Getting Dropbox's Act Together

in

I'm not sure what Dropbox has been doing since I last wrote about them almost a year ago. There have been many recent headlines of Dropbox's lowering valuation - it has even been branded a dying unicorn, but that might be a bit extreme (as tech headlines tend to be). To me, the path Dropbox should be taking is so clear that I can begin selling vision pills for flustered founders. At the heart of the matter, Dropbox is a company that wants to provide services for consumers, but lives in a market that only thrives in enterprise. 

Selling cloud storage may have been a good business model five years ago (even then it was questionable), but today, it is downright impossible. Just look at Box's financials (hint: unprofitable). Apple, Google, Microsoft, and Amazon have squeezed out any margins that could have been made out of cloud storage by using their massive economies of scale. Cloud storage is effectively a commodity, and Dropbox needs to forget about selling it to consumers. 

That's not to say things are going to be dire for Dropbox. If you want to compete in this business, you've got to offer more than just some terabytes in the cloud. Dropbox's best bet is to go after enterprise. And what better way to go after enterprise than to go directly for Microsoft Office?

Mailbox > Outlook

Nobody enjoys using the Outlook desktop apps (the mobile app, which was originally Accompli and repurposed to be Outlook, is well regarded). Outlook is a codger, anachronistic piece of software that makes email feel like it's 1999 again. It is cluttered with features that very few people use, existing only because some large enterprise client convinced Microsoft to add it. When Dropbox purchased the email client Mailbox, I was sure they would go after the email space. To my surprise, they didn't. 

People want out of Outlook, so give them an option. What Dropbox needs to do is make a semi-powerful enterprise friendly email client. Start with what you have from Mailbox, and build it out. There's already a productivity angle to Mailbox - all that needs to be done now is to make a Web/Windows client, and add some additional productivity features. This would make it much easier to pierce enterprise IT departments. I'm a Mac guy myself, but I'm not oblivious to the fact that enterprise is still very much synonymous with Windows.

Dropbox > OneDrive

This one is easy. Dropbox is already the best (and most expensive) cloud storage provider. Search is fast, the design is great, and the integration with apps is unparalleled. What's not great is the lack of integration with other Dropbox apps. 

Attaching files to an Outlook email is an extremely clunky experience in most corporate environments. What if you could simply open your Mailbox app (on any platform), click attach, and quickly search your Dropbox account for the file. You can sort-of do this now with the Mailbox iOS/Android apps, but for it to truly be powerful, desktop support needs to be added (Mailbox for Mac is in beta). 

Dropbox Office > Microsoft Office

The Grand Canyon is said to have been formed by the Colorado river 5-6 million years ago. Similarly, Microsoft Office has been formed by Microsoft's slow, iterative, and consistent updates. At this point, I wouldn't be surprised if the history of Office will be as storied as the Grand Canyon. With the exception of Internet Explorer, I doubt there's a more popular and long-lasting piece of software than Microsoft Word and Excel. These two productivity apps dominate in both consumer and enterprise markets, and for good reason. They're extremely powerful, have great support for older versions, and have file extensions everyone can open. This creates a positive feedback loop where people use Microsoft Office because other people use Microsoft Office, thereby guaranteeing that when you send someone a file they will be able to open it.

But as great as Word and Excel are, they're not great productivity tools for working in 2015. With competition from Google Docs, Apple iWork, Quip, and probably another few dozen productivity apps, the age of Microsoft Office is beginning to show. Collaborating on a document in Word with multiple people is not ideal. Inserting and marking up an image in Excel is still too much work. File syncing and concurrency issues can be hit or miss. The mobile apps are powerful but feel heavy. In short, Microsoft Office has many pain points that users would love to get fixed.

Dropbox is getting into this métier already, but not quickly enough. If you open a PDF/Word document in Dropbox, it will allow you to view the document without downloading a local copy and opening it in Adobe Reader/Word. Dropbox also has a very awkwardly succour partnership with Microsoft, whereby you can use Microsoft Office and integrate it with Dropbox. But these are half-steps. What Dropbox really needs to do is create competitor products to Word and Excel. The goal here is not to create a me-too product, but to offer a comprehensive enterprise software package that a CIO would want to purchase for his company. It needs to compete with Microsoft on every front, and win on most (Germany is said to have lost WWII by fighting on too many fronts at once, spreading itself too thin. Dropbox should focus on the above three fronts, and abandon the others such as its photo service Carousel). 

