets stuck with the check. Somewhere, Dandy Don Merideth is singing “Turn Out the Lights, The Party’s Over” on the current bubble.

      1. ambrit

        Ah yes. Dandy Don and Howard Cosell. The present state of play in finance would be the perfect venue for those two. Imagine if some of the so called regulators had the combativeness and tenacity of those two. They would surely call out kayfabe when they saw it. Thanks for that. I haven’t watched football on television in years. At least those announcers were up front about the proceedings they were commenting on; It’s all just a game folks!

  2. TheraP

    Several thoughts:

    1. Somebody could usefully gather up the abstractions, code words and lingo that go into various modes of propaganda, meant to sway votes, open wallets, hypnotize us – the better to sell nonsense to the unwary. This happens in every field. And it’s best purveyors are sociopaths.

    2. Dog walk: a new start-up that will show up in 15 minutes to walk your dog.

    3. Paper Trail: this start-up will deliver a dog in 15 minutes to grab your paper from the lawn and deliver it to your door.

    4. Mail Dog: this start-up uses dogs fully trained to open your mailbox and deliver the contents to your door – in 15 minutes. (For an extra charge, the fully trained dog will sort your mail, right there at the mailbox, into two piles: one for the trash, another for you. Trash mail to be deposited into the nearest trash can. Real mail, delivered to your door.). Mail Dog will use its initial funding of $1Billion developing a program to teach dogs to read.


  3. David Lentini

    Having lived in the Valley and Bay Area from ’89–’07, I remember a sense of intellectual relief when the bubble popped, thinking that all of the B.S. would finally get shoveled from the stables, and the mob of hucksters and carpetbaggers who made a mockery of the serious scientsts and engineers who made real inventions would have to get real jobs selling used cars and aluminum siding. But “Bubbles” Greenspan had a diffrerent idea of the economy, one that was built on a foundation of garbage for the purposes of the über hucksters and super-carpetbaggers, and simply inflated another one of his signature bubbles.

    And so, we have what we should call the “STD Economy”, one that left untreated only gets more painful and more infectous.

    1. susan the other

      Plus a squillion. Propaganda must scale all the distrust. Until it cannot. The thing I like about calling for deliveries is that it reduces al the cars on the road, not to mention the drunk drivers. The delivery of emergency booze businesses should expand into hygiene kits and sleeping bags. Maybe viable for a decade or so. But here’s what I really like about this post: it portends the future reality of transportation. We want to recycle all our private cars; manufacture no more cars whatsoever; and face serious fines for trying to drive an unlicensed vehicle in the wee hours of the night. Yes. This sounds like some crazy service but it is not. It is a very sound proposition.

  4. Dino Reno

    Coders, marketers, and developers are all so busy in the City working on disruptive tech, they don’t have time to shop, clean or feed the dog. Bingo, a startup is born. In the distant past, these techies had moms and dads who performed these tasks, but living on your own presents a whole new set of challenges. Since money is no object, all this drudgery can be farmed out to a temp slave society via an app. In their insular world, it all makes sense.

    I’m pitching an app that will find a person your exact same size who will go to stores and try on clothes for you.
    I’m calling it “Dummy.” First round of funding is almost complete. IRAs and 401Ks gladly accepted.

      1. RUKidding

        It’s a precarious way to earn a living, but it’s probably possible to survive on the rates advertised. Basically they are small time entrepreneurs, but I believe that there is a true need for this kind of service in high society towns like LA and NYC, where the mega rich go out just about every night. The ladies truly do not have the time to do their own shopping and wardrobe choosing (as amazing as that might seem).

        That said, I have a friend who did design and other work (her own company) in LA and did well enough in the 80s/90s, but it got harder for her to keep up and survive like this. Now “reduced” (her words) to working for the state govt in a job she’s not fond of, but it pays the bills and is reliable.

        Tough being a small-time entrepreneur not matter what fairy tales the Ayn Rand types want to spout.

        1. ambrit

          Thanks for the feedback. I’ve tried my own small scale plumbing repair work, but the margins were pretty slim. Also, the cost of living here isn’t anywhere as steep as on the West coast.
          Ayn Rand was a fairy tale herself. It’s funny how her acolytes don’t seem to talk much about the nine striving entrepreneurs who go belly up and or die for each ‘success’ story they cite. The idea is to be better than the beasts, not like them. Else, “who should ‘scape whipping?”

