Really insightful and much appreciated! I definitely saw the startup valuations skyrocketing right around the 2010 recession; I wonder if there is a more direct connection between that and your observation about self-serving customer bases (both B2B and B2C). In 2010, partly to help recover from the financial crisis, there were many explicit tax credits for startup investment (eg see this overview of US state angel investment incentives https://www.cga.ct.gov/2010/rpt/2010-R-0376.htm) and with interest rates at zero, this further intensified the ROI of startup investment. This incentive loaded up startups with more cash, which then fueled a flywheel of both B2B services spending ("Process back-office transactions manually? Let's try this SAAS service instead?") and B2C ("I'm working late at my overcapitalized startup; let's order gourmet food delivery tonight"). Even the Cloud: In 2010 I distinctly remember pricing out this "AWS thing" which was way more expensive than we paid for bare metal servers, but once we raised our next round, my team was pretty adamant it was suddenly a good deal.
I don't know whether startups as both producers and consumers is enough to explain this effect but it feels like there's a strong, self-reinforcing component to your top 5-10% segment.
Great point Mark about the government incentives. And yes there is clearly an echo chamber in the startup world, where one small signal gets ricocheted... my sense is that it's more of the gradually-diminishing echo chamber instead of the accelerating flywheel, but those two phenomena can be hard to distinguish, and in either case it clearly amplified the effects of (1) zero interest rates and (2) B2B services innovation. On the B2C side, my guess is that the dynamics in startup-world were very similar to the dynamics in financial services-world, in corporate consulting, in tax law, etc. etc. All self-reinforcing indeed.
Brilliant. All very true. As per Hayek’s 1976 book “The Denationalization of Money”. I slightly differ in that I believe governments and Central Banks are the main culprits, banks are just accessories to crime. As per the huge rise in FED and ECB balance sheet over the period. It’s “La planche à billets” foremost.
Yes, agreed that the central banks are ultimately responsible! The banks are playing the game they are designed to play within the bounds of the system...
🤯 When you read this, it seems so obvious and thus just so incredible that this information is not taken into account for decision-making that has such massive impact. This piece makes a lot of sense. Analysts seem to have developed such blind automatisms: waiting for monthly and quarterly stats to make their move. They have forgotten basic economics principles. I briefly experienced this disconnection with value, back in the days I used to work for a hedge fund. I had fled this sector as soon as I could, literally disgusted by the practice. I'm terrified at the idea that it's what our world has come to.
Apart from this, I really like one of your last paragraphs on the startups' target. It really describes one of the struggle we faced during the past year with the project I worked on. Who to serve? and if it is the mass market, how do you make it viable ? Unfortunately social impact as great as it could be, will not outweigh financial criterias, at least not in our present world. And so the mass market continues to be left out, digging the gap even deeper, and nourishing social unrest even more strongly....fun times coming!
Great article. I never thought of bank loans as printing money (I thought only governments did that), that insight was an eye-opener. Also the billionaires borrowing at 0% and investing in stocks that they drive up themselves at 10% annual returns seems to be something that shouldn't happen when our politiicans are supposed to be running countries for the "people".
I thought that a little more on house prices would have been interesting as the cost of existing real estate is not directly affected by productivity gains. I saw that house prices in France have increased by 50% in the last 10 years vs 1% to 2% inflation per annum (not the hidden kind).
In the end I guess the real reason things are broke boils down to the definition of true growth and how we measure it (not by GDP).
Thanks for the great comment Matt! You're absolutely right, housing is a sector that is totally impacted by the secret inflation (and costs not decreased by tech) and thus has become increasingly unaffordable for 90+% of people. The 50% -over-10-years number you mention corresponds pretty exactly to the other surplus, unexplained price increases we see in financial assets like startup valuations & stock prices...
Well written and super interesting! Really looking forward to the rest of this series. Attila's posts were good reads as well.
I think the argument for secret inflation would be a bit stronger, however, with visual arguments showing an inflection point around 2010. The seed-round graph doesn't show the steady-state before 2010 and the price-changes graph shows problematic cost increases that seem to be pretty constant since 2000.
I'd push back a bit on the statement "everyone is getting poorer," because, as you point out, those 5-10% of the richest folks have generally been insulated from this inflation. So they're either getting richer or at least treading water.
The mental context into which I'm putting this money printing would be that it's the latest installment in the neoliberal era. I mean, how much more trickle down can we get than a policy that's continued giving free money to the most rich?
Hey Nathan! Yes agreed, I couldn't find a good graph with seed-round valuations going back to 2000, but I'm pretty confident about that data there. As for price changes, you're right to point out the graph I used goes back to 2000 and we don't see an inflection point after 2010. I'm less confident about the data here to support the argument.
As for the "everyone is getting poorer", you're right I should have said, "90%+ of people are getting poorer (even though most of them have had stable, or even officially-inflation-adjusted wages)". And yeah, the zero-interest-rates regime is clearly a trickle-down idea based on some classical economical models. Which seem to me to be bogus, but still carry so much weight in high-level policy circles on both the left and the right...