The Business Model

Having a great product without a great business model is very much like having a nice TV with no channels to watch - it doesn't stand on its own. The problem Dropbox has had since day 1 is converting free users to paid users. And they still suffer from the same problem, mainly because the value they offer (storage) is too low. That's why it's so imperative from Dropbox to lock in enterprise users. The first major benefit of enterprise users is that they pony up the money. Second, if you get them stuck in your moat, they stay in your moat. 

This is precisely why I'm suggesting Dropbox go right after Microsoft - it's a proven business model that pays great dividends. It's true that enterprise is not in Dropbox's culture, but that's fine. You can design great enterprise applications with a consumer model in mind (great design, UX). Many people already use Dropbox at work, but it is their personal account. Now it's time for them to charge the company for that service. 

Goodwill and Innovation

in ,

How can you gauge how innovate a company truly is? Is there a metric that comprehensively measures the innovative capacity of a company? It’s a loaded question, I know. 

There are many ways analysts look at the innovation that comes from within a company using their spreadsheets as lorgnettes, but none of the metrics alone answer the question. You can look at cash flows from investing activities to see what assets a company is purchasing to develop future products. You can look at revenue and income growth, which encompass the affects of innovative products and services. Or you can take the holistic view and see how the actual products and services compare to those of competitors (is the Apple Watch innovative compared to the Pebble, Galaxy Gear?). There are probably hundreds of other metrics you can look at, but watch out, don’t get bit by analysis paralysis. 

I decided to take a different approach to gauge the innovation index of a company - one you will not find in textbooks. My approach is simple (Excel bravura seems to be a major trend among analysts. I’m a strong believer the less complexity your financial models contain, the more accurate they are). I’m looking at goodwill on the companies balance sheets and the age of the company. Divide goodwill by age (in days), and you get goodwill acquired per day. The higher the goodwill per day, the more acquisitions a company engaged in over the years. Usually, acquisitions mean external innovation rather than internal innovation, since by definition you are hiring people from outside your company.

If you’re not aware of what goodwill is, don’t worry, we will cover that now. When a company buys another company, they will often pay a premium for the other company. In short, that premium is goodwill. The accounting behind goodwill is rather complex, but I think an example will greatly simplify the idea for you. When Apple acquired Beats, they paid $2.6B for the company. Of this, $2.2B was goodwill. Try to imagine the assets of Beats. They might of had some cash on hand, maybe some accounts receivable, some office space, a few company cars, and a bunch of headphone inventory. They probably also had a good amount of debts in the form of accounts and notes payable. If you add all of the assets, and subtract the liabilities, do you think Beats would be worth $2.6B? Of course not! In other words, Apple paid $2.6B for something that is worth around $400M (net of liabilities). In accounting, everything has to balance. The difference between the price you paid ($2.6B) and the net price Beats is worth ($400M) is goodwill. In this case, Apple added $2.2B ($2.6B - $400M) of goodwill to its books. For the accountants reading, I know this is a gross simplification of goodwill calculations, but work with me here! 

So why does goodwill matter? Well, because it’s essentially external innovation. You purchase innovative, external companies to generate income for you in the future instead of generating it internally with your own employees. There’s nothing wrong with that. In fact, acquisitions are a way of life in some industries. But it’s always better to innovate from within when you can. Normally, older companies tend to start amassing goodwill as they become more bureaucratic, larger, and as a result much slower to innovate. In contrast, younger companies are less bureaucratic, much smaller, and can move fast and break things more easily. They also tend to have much less cash on hand to make the acquisitions in the first place. With all that out of the way, let’s take a look at a few goodwill charts using my simple method. 

For the chart above, I picked a few well-known companies to see how much goodwill they carry on their books. As you can see, IBM and Microsoft lead the way. IBM has been around in some way or another for over a hundred years, so it’s no wonder their goodwill is almost $30B (goodwill can be “impaired” and written off the books, so this $30B is everything that wasn’t written off over the years). Similarly, Microsoft and Intel also accumulated high amounts of goodwill over the years as a result of many acquisitions. Unlike the ancient tech giants, however, Facebook has not been around for decades, and yet it leads the pack in goodwill. This is mostly due to the WhatsApp acquisition, which contained $15.3B of goodwill. It’s also worth pointing out that neither Tesla nor Netflix have any goodwill, which is because they haven’t purchased any companies. In other words, all of their innovation comes from within the company. Finally, look how low the goodwill of Apple is, despite it being older than Microsoft (more on that later). 