  5. MikeNY

    Disruptive I think has moved from meme to uber-cliche. When there’s a start-up with disruptive shoe-shine technology, I guess we’ll be close to the end…

    At least we’re getting some rain.

    1. RepubAnon

      We’ll probably start seeing meta-disruptive industries just before the final collapse – but I agree: “disruptive” is the new “dot.com” for new companies.

      1. ds

        “Disruptive” is a B.S. CEO term. It means breaking a system with the aim of pointing out the weak points, only to break it again. It’s another B.S. excuse for CEOs being “Masters of the Universe”. In reality, the whole edifice eventually is reduced to non-functionality. There’s only so much blood to squeeze from a rock.
        I guess in the world of tech, it means figuring out a way to reorder the mundane or offer an alternative. The vast majority is non-sense.

  6. Jim Haygood

    During the madness of 1999, a wry ad on Bloomberg radio featured two young dudes chatting about their stock market punts. One of them recommended a tech start-up that ‘already had earnings.’

    ‘Earnings? EWWWW!‘ objected his interlocutor. With reason: earnings-free (and preferably revenue-free as well) IPOs were beating the living crap out of the hokey old sales ‘n profits model in 1999.

    Fundamentals are irrelevant during bubbles (as poor Dr. Hussman is rediscovering for the third time in his bubble-fighting investment career). This is the profound derangement of the economy produced by Federal Reserve easy money. You know the rest of the drill — the panic, the crisis, the layoffs, the bailouts, the extended unemployment benefits, the $2 trillion deficits.

    Who ever thought free money would be so damned expensive?

      1. Jim Haygood

        He laffed so hard the day Lehman died, they had to lock him in a padded room on intravenous tranks.

        Unfortunately it didn’t make him any money, since he was hedged but not short. Long Treasuries are what really cranks in a crisis.

    1. GrkStav

      “This is the profound derangement of the economy produced by Federal Reserve easy money.”

      I see this quite a bit, too much actually. Precisely how does “easy” (i.e. cheap) money PRODUCE “the profound derangement of the economy”? If interest rates were higher then all the actual, reasonable, really productive business enterprise propositions would magically appear, and offer a sufficient margin such that they would be funded?

      Low cost of money, by itself, creates bupkus, let alone “the profound derangement of the economy”.

      1. c1ue

        One of the reasons for the explosion of valuation – which by the way is heavily skewed to a handful of startups – is institutional money. The returns offered by bonds and even the stock market are such that many large funds are now putting large sums into startups – and the herd-like nature of these types of investors means that they tend to cluster around the “sure fire” opportunities.

  7. NotSoSure

    Last time it was the Alibaba IPO that supposedly marked the top and then now this. The market will never top since the Fed’s probably buying stocks secretly. One just has to see the pretty regular pattern of VIX slamming and market ramp on super low volume every day (almost) near the close of market. We still then have to go through the phase of the Fed buying stocks openly just like the BoJ. I think Dow 30K and Nasdaq 10K will be a reality this time around.

    1. Jim Haygood

      Shiller’s CAPE (the market’s P/E ratio on 10-year average earnings) gives us some capability to compare the seductive sheen of bubbles in different eras.

      Currently it’s at 27.09. In Sep. 1929, it reached 32.56. In Dec. 1999, it soared to an eye-popping 44.20, as Magoo Greenspan protected us from the Y2K bug with the Y2K bubble.

      Taking 1929 as the more ‘conservative’ target for J-Yelzebub to shoot for implies a further 20 percent rise to S&P 2,480 and Nasdaq 5,665.

      If we’re gonna party like 1999, then it’s a 63% blast to S&P 3,367 and Nasdaq 7,700. But heed this warning:


  8. Jackrabbit

    Naked Capitalism “Quelle Surprise!” App: tracks pitchfork sales at your location.

    The “gift for those who have everything”, this holiday season.

