So coincidentally, I had the pleasure of attending the MIT Sloan Club of NY's Annual Hedge Fund Dinner. One of the guest speakers happened to be the Peter Thiel. Most of the conversations that night revolved around the current climate of valuations. Peter gave us his take on the 3 bubbles (housing, credit lending, emerging markets) that we are currently facing and he believed that globalization (or the expectation of globalization) may be the root cause behind every boom, bubble, or bust.
We all listened intently....trying to glean some type of "free" tidbit from the over achieving entrepreneur turned hedge fund guru. After his 30 minute talk, we had about 5 minutes of Q&A. The first 3 questions were basic questions that could be answered reading any macro textbook...............then came the final question from the wild gunslinger. My question to Peter:
"Peter, given the context of tonight's discussions, where do you see the recent facebook investment by microsoft and 2 hedge funds at a $15B valuation?" - whooknewBefore he could start to answer the question, Peter began with a diatribe of disclosures starting with he's on fb board, was an early investor, believes in the company's long term plan, blah blah blah blah.
He went on to say that Facebook is "the classic growth vs. value story." He contends the $15B was absolutely justifiable in the current climate. Now........I'm not mad at Peter. Why would he ever say anything different? It would be suicide (and stupid) for him to to question the valuation. He is on the board and has a lot riding on his own farabuttos.
The funny thing is........after listening to Peter recount the history of markets, mobs and mayhem (and I mean history), he had the nerve to look us in the face (a room full of pretty smart people) and say NO, we are not in a tech bubble. GTFOH. Here are his three reasons.
1. Prospect Theory. (I don't recall him using the term, but I've taken the liberty to interpret what he was trying to say.) Basically, people value gains and losses differently. He recalled some study that says we feel loss much more than gain......almost 3 to 1. Peter contends that the 2000 bubble is still fresh on the brain and people have not forgotten the pain. Since investors lost so much money with the last tech bubble, they would need to make 3 times the money they lost in order to get to a new irrational state. (These are not his exact words, but my understanding of his words.)
2. No tech ipos. During the late 1990's, the way to monetize a tech investment was through an IPO. There were a number of entrepreneurs who made their fortune after going public. Peter contends the absence of tech IPOs is an indicator that we are not in a speculative tech bubble.3. HBS grads are not in tech. In the late 1990's HBS grads were going into startups. From 2005 to date, HBS grads have been flocking to private equity and hedge funds. Since HBS grads have not gone into startups yet, we are not in a tech bubble. (This was somewhat of a joke, but I believe the metaphor is plausible.)
After this third point........I sat patiently.......waiting, hoping, praying for some insight........ I would still be sitting at the Tribeca Grand Hotel right now if I continued to wait for some reasonable explanation.
IMHO, #1 is purely wishful thinking. I could counter his application of Prospect Theory with Sunk Cost Fallacy. We can't say that because people lost money in 2000 and haven't made 3x the amount lost, we are not in a bubble. Read #1 again. Seriously, this just sounds asinine. I could argue that given the current level of capital raises, people are placing more bets on tech companies now. Granted it takes less money to start a company, but startups are raising more money at higher valuations. Sounds like doubling down to me.
#2 just sounds good. I can't really agree or disagree. People have been waiting for the tech ipo window for awhile. Here's a current status check. Here is some research on IPOs (from April 2007). Wall Street fiascos and Sarbanes-Oxley have to be addressed as well. Why would you want to IPO when you could be acquired, get paid in cash, and not have to deal with all the extra reporting/disclosures. Let's not forget going across the pond.
# 3 is probably the most palpable. If you replace "HBS grads" with "seemingly informed herds," one could agree with Peter. By the time people realize something is good, it's time to get out. Next time we go to MIT to recruit, I'll stop by HBS and take a poll on where people are going after graduation. Hopefully it's still PE and hedge funds.
Honestly, the most disconcerting thing for me was not Peter's response. That's his story and he's sticking to it. I'm not mad at him. For me the problem is the 30 minutes prior to my question. He cautioned the audience to move out of investments that are levered and suggested not investing in popular, crowded ideas. I guess fb is an anomaly and social networking is not a popular, crowed space. I guess fb is profitable and not leveraging current growth with future cash flows. I'll just stop here and let the numbers speak for themselves.
------------------ Extra
What was Peter's take on yoonew?
Why did it take you so long to build a futures market for tickets?
Why would you try to build a startup in nyc?
I'll respond in a future post.