This chart is where the interesting stuff begins to appear. The simple goodwill metric I was talking about it evidenced here. While it’s by no means a perfect metric (all metrics have flaws), it attempts to show how much innovation is developed internally versus externally. Goodwill is displayed by the light blue line, while Days Since IPO is shown on the navy bar chart. As you can tell, IBM has been around the longest, and also has the highest amount of goodwill. Next on the list is Microsoft, which is relatively old, but has goodwill that is disproportionately higher to its age (look how much higher goodwill is compared to the age of the company). Intel developed most of its technology internally, since the light blue goodwill line is inside the Days Since IPO bar. I won’t detail every company on the chart, but here are some the caught my eye.

Amazon develops most of its stuff in-house. Relative to the age of the company, Amazon’s goodwill isn’t too high, which means that Amazon hasn’t made many acquisitions. Google has goodwill that is higher than the age of the company, which tells us a lot innovations made by Google were purchased from external companies. For a large and old company, Apple has a remarkably low amount of goodwill. Crazy low, in fact (it would be even lower before the Beats acquisition, which was one of the largest goodwill acquisitions Apple has ever made). In English, we know this means that almost all of Apple’s products and services are developed internally without the help of external purchases. Since its IPO in 1980, Apple has been able to innovate incredibly well. Facebook, by stark contrast, has a goodwill that is literally off the charts, compared to its age. Of course, this is mostly because of one major purchase (two if you count Instagram). Since Facebook is such a young company, it is too early to tell how innovative it is internally, but the data so far suggests it is not. 

There isn’t much to say about this chart other than it’s interesting, but not as insightful as the previous two charts. I divided the total goodwill of each company by its age to get Goodwill Acquired Per Day. Again, look how small Apple’s goodwill compares to the other tech giants (IBM, Microsoft, Intel, and Google).

Finally, I took the goodwill and divided it by the total assets of each company. While this is a deeply flawed metric, it does attempt to communicate a powerful point: the percentage is how much a company relies on external innovation (see the caveat emptor below for more disclosures before relying too heavily on these metrics). 43% of Facebook’s assets are goodwill - crazy! In contrast, only 2% of Apple’s assets are goodwill. 

Coda

What I like about these goodwill charts is that they confirmed what I always suspected. It’s best to compare the companies as a cohort. IBM is in its own cohort because it’s by far the oldest company. Intel, Microsoft, and Apple are the next oldest cohort. All of the other companies are the third, and youngest cohort. Feel free to make as many cohorts as you like - my only advice is to make a cohort in the first place because it would be foolish to compare IBM to Facebook (IBM has over 100 years on Facebook!). Just to provide an example of how this could be done, let’s take the second cohort of Intel, Microsoft, and Apple. Their goodwill as a percentage of total assets is as follows: Intel 12%, Microsoft 12%, Apple 2%. Judging by the much lower percentage Apple holds, you can draw the conclusion that Apple makes less acquisitions and thus develops more innovations internally. Intel and Microsoft, on the other hand, are just about equal in their reliance on external acquisitions. If you want to beef this metric up, I would even recommend you make a historical comparison of goodwill for these companies just to see how write-downs have impacted goodwill over the years. 

Caveat Emptor

Before any critics start commenting on this post, allow me to point out the major flaws of this goodwill metric. First, it uses goodwill as of the most recent balance sheet date. This means that if any goodwill was written off in prior periods, the charts above will not factor that in. Next, there is no weighting for the age of the companies. It would be most interesting to compare all of the companies as if they were the same age (Apple at 2 years old, Microsoft at 2 years old, Facebook at 2 years old, etc) so that we see how goodwill compares relative to the age of each company. I wasn’t able to find financial records dating that far back for the older companies, granted I only checked EDGAR archives and could probably find them with more time (perhaps in a future post). More caveats still - goodwill can be the result of overpayment. Finally, it’s a valid argument that goodwill does not imply a company is not able to innovate internally. Perhaps a company with a large amount of goodwill acquired many companies, but nothing innovative came out of them, and instead, the innovation came internally. This is entirely possible, but I cannot measure that in a spreadsheet. There are many more flaws to this metric, but it still gives us an interesting look into goodwill. I recommend adding it to your arsenal of metrics to gauge a company by.

