This link has been bookmarked by 48 people . It was first bookmarked on 31 Jul 2006, by Kevin Wen.
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12 Dec 17
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What made our earnings bogus was that Yahoo was, in effect, the center of a Ponzi scheme. Investors looked at Yahoo's earnings and said to themselves, here is proof that Internet companies can make money. So they invested in new startups that promised to be the next Yahoo. And as soon as these startups got the money, what did they do with it? Buy millions of dollars worth of advertising on Yahoo to promote their brand. Result: a capital investment in a startup this quarter shows up as Yahoo earnings next quarter—stimulating another round of investments in startups.
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As in a Ponzi scheme, what seemed to be the returns of this system were simply the latest round of investments in it. What made it not a Ponzi scheme was that it was unintentional. At least, I think it was.
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there were presumably people in a position, if not to create this situation, to realize what was happening and to milk it.
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there was a core of truth. You need that to get a really big bubble: you need to have something solid at the center, so that even smart people are sucked in.
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Over the long term, what the Bubble got right will be more important than what it got wrong.
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1. Retail VC
After the excesses of the Bubble, it's now considered dubious to take companies public before they have earnings. But there is nothing intrinsically wrong with that idea. Taking a company public at an early stage is simply retail VC: instead of going to venture capital firms for the last round of funding, you go to the public markets. -
The stock of a company that doesn't yet have earnings is worth something. It may take a while for the market to learn how to value such companies, just as it had to learn to value common stocks in the early 20th century. But markets are good at solving that kind of problem. I wouldn't be surprised if the market ultimately did a better job than VCs do now.
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Going public early will not be the right plan for every company. And it can of course be disruptive
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just as the market will learn how to value startups, startups will learn how to minimize the damage of going public.
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2. The Internet
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Recognizing an important trend turns out to be easier than figuring out how to profit from it. The mistake investors always seem to make is to take the trend too literally.
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In fact most of the money to be made from big trends is made indirectly. It was not the railroads themselves that made the most money during the railroad boom, but the companies on either side, like Carnegie's steelworks, which made the rails, and Standard Oil, which used railroads to get oil to the East Coast, where it could be shipped to Europe.
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what we've seen so far is nothing compared to what's coming. But most of the winners will only indirectly be Internet companies
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3. Choices
Why will the Internet have great effects? The general argument is that new forms of communication always do. They happen rarely (till industrial times there were just speech, writing, and printing), but when they do, they always cause a big splash. -
The specific argument, or one of them, is the Internet gives us more choices.
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Winning depended not on doing good work, but on gaining control of some bottleneck.
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The exciting thing about the Internet is that it's shifting everything in that direction. The hard part, if you want to win by making the best stuff, is the beginning. Eventually everyone will learn by word of mouth that you're the best, but how do you survive to that point? And it is in this crucial stage that the Internet has the most effect. First, the Internet lets anyone find you at almost zero cost. Second, it dramatically speeds up the rate at which reputation spreads by word of mouth.
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4. Youth
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The most important quality in a CEO is his vision for the company's future. What will they build next? And in that department, there are 26 year olds who can compete with anyone.
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increasingly the founders of the company are the real powers, and the grey-headed man installed by the VCs more like a music group's manager than a general.
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5. Informality
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A company that made programmers wear suits would have something deeply wrong with it.
And what would be wrong would be that how one presented oneself counted more than the quality of one's ideas. That's the problem with formality. -
dressing up is inevitably a substitute for good ideas.
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6. Nerds
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as technology becomes increasingly important in the economy, nerd culture is rising with it.
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It's not because people are realizing that substance is more important than marketing. It's because the nerds are getting rich. But that is not going to change.
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7. Options
What makes the nerds rich, usually, is stock options. -
Equity is the fuel that drives technical innovation.
Options are a good idea because (a) they're fair, and (b) they work. Someone who goes to work for a company is (one hopes) adding to its value, and it's only fair to give them a share of it. And as a purely practical measure, people work a lot harder when they have options. I've seen that first hand. -
If there is a problem with options, it's that they reward slightly the wrong thing.
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What you want is to increase the actual value of the company, not its market cap. Over time the two inevitably meet, but not always as quickly as options vest. Which means options tempt employees, if only unconsciously, to "pump and dump"—to do things that will make the company seem valuable.
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when I was at Yahoo, I couldn't help thinking, "how will this sound to investors?" when I should have been thinking "is this a good idea?"
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Maybe options should be replaced with something tied more directly to earnings.
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8. Startups
What made the options valuable, for the most part, is that they were options on the stock of startups. -
Originally a startup meant a small company that hoped to grow into a big one. But increasingly startups are evolving into a vehicle for developing technology on spec.
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employees seem to be most productive when they're paid in proportion to the wealth they generate. And the advantage of a startup—indeed, almost its raison d'etre—is that it offers something otherwise impossible to obtain: a way of measuring that.
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In many businesses, it just makes more sense for companies to get technology by buying startups rather than developing it in house. You pay more, but there is less risk, and risk is what big companies don't want.
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9. California
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What makes the Bay Area superior is the attitude of the people.
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The atmosphere varies from city to city, and fragile organisms like startups are exceedingly sensitive to such variation. If it hadn't already been hijacked as a new euphemism for liberal, the word to describe the atmosphere in the Bay Area would be "progressive." People there are trying to build the future.
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Silicon Valley may not be the next Paris or London, but it is at least the next Chicago. For the next fifty years, that's where new wealth will come from.
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10. Productivity
During the Bubble, optimistic analysts used to justify high price to earnings ratios by saying that technology was going to increase productivity dramatically. They were wrong about the specific companies, but not so wrong about the underlying principle. I think one of the big trends we'll see in the coming century is a huge increase in productivity.
