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This is the ‘bubble’ that people in the tech industry should really be afraidof, says the leader of Silicon Valley’s top startup schoolSam Altman, the leader of startup school and venture capital fundY-Combinator, doesn’t think we are in a tech bubble.He believes we are in a “tech bust,” where technology companies areundervalued. He thinks private technology companies as a general group aredestined to rise, and that people obsessing over individual valuations onindividual companies are missing the big picture.However, not everything is perfect in startup land, says Altman.Altman was the guest on the Jay and Farhad Show, a weekly podcast I host withNew York Times’ columnist Farhad Manjoo.On the show, Altman says, “The bubble I’m afraid of is the risk bubble. Peopleare so sure that things are going to work out that you see burn rates that Ihave never seen before, and that I think is actually a real danger.”Right now, startups believe everything is going to work out so they arespending recklessly, burning millions of dollars every month. This will notend well for many of them.You can listen to our full audio here below. We’ve also transcribed, andedited the conversation.You can subscribe to the podcast in iTunes here. Or just look for it in yourfavourite podcast app under “Jay and Farhad”. Here’s an RSS link to the show.We use SoundCloud as a host, so you can listen to the show over there, too.J &F: I’ve looked at your blog archive, and you’ve written about the economicsof startups quite a bit. Do you think startups are not charging enough fortheir products? Are they spending too much money?SA: Well, actually I think they are two different but sort of interrelatedproblems, so let me take a step at articulating both of them.One is what I call the unit economics problem. This is a sort of newish thingwhere they lose money on every transaction and they have plans in the futurefor how they are going to make money later. I wasn’t around for the 2000bubble, but I’ve heard this was super common then. So you have a lot of eitherenterprise SaaS or on demand companies or whatever you want, where they areselling a product for less than it costs them to deliver it, and they have aplan — or maybe they don’t have a plan — to make it better later. And look,it’s true, if you sell a dollar bill for 90 cents you can grow really, reallyquickly until you run out of cash, and some of these companies do growincredibly quickly. But I think it’s dangerous to grow, and bad advice thatthese company sometimes get from their investors, which is just like, ‘itdoesn’t matter how much money we lose per customer just keep growing and thenwe’ll be able to raise more later,’ and sometimes there is just no plan forhow that ever gets resolved.So I think that is one problem, where you have a company that has very badunit economics, they lose money on each transaction, and they lose ever-growing amounts of money every month. And when you ask the founders howthey’re going to fix this, sometimes you get a little bit of a glassy stare.A second issue is companies raising at very high valuations, because — or atleast as I believe — that if you raise a lot of money in preferred stock withcertain terms then valuation doesn’t matter.However, where I think people kind of get screwed with that sometimes, is noone ever wants to raise a down amount, for good reason. And employees, andthis is a bad thing, I think employees see someone like Fidelity or whatevercome in and price a company and say, “oh Fidelity’s an expert, this companymust really be worth $US5 billion, and thus my options are worth x.” And thenthey find out that that was a fiction, but the company doesn’t wanna raise adown round and deal with all of that.So you do sometimes get trapped by these high imaginary valuations. They arerelated because you need more money to lose more money, but they are twoindependent problems I think.J &F: Recently, Bill Gurley said something to the effect that that startupshave to play the game that is on the field, not the game as they want it tobe. How do you reconcile a conservative approach to business with competingwith rivals that might be willing to do crazy stuff? SA: That’s a great question, and it’s why running a business is hard. There isno-one-size-fits all answer for that. It depends on how confident you areabout your customer lifetime value, how confident you are you can raiseprices, how cheap the capital is available to you, whether you believe thecompetitor is going to die or not. These are the conversations that take twohours in a board meeting, and you know if you have five people on a board, youhave three or two different opinions that are very reasonable, and these arethe hard judgment calls to make. It’s true that sometimes a recklesscompetitor will beat you in the long run, but I don’t think a general purposegood strategy is, “well my competitor is doing this crazy thing and lightingdollar bills on fire, so I better light more dollar bills on fire.” That doeswork occasionally, but I don’t think it’s a general strategy that you canrecommend without knowing the situation.I do appreciate the point that Bill is making, that you have to play the gamethat’s on the field. But I think he’s also made the point that you shouldn’tbe totally reckless in business. You should not have crazy burn rates, so I’mmore inclined to agree with him on that advice and maybe sometimes youshouldn’t actually play the game. Maybe sometimes the game is just crazy.I appreciate the comments Bill makes about not having crazy burn rates, butone company he’s on the board of, Uber, has burnt more money than any privatecompany ever, I think. So, obviously, as Bill is proof of, there areexceptions and sometimes you really do want to spend a lot of money.J & F: In your latest post you say the public market valuations of techcompanies are far from bubbly. Why do you think that is? Why are publiccompanies given conservative valuations? SA: You know I am so far from a public market expert that I would only beguessing to say why they decide value a company the way they do. I think theefficient market hypothesis is clearly wrong plenty of the time. Like, Amazonhas doubled in value in the last 10 months, so clearly the efficient markethypothesis got something wrong there. I don’t think they have transformedtheir business such that you can blame it on that. I think that I don’tunderstand the way the public markets think about the going forward value ofApple in particular, for example. And so that’s OK with me. I am still willingto say, “Well, I don’t understand why it’s mispriced, but I do believe it ismispriced, and that’s why I’m going to keep buying shares.”J & F: Earlier you said you think that some startups are overly optimistic andtaking on too much risk. You also said that you think some high valuations areirrelevant. How does that not mean things are in a tech bubble?SA: It comes out to the sort of portfolio construction thing. I think if youbuy a basket of public and private tech stocks, even with this crazy debtdisconnect, you’ll still make money. But on an individual company basis, Ithink there are particular companies that are going to kill themselves byspending money.J & F: Do you wanna name some of them right now?SA: (laughs) Not really.J & F: Do you think there are gonna be a couple or a whole bunch that aregoing to be doomed?SA: More than a couple. I don’t know how to put a percentage on it.### Business Insider Emails & AlertsSite highlights each day to your inbox.Follow Business Insider Australia on Facebook, Twitter, LinkedIn, andInstagram.