Chart Dump

A Parable of Decline

in

The following is a parable which shows how a company can go from success to failure over the court of its life. It is a simplification of reality. Despite this, this story is still able to teach us a valuable lesson.

Revenues are inflows of money. If you sell a bar of soap, you get money. That money is revenue. Expenses are outflows of money. The money it cost you to make that bar of soap is an expense. Why would you ever get into the business of selling soap? Well, you probably thought you could sell the soap for more than it cost you to make it, earning you a profit. Of course, maybe you think your bar of soap will change the world, so you sell it for less than it costs to make. That is, of course, until you run of money. Almost all businesses operate with a profit motive - they're in it to make a buck, not spend it. 

Assuming you're a rational human being who wants to support yourself and your family, buy nice things, and take beautiful vacations to countries you've only seen on the June page of the calendar, you'll also start a business with a profit motive. So let's continue with our soap business, which hit it big in the last few months. There's been a nasty virus in your town, so everybody started washing their hands dozens of times a day. And luckily for you, they starting buying boxes and boxes of your soap! Revenues on revenues on revenues, you think in delight, as each customer packs a box of soap into the trunk of their car. Since you're selling so many bars of soap now, you were able to negotiate down the price of materials to make the soap, as you are now buying in bulk. Thus, you are making even more profit on every bar of soap you sell! 

The virus spreads to the neighboring town, and the citizens of this town also start washing their hands dozens of times per day. If somebody loses, somebody also wins. The winner, in this case, is you, since this the citizens of the neighboring town start coming to you for your miraculous bars of soap. This town is so big, however, that you can't make enough bars of soap to meet the demand. So you take your revenues, and you build a soap factory in your backyard. In business terms, you reinvested the revenues you made from selling the bars of soap back into the business in order to build a new soap factory. With this new soap factory, you can make a hundred boxes of soap per day, which is more than enough to meet the demand of both towns. 

After many years, you're a soap magnate. The virus infected the whole world, and your soap company transformed from a factory in your backyard to a global soap enterprise. In the time since, you've become a public company - you gave shares to your grandma, grandpa, and mom, dad, and your brother, since they loaned you money to build your second and third soap factories. Since everybody in the world is infected, the bars of soap you sell every year is almost the same. At this point, your revenues are constant since you haven't changed the price of soap, and your expenses are slightly decreasing each year, as you become better and better at making soap. And since your revenues are higher than your expenses, your soap company is extremely profitable and earns a net income every year, which you deposit in the fattening bag under the mattress. 

Personally, you're extremely happy with your soap business. As a kid, you've always wanted to let the whole world enjoy the best soap it can buy, and you've completed your mission. You've also had dreams to travel all over the world, and finally, you have the means to afford it. Now, your soap business shows no signs of slowing down, but it's not growing either. And since you've been profitable for so long, you start giving some of the profits you made to your grandma, and grandpa, mom and dad, and of course, your beloved brother. They believed in you early on, and now you reward them for their patience. This reward, in business-speak, is called dividends. 

Your grandma and grandpa are very happy with the dividends your pay them every year. They just want a steady flow of cash that they can use every year for their vacation to Florida. And your mom and dad are happy with your dividends too, since they are getting ready to retire and want a cushion of cash to use when they stop working. Your brother though, he isn't happy. Bro thinks that you should make a new line of soap, called shampoo, so that revenues can start growing again. Bro doesn't care that you accomplished your mission of providing the best bars of soap to the world - he wants you to start a new mission of providing the best shampoo to the world. Not because he really cares about the shampoo, but because he wants even higher revenues, and hopefully juicier profits. 

Now your regret ever giving shares of your company to bro. You are happy with the business the way it is, and you don't want to expand it for the sake of making money. Bro, however, is now a shareholder of your soap company, and he has a say in things. When you gave shares to grandma, grandpa, mom, dad, and bro, you decided to give the most to bro because he was your closest friend and supported you most. You were feeling so generous that you gave bro more than half the shares of the company, and now his vote is majority vote. What he says happens. When he says the company is making shampoo, it makes shampoo.

