About Me 0046: Being Right or Making Money

“You wanna know what the mother of all bubbles was? Us. The human race.”

That’s Gordon Gekko in the distinctly-mediocre Wall Street: Money Never Sleeps.

This weekend brought a rush of stories about a “bubble” that may or may not be re-inflating in Silicon Valley. The New York Times kicked it off, venture capitalist Fred Wilson (who is featured prominently in the story) quickly responded, and then Newsweek weighed in just to make sure the “Bubble 2.0″ moniker was secure. Uh oh, right? Not so fast.

One giant nugget of information in the NYT piece (co-written by TechCrunch alum Evelyn Rusli) is a bit buried:

For starters, this is not a stock market bubble. None of the companies are publicly traded.

In other words, if this “bubble” were to pop, it wouldn’t be the mothers and fathers of the world hoping to put their children through school who would be getting screwed. It would be the private investors. It would be a handful of (mostly) rich people who would be out of some of their money.

I suppose the employees of the collapsing startups could also be screwed somewhat. But they’d undoubtedly find work again quickly. And the founders would start new companies. Just like after the first bubble.

Business Insider has a good rundown of the actually public tech companies — you know, the kind mom and pop can and do actually invest in. The consensus there? Pretty wonderful, actually. Not over-the-top outrageous, just very solid for the most part.

Now, that doesn’t mean a “Bubble 2.0″ couldn’t pop and adversely affect the overall ecosystem. In fact, I’m sure it would to some extent, mainly because less money coming in would mean less innovation across the board. But it wouldn’t cause everything to collapse.

We all just lived through a very real bubble. The housing bubble. The results of it popping almost completely brought down not only our own economy, but much of the world’s economy as well. Real people lost their life savings. People went to jail. More people should have been locked up forever. It’s almost insulting to mention this supposed new web