Really insightful and much appreciated! I definitely saw the startup valuations skyrocketing right around the 2010 recession; I wonder if there is a more direct connection between that and your observation about self-serving customer bases (both B2B and B2C). In 2010, partly to help recover from the financial crisis, there were many explicit tax credits for startup investment (eg see this overview of US state angel investment incentives https://www.cga.ct.gov/2010/rpt/2010-R-0376.htm) and with interest rates at zero, this further intensified the ROI of startup investment. This incentive loaded up startups with more cash, which then fueled a flywheel of both B2B services spending ("Process back-office transactions manually? Let's try this SAAS service instead?") and B2C ("I'm working late at my overcapitalized startup; let's order gourmet food delivery tonight"). Even the Cloud: In 2010 I distinctly remember pricing out this "AWS thing" which was way more expensive than we paid for bare metal servers, but once we raised our next round, my team was pretty adamant it was suddenly a good deal.
I don't know whether startups as both producers and consumers is enough to explain this effect but it feels like there's a strong, self-reinforcing component to your top 5-10% segment.
Thanks again!
Great point Mark about the government incentives. And yes there is clearly an echo chamber in the startup world, where one small signal gets ricocheted... my sense is that it's more of the gradually-diminishing echo chamber instead of the accelerating flywheel, but those two phenomena can be hard to distinguish, and in either case it clearly amplified the effects of (1) zero interest rates and (2) B2B services innovation. On the B2C side, my guess is that the dynamics in startup-world were very similar to the dynamics in financial services-world, in corporate consulting, in tax law, etc. etc. All self-reinforcing indeed.
Thank you for reading!!
Brilliant. All very true. As per Hayek’s 1976 book “The Denationalization of Money”. I slightly differ in that I believe governments and Central Banks are the main culprits, banks are just accessories to crime. As per the huge rise in FED and ECB balance sheet over the period. It’s “La planche à billets” foremost.
Yes, agreed that the central banks are ultimately responsible! The banks are playing the game they are designed to play within the bounds of the system...
Thanks for taking the time to distill this topic for the rest of us to chew on! I'm looking forward to reading the next segments.
🤯 When you read this, it seems so obvious and thus just so incredible that this information is not taken into account for decision-making that has such massive impact. This piece makes a lot of sense. Analysts seem to have developed such blind automatisms: waiting for monthly and quarterly stats to make their move. They have forgotten basic economics principles. I briefly experienced this disconnection with value, back in the days I used to work for a hedge fund. I had fled this sector as soon as I could, literally disgusted by the practice. I'm terrified at the idea that it's what our world has come to.
Apart from this, I really like one of your last paragraphs on the startups' target. It really describes one of the struggle we faced during the past year with the project I worked on. Who to serve? and if it is the mass market, how do you make it viable ? Unfortunately social impact as great as it could be, will not outweigh financial criterias, at least not in our present world. And so the mass market continues to be left out, digging the gap even deeper, and nourishing social unrest even more strongly....fun times coming!
Hey Rob,
Great article. I never thought of bank loans as printing money (I thought only governments did that), that insight was an eye-opener. Also the billionaires borrowing at 0% and investing in stocks that they drive up themselves at 10% annual returns seems to be something that shouldn't happen when our politiicans are supposed to be running countries for the "people".
I thought that a little more on house prices would have been interesting as the cost of existing real estate is not directly affected by productivity gains. I saw that house prices in France have increased by 50% in the last 10 years vs 1% to 2% inflation per annum (not the hidden kind).
In the end I guess the real reason things are broke boils down to the definition of true growth and how we measure it (not by GDP).
Thanks for the great comment Matt! You're absolutely right, housing is a sector that is totally impacted by the secret inflation (and costs not decreased by tech) and thus has become increasingly unaffordable for 90+% of people. The 50% -over-10-years number you mention corresponds pretty exactly to the other surplus, unexplained price increases we see in financial assets like startup valuations & stock prices...
Well written and super interesting! Really looking forward to the rest of this series. Attila's posts were good reads as well.
I think the argument for secret inflation would be a bit stronger, however, with visual arguments showing an inflection point around 2010. The seed-round graph doesn't show the steady-state before 2010 and the price-changes graph shows problematic cost increases that seem to be pretty constant since 2000.
I'd push back a bit on the statement "everyone is getting poorer," because, as you point out, those 5-10% of the richest folks have generally been insulated from this inflation. So they're either getting richer or at least treading water.
The mental context into which I'm putting this money printing would be that it's the latest installment in the neoliberal era. I mean, how much more trickle down can we get than a policy that's continued giving free money to the most rich?
Hey Nathan! Yes agreed, I couldn't find a good graph with seed-round valuations going back to 2000, but I'm pretty confident about that data there. As for price changes, you're right to point out the graph I used goes back to 2000 and we don't see an inflection point after 2010. I'm less confident about the data here to support the argument.
As for the "everyone is getting poorer", you're right I should have said, "90%+ of people are getting poorer (even though most of them have had stable, or even officially-inflation-adjusted wages)". And yeah, the zero-interest-rates regime is clearly a trickle-down idea based on some classical economical models. Which seem to me to be bogus, but still carry so much weight in high-level policy circles on both the left and the right...