And so, your soap company quickly becomes a shampoo company too, and later a body wash, lotion, creamer, and even lip-balm (bro's wife's sister thought lip-balm was going to be a huge growth market, so bro started making lip-balm too) company. Revenues and profits keep growing, but as the company starts making more and more products, it loses its focus. The quality of the original soap product is no longer the same. The body wash stopped selling as well after a competitor released a new, rock-scented body wash (neutral scents are a huge hit in Washington). The lotion became watered down, ever since bro hired a twelve-sigma-alpha supply chain guru who advised to cut the expenses down. And the lip-balm, which was supposed to be a global phenomenon and sell millions of tubes, actually ended up selling in only one country and was thus a huge flop. Over time, revenues fell, profits turned negative, and the company went bankrupt. 

You sold your stake in the company long ago, but it still hurts to see the soap company you started go out of existence. You changed the world with the best bars of soap, and now that's all gone. You're not one for regrets, but one always gets to you. Had you held a majority share in your company and not diversified into other products, your bars of soap would still be selling today, and your company would be as successful as ever. But growing revenues and profits got to your brother, and the company grew until it couldn't grow no more, at which time it started aging and losing its focus. Focus, you tell your kids, is what makes a great lasting company. Don't let yourself lose focus, you tell them, as the pits of your eyes start swelling with tears, educed by the fervent regrets of your lost company. 

Well Rounded Companies

in

People often mention the term well rounded to describe folks who are good at more than one thing. John is a biology wiz, but he also knows a lot about sports and plays basketball every week. John is also well educated in history, given his fascination with medieval Europe. We are all familiar with this term in regards to people, but I’ve been recently thinking how appropriate this term is for describing companies. For this post, we will be taking a look into a few well-known companies: Apple, Google, and Microsoft to see just how well rounded they are. I have picked three easily comparable criteria to gauge these companies by: design expertise, functionality expertise, and empathy (arguably the hardest characteristic to measure). These are three attributes that I believe substantially differentiate companies (unlike say, business models, which are necessary but not sufficient attributes), and are prime reasons for their success. This comparison only works when compared in relative terms; we can’t compare a tech company to a luxury car manufacturer since they solve different problems. 

Apple 

It is hard to argue that Apple’s design expertise is anything other than prudential. Apple products are renowned for their hardware differentiation. Competitors base their designs on the paradigm set by Apple, not vice versa. In terms of software design, I would argue that Apple is in the lead, but not by the country mile it leads in hardware. 

A common complaint people have with Apple products is their lack of functionality. Functionality is an umbrella term for anything a consumer may want to do with the device. Mac OS X notoriously doesn’t have many games on the platform (although this has improved lately), iOS has no file explorer, and so on. Compared to the functionality Android and Windows offer, Apple devices are much more limited in functionality. There is nothing inherently good or bad about this point; the minimum functionality must meet the minimum functionality demands of consumers, and anything more can actually lead to confusion and dysfunctionality. 

Finally, let’s talk about Apple’s empathy. What I mean here of course is how well Apple understands the needs, desires, and all that other gooey stuff of its consumers. An empathetic company is able to correctly predict what customers may want, and offer that amount in terms of functionality. Judging purely on the extraordinary success of the iPhone and Mac platforms, I would characterize Apple as an extremely emphatic company. In most cases, it accurately predicts the problems a user experiences, and solves them a way they can appreciate. The key here is to focus on the average user. Apple does not cater well to users on the outskirts, and nor does it attempt to. 

Google 

Although Google was off to a slow start, their design expertise has improved dramatically in the last few years. Android is no longer the terminator OS from the future - it is colorful, friendly, and humane. Chrome OS is similarly playful, and appears to be improving rapidly. In fact, all of Google’s products are relatively well designed. In a vacuum, Google’s design is impressive, but it still had a long way to go to come near Apple. Google’s products are often difficult to navigate and are loaded with options (functionality), to the detriment of their design. 

The functionality Google products offer is vast. You can do pretty much anything you would want to do with a computer on Android. Gmail has hundreds of different settings that you can tweak to your liking. Google’s portfolio of products and services is expansive; the term focus does not exist in Google’s otherwise complete dictionary. As hinted earlier, functionality is a blessing and a curse. Too little and nobody will use your product. Too much, and nobody will understand how to use your product. Finding the right balance is difficult. On average, Google provides more functionality at the risk of overbearing complexity. 