    H O P

  9. Jay M

    A friend of mine accidentally tried a new app going around called “Konzentrationslager.com”. He figured it was a beer delivery service, or maybe powdered instant beer, how cool would that be? Disruptive. Quickly he found himself surrounded by four SS types sporting grease guns and given an offer he couldn’t refuse to enter a foul smelling black maria. Talk about disruptive. He found himself, after being given prison garb, in an undisclosed airBNB pad sporting barbed wire, gun towers and a personal quarry. Assigned to back breaking labor and deprived of all assets, he asked one of the guards what was up. Turns out it was all a mistake. He wasn’t their type, so they gave him a cardboard box to live in and dumped him on skid row.

  10. Larry

    While I agree with the thrust of the article that we’re probably nearing the peak of the bubble, I disagree that Facebook ad sales are going to be hurt by a lack of ads for apps. Facebook ad sales are only going to be hurt if advertising budgets take a major dive. Facebook it banal and boring, but everybody is there. It’s akin to the world’s biggest newspaper, that everyone glances at even if they don’t read it in depth. And if you have wares to sell or brands to market, you’ll spend your money at Facebook, because everybody is there.

  11. RUKidding

    plus ça change, plus c’est la même chose

    During the late 90s dotcom insanity, I was less familiar with the “system.” But I knew something was rotten in Denmark, uh, Silicon Valley. Frankly, most of what was happening made absolutely no sense. That was my first clue. I’ve had an investment portfolio for many years, and I resisted the siren call to sell all and buy tech stocks. Warren Buffet’s a shyster-crook, but he has offered some reasonable advice to the small fry. Diversify and stick with, to the best of one’s capabilities, one can know somewhat reasonably well.

    I suffered not too much in the dotcom bust and learned lessons. Been witnessing this latest b.s. in Silicon Valley and SF with an extremely jaded eye. Figured it was only a matter of time before it all goes south, just like the last time.

    I don’t know what it is about SF/SV and what Kool Aid they drink there. I go to SF periodically, and just like the last boom, it’s a miserable place to visit right now. Scores of hipsters with their numerous expensive devices plugged into every orifice, running around in expensive but ever-so-ironic jaded clothing (perhaps purchased for them by personal bot-shoppers?), all taking Uber and Lyft to their various hip but ironic and mucho expensive destinations.

    Bleah. I stay away as much as possible and wait out the bubble bursting. Once that happens SF might become a decent place to visit again. Loath the bubbles. Ruins the ambiance.

    1. MikeNY

      Yah, the influx of SV money and the construction boom in SF right now is epic… it’s changing the city, and not all for the good.

  12. bob

    “But it appears to be another startup, probably flush with money like its eight startup-clients”

    Or, it could be a vehicle for looting.

  13. Waking Up

    It would be interesting if data was compiled on who, how many investors, and how much investment is made on short selling of tech stocks.

  14. Bob Morris

    The real estate bubble in San Jose / S.F. has slowed in just the past couple of months. Properties that would have sold quickly 6 months ago aren’t.

  15. c1ue

    One thing which is different this time is that there is much more focus on gaming the system by tying into an incestuous spiral between overpaid tech workers and service providers to show great initial revenue numbers and revenue growth.
    Last time around, it was mostly independent small providers which gained – event management, restaurants, bars, etc – but this time there is a clear vein of startups targeting reharvest of venture funding via highly paid startup employees as well as highly paid existing tech company employees.
    For example: there are more than a half dozen different food delivery startups who have each raised AT LEAST $10M; these all can show amazing revenue growth numbers, but they are also all focused on the tech epicenters – primarily San Francisco/Palo Alto. $250K/year Ruby-on-Rails programmers can spend a lot of money on delivered food, booze, or whatever – but it is far from clear to me that this model propagates well across all of US society.
    Another category are services seeking to piggyback on the large “disruptive” companies – Handy is a great example. Their entire model consists of following Airbnb around – but the regulatory schema in various cities is starting to react just as is happening in the ride share world which is a serious risk factor for Airbnb, and therefore for Handy.
    We’ve already seen fails – Fab for example – but we’ll see more.
    Sure, there will almost have to be some companies of value created, but beware those which look great because they’re sucking secondhand on venture funding which also happens to correlate well with existing tech company valuation.

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