Or more precisely, a huge increase in variation in productivity. -
Technology is a lever. It doesn't add; it multiplies. If the present range of productivity is 0 to 100, introducing a multiple of 10 increases the range from 0 to 1000.
One upshot of which is that the companies of the future may be surprisingly small. -
small groups are intrinsically more productive, because the internal friction in a group grows as the square of its size.
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The question is not whether you can afford the extra salaries. Can you afford the loss in productivity that comes from making the company bigger?
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What's New
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is there any overall theme? There does seem to be: that in the coming century, good ideas will count for more. That 26 year olds with good ideas will increasingly have an edge over 50 year olds with powerful connections. That doing good work will matter more than dressing up—or advertising, which is the same thing for companies. That people will be rewarded a bit more in proportion to the value of what they create.
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Good ideas always tend to win eventually. The problem is, it can take a very long time.
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even a small increase in the rate at which good ideas win would be a momentous change—big enough, probably, to justify a name like the "new economy."
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Notes
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if the value of a stock is its future earnings, you can't tell if it was overvalued till you see what the earnings turn out to be.
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18 Jan 12
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September 2004
(This essay is derived from an invited talk at ICFP 2004.)
I had a front row seat for the Internet Bubble, because I worked at Yahoo
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03 Aug 08
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21 Mar 08
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23 Apr 07
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18 Apr 07
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26 Oct 06
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31 Jul 06
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04 Jan 06
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01 Nov 05
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25 Jun 05
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04 Feb 05
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18 Nov 04
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21 Oct 04
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14 Oct 04
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I had a front row seat for the Internet Bubble, because I worked at Yahoo during 1998 and 1999. One day, when the stock was trading around $200, I sat down and calculated what I thought the price should be. The answer I got was $12. I went to the next cubicle and told my friend Trevor. "Twelve!" he said. He tried to sound indignant, but he didn't quite manage it. He knew as well as I did that our valuation was crazy. ... Now anything that became fashionable during the Bubble is ipso facto unfashionable. But that's a mistake-- an even bigger mistake than believing what everyone was saying in 1999. Over the long term, what the Bubble got right will be more important than what it got wrong.
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I had a front row seat for the Internet Bubble, because I worked at Yahoo during 1998 and 1999. One day, when the stock was trading around $200, I sat down and calculated what I thought the price should be. The answer I got was $12. I went to the next cubicle and told my friend Trevor. "Twelve!" he said. He tried to sound indignant, but he didn't quite manage it. He knew as well as I did that our valuation was crazy. ... Now anything that became fashionable during the Bubble is ipso facto unfashionable. But that's a mistake-- an even bigger mistake than believing what everyone was saying in 1999. Over the long term, what the Bubble got right will be more important than what it got wrong.
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10 Oct 04
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09 Oct 04
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05 Oct 04
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04 Oct 04
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The fact is, despite all the nonsense we heard during the Bubble about the "new economy," there was a core of truth. You need that to get a really big bubble: you need to have something solid at the center, so that even smart people are sucked in. (Isaac Newton and Jonathan Swift both lost money in the South Sea Bubble of 1720.) Now the pendulum has swung the other way. Now anything that became fashionable during the Bubble is ipso facto unfashionable. But that's a mistake-- an even bigger mistake than believing what everyone was saying in 1999. Over the long term, what the Bubble got right will be more important than what it got wrong.
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01 Oct 04
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30 Sep 04
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I had a front row seat for the Internet Bubble, because I worked at Yahoo during 1998 and 1999. One day, when the stock was trading around $200, I sat down and calculated what I thought the price should be. The answer I got was $12. I went to the next cubicle and told my friend Trevor. "Twelve!" he said. He tried to sound indignant, but he didn't quite manage it. He knew as well as I did that our valuation was crazy.
-
-
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The fact is, despite all the nonsense we heard during the Bubble about the "new economy," there was a core of truth. You need that to get a really big bubble: you need to have something solid at the center, so that even smart people are sucked in. (Isaac Newton and Jonathan Swift both lost money in the South Sea Bubble of 1720.) Now the pendulum has swung the other way. Now anything that became fashionable during the Bubble is ipso facto unfashionable. But that's a mistake-- an even bigger mistake than believing what everyone was saying in 1999. Over the long term, what the Bubble got right will be more important than what it got wrong.
-
-
-
The fact is, despite all the nonsense we heard during the Bubble about the "new economy," there was a core of truth. You need that to get a really big bubble: you need to have something solid at the center, so that even smart people are sucked in. (Isaac Newton and Jonathan Swift both lost money in the South Sea Bubble of 1720.) Now the pendulum has swung the other way. Now anything that became fashionable during the Bubble is ipso facto unfashionable. But that's a mistake-- an even bigger mistake than believing what everyone was saying in 1999. Over the long term, what the Bubble got right will be more important than what it got wrong.
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29 Sep 04
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Now the pendulum has swung the other way. Now anything that became fashionable during the Bubble is ipso facto unfashionable. But that's a mistake-- an even bigger mistake than believing what everyone was saying in 1999. Over the long term, what the Bubble got right will be more important than what it got wrong.
By the end of the Bubble, companies going public with no earnings were being derided as "concept stocks," as if it were inherently stupid to invest in them. But investing in concepts isn't stupid; it's what VCs do, and the best of them are far from stupid.
I think the Internet will have great effects, and that what we've seen so far is nothing compared to what's coming. But most of the winners will only indirectly be Internet companies; for every Google there will be ten JetBlues.
The exciting thing about the Internet is that it's shifting everything in that direction.
As always, business has clung to old forms. VCs still seem to want to install a legitimate-looking talking head as the CEO. But increasingly the founders of the company are the real powers, and the grey-headed man installed by the VCs more like a music group's manager than a general.
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