Google has probably gotten the worst press on this last attribute, empathy. There is a long cemetery of services that Google has put to rest, mostly because they didn’t vibe with consumers. Most prominent such service was Google+, which was supposed to be a social network for Google users. It still exists, but Google has all but abandoned their quest for social. Many users are also increasingly wary of privacy and tracking, which goes against the nature of Google. Google makes money based on advertising, which itself requires user data. Google may understand that consumers value privacy on an intellectual level, but that does not change the company’s behavior in meaningful ways. Just as Apple thinks it knows design better than the consumer, Google believes openness is superior to privacy. There is no right or wrong here, there is only is and isn’t. 

Microsoft 

If you lived through the 1990s and 2000s with Microsoft products, you would know just how uninspired their design was. Nobody would ever call Windows XP beautiful (if one such person exists, direct them to me, and I will cover the eye doctor charges). That all changed with Windows 8 and the Metro interface, and has only been improving with Satya Nadella at Microsoft’s helm. The design may not be for everyone, but it’s undeniably opinionated and an improvement over prior Microsoft products. Microsoft began designing for consumers, not corporations. 

Microsoft products have always been strong in their functionality offering. I don’t think you will find a person in the world who knows every single Excel function and feature - the same can be said about nearly every Microsoft product. More than Google, Microsoft classically aimed to appease the needs of every user, even if it made the product more difficult to use. Lately though, Microsoft has begun to strip functionality away, catering to the 99%, abandoning the 1% power user. 

Microsoft has always understood the needs of enterprise users, but regular John Doe consumers were a mythical beast with unexplainable desires. Microsoft clearly understood the fundamental needs of corporations: collaboration, security and liability precautions, support, and product uniformity were all provided by Microsoft. These attributes, however, added almost nothing to ordinary consumers, who Microsoft all but abandoned. For this reason, Microsoft went down in history as being extremely empathetic to enterprise, and not at all to consumers. Full credit is again due to Microsoft for changing priorities so quickly. The new Microsoft is still enterprise friendly, but it now understands the need of consumers. Microsoft Office is available on every platform, it is free for practical purposes, and I dare to say that the apps are excellent. 

Coda 

Given the task of ranking Apple, Google, and Microsoft in these three attributes, I would define the following order. 

Design 

1) Apple

2) Google

3) Microsoft

Functionality 

1) Google/Microsoft

2) Apple

Empathy 

1) Apple

2) Microsoft

3) Google

Note that weights are not assigned to each attribute - not because the attribute doesn’t deserve a weight but because it requires further analysis (maybe in a later post). In other words, empathy may matter more than design, but how much more exactly is unknown to me at this time. We should also note that the rankings of each company changes through time. The above rankings are how I see the companies at the present time, not yesterday or tomorrow. 

Feel free to comment and assign your own rankings in the comments section below. It would be interesting to compare what others think.

On Bubbles

in

There has been a a lot of bubble talk lately. Many startups companies have become “unicorns”, which is a status given to a company that is valued at over $1B but hasn’t yet gone public. Just to give you some examples, these companies include Uber, Dropbox, and AirBnB, among many others. What I hope to achieve in this post is to give you a perspective that you may not have seen, regarding this bubble fiasco. I find myself in this explanatory position for a few reasons. 

First, I follow many venture capitalists on Twitter, and have been watching the VC industry for a few years. I’ve seen great acquisitions (Instagram), and terrible ones (Mailbox). You won’t have to go far to read about VC news, as many VC firms write blog posts disclosing their view on the state of the industry, as well as investments and exits (sales) they’ve made. Personally, I read every VC blog post with a grain of salt, as interests are inherently biased when money is involved (especially if it is your money!) 

Second, I follow the world of finance, which is not as popular among venture capitalists and the tech media. If you should know one thing about the accounting/finance world, it is its undying conservatism. The stock market has been around for a long time, and investors have witness and learned about dozens of depressions and bubbles throughout history. Most recently, two bubbles have scarred investors - the Dot-com bubble, and the housing bubble. As a result, the world of finance is, on average, extremely skeptical of every new IPO, sexy startup, or revolutionary technology, as they have been burned before. 

