Thursday, April 26, 2012

Notes From the Peter Thiel Startup Class 7

Blake Masters posted more of his notes from the Peter Thiel startup class. I thought that this comment was very interesting:

Roelof Botha: People don’t always appreciate or understand rapid increases in value when businesses take off. They underestimate the massive asymmetry of returns. They hear that a company has joined the billion-dollar club and are perplexed because only 6 months ago, it was worth $200m. The alternative to understanding the exponential growth is believing that Silicon Valley VCs have gone crazy.
Right... but in many of these cases we are talking about companies with no operating profit and even no revenues to speak of. It seems like a rationalization for the new bubble mentality. It's especially funny because he goes on to admit that many of these companies "can be built very quickly, often seemingly overnight" which implies an absence of barriers to entry.

In some cases, these companies have intellectual property barriers or network effects that reward firstcomers, but I don't think that is true as a rule. The Zuck paid $1B for instagram despite revenues of $0. I saw someone who suggested monetizing this app by
  • Buying different filters (I really hope they don't go this route, it would be extremely lame and would open the doors for competitors to step right past them).
  • Tagging parts of images and placing links to companies/advertisers and shared revenue [...] Maybe even identifying company logos in images and smartly placing the tags on there.
  • Create a backup and syncing service for those that want to have their computer, tablet, and mobile pictures uploaded to the cloud (also allowing for easy sharing), this would have a small fee depending on amount of storage needed.
Ugh. So, they can't actually charge for their product because it would "open the doors for competitors to step right past them". Who doesn't want lots of obnoxious logos and advertisements all over their photos? Why do I need instagram to back up my photos when I have XX GB on my phone and itunes/the cloud back it up for free?


Allan Folz said...

As Steve Jobs said of Drop Box, "it's a feature, not a product."

Also, paying $1B for Instigram is more of the same game theory, self-justification for the bubble. If Instigram is worth $1B, then FB which now owns Instigram must be worth $100B.

If the Fed didn't have real rates negative and a gun to everyone's head to take on risk assets, the whole Silicon Valley shell game would not be going on.

Have you seen the piece in Wired on Klout. Sheesh. I remember Paul Graham writing in one of his essays that High School was so similar to Renaissance court politics because in both times and places people were left without anything meaningful to do. Such is "social media" today.

Taylor Conant said...

I've long wondered if there is a higher logic to tech titan acquisitions that we mere mortals don't get (ie, they understand how their biz works so they can see the incredible inherent leverage of a bolt-on like Instagram... instagamantly) or if they're just flailing around making completely arbitrary decisions such as "That's SO cool, we gotta own that company!" or if it's often about category killers. I saw that happen with Google and this music site I used a couple years ago called Lala, which was a far superior product to even the latest iteration of Google Music and which Google just shut down and discarded as soon as they had purchased it.

Btw, I don't think many young people understand how ahistorical this era of "free, awesome services" is, and that it's likely unsustainable. So many people are becoming accustomed to being able to do high tech things like send silly pictures to each other via Instagram that when the day comes where those services die because they make no money, or they demand their customers pay for them, an entire generation will rise up in pathetic anger.

Taylor Conant said...

This is the article portland_allan was referring to:

It's like a big investment bank interview with a curve-ball brain teaser, but set in Silicon Valley.

That's so funny that someone would make a hiring decision based off an inane metric like that.

CP said...

Potential new name for the blog:

"What a world we live in!"

Allan Folz said...

... and here's the Graham essay. It's long he was getting a lot of his chest, but something I'd wager 80% of engineers can relate to.

In almost any group of people you'll find hierarchy. When groups of adults form in the real world, it's generally for some common purpose, and the leaders end up being those who are best at it. The problem with most schools is, they have no purpose. But hierarchy there must be. And so the kids make one out of nothing...

Court hierarchies are another thing entirely. This type of society debases anyone who enters it. There is neither admiration at the bottom, nor noblesse oblige at the top. It's kill or be killed.

This is the sort of society that gets created in American secondary schools. And it happens because these schools have no real purpose beyond keeping the kids all in one place for a certain number of hours each day. What I didn't realize at the time, and in fact didn't realize till very recently, is that the twin horrors of school life, the cruelty and the boredom, both have the same cause.

So, I believe, it is with all these social networks springing up like daisies. Or should I say crabgrass. People don't have enough to do, so they play games on social networks. Fortunately most are adults and so the cruelty aspect that exists among the jr high set isn't as prevalent and the networks themselves supply cookies and treats to provide an ostensible goal besides zero-sum status hoaring, but at root there is gaming for status because so many have nothing more important or pressing to do with their time.

Allan Folz said...

Yes, there is logic to the acquisitions, but whether one would call it higher, I suppose, depends on how you look at it. I believe a lot of times it's keeping up appearances. The start-ups and venture capital outfits are like a cartel engaging in price-fixing. The higher logic is to convince the public to over-pay for the IPO's that they either own stock in or have friends that do and they owe 'em a chit.

CP said...

In other words, non-economic reasons.

It probably helps VC funds to raise money if they are invested in "hot" properties. Especially since the fund returns won't be known for a decade.

Plus, they paint the tape by investing at continually higher valuations... and charge fees on the inflated fund sizes.

CP said...

Question: how much has it cost to operate instagram over its history, i.e. negative retained earnings?

Allan Folz said...

I don't know what it costs to run instigram. My guess is not very much. I haven't looked closely -- if I had a klout score it would no doubt be negative ;-) -- but, I suspect it's a pinch software that relies on other people's bandwidth.

Allan Folz said...

From Instagram's engineering blog, albeit 4 months old:

"We run Ubuntu Linux 11.04 (“Natty Narwhal”) on Amazon EC2... We’ve only got 3 engineers, and our needs are still evolving, so self-hosting isn’t an option we’ve explored too deeply yet..."