I live in both of these bubbles every day, and read both sides of the story. Unlike VC’s or financiers, however, I have no monetary interests involved in either bubble - I act merely a spectator and a student. I am not a VC, and have not invested a dime in any startup, nor do I hold investments in any companies. 

We all live in bubbles of influence: you may be interested in programming and follow developers, or perhaps a designer following designers. Consequently, your view can often be fogged by the film of the bubble of your interests. My bubbles are technology (predominantly Apple), VC, and finance. 

Back to the question of bubbles. Are we in one? 

The VC Perspective

Generally, most VC’s will say no. Interest rates are falling, and cash is plentiful. This results in huge funds. Unlike Index Funds, a venture capitalist doesn’t make money by diversification. They make money by going all-on on one or two unicorn companies, which will hopefully get acquired or IPO and provide extraordinary returns to investors - think Twitter and Facebook. 

Another common defense raised by VC’s is the relatively tiny size of venture capital. In 2014, VC funding amounted to $50B, versus $1T that resulted from the buybacks and dividends of publicly traded companies. If you asked me, I would say this is a partially valid defense against evidence of a bubble, but not a full defense. All it tells me is that there might be a smaller bubble than the dot-com bubble. It isn’t evidence of a lack of bubble-mania. 

The Conservatists Perspective

As previously mentioned, many long-term investors today practice conservatism in their investing habits. They are avid students of history and don’t want to make the same mistakes as their elders, even if it means potentially lower returns. These type of investors invest when a company has a future of growth, dividends, or some other type of expansion. Most importantly, however, these investors (who are inspired by Benjamin Graham, Warren Buffet, Jack Bogle, and the like) are judicious when it comes to avoiding overvalued companies. There is a general rule of investing that goes something like this: even the best business in the world can be overpriced. 

To illustrate an example of this principle, let’s take the stock of the most valuable company in the world, Apple. At the time of this writing, one share of Apple is worth $124. A conservative investor might look at this price, and say, “Hey, Apple just released the Watch, and it looks like the next iPhone will be a big hit. According to my estimates, their stock is worth $140!” This investor would then proceed to buy Apple stock at $124, and continue buying Apple stock until it reaches $140. Anything past $140 is too expensive, in this type of investors eyes, and results in overvaluation. Thus, he sells at $140. Perhaps he is wrong, and the actual value of Apple stock is around $150 - but he still made a profit of $16 ($140 - $124 = $16) per share! 

Alternatively, let’s say a more bullish investor thinks the stock has no limit, and growth will continue indefinitely into the future. This investor buys Apple stock a little after the conservatist investor sold his shares, at $150. Fueled by excellent news, a strong economy, and weak competition, Apple’s stock price rises all the way to $215 - far beyond what the business is actually worth. Upon reaching this peak, however, things stop being so rosy. A recently released unemployment report, mixed with less than stellar financial performance, makes the stock fall from $215 to $200 in one day. The plummet continues over the next few months, finally settling on $142 per share, which if you recall, is somewhere around what the company is actually worth ($140). Unfortunately for this more bullish investor, he never sold his stock at $215 since he expected the price to eventually rise higher. Thus, he lost a total of $8 ($150 - $142 = $8) per share, which is $24 (16 + [–8] = 24) less than what the conservative investor earned. 

So you see, even the best company in the world can be overvalued by the speculative and often illogical movements of the stock market. You can earn a lot of money if you time the market right, but very few people can do it more than once. 

This very same type of logical applies to how conservative investors view the most recent tech “bubble”. Sure, Snapchat, Palantir, Square, Pinterest, and Spotify are great companies worth billions of dollars. But there is a limit to how many billions they are worth. Five billion might sound plausible, seven billion is slightly overpriced, but still realistic. 15 billion is a bubble that will at some point burst. 

Bathing in bubbles

What I hope you took away from this post is that there are always two sides to the same story. Both sides make great points arguing against and for bubbles. Ultimately, however, everybody is simply speculating, spreading a psychological contagion from investor to investor. There is one other rule of the market that I haven’t shared yet - a bubble can last for a very long time, and bursts suddenly and by its own accord. I encourage you to branch out of your bubble of influence and into an opposing one, if only to see another viewpoint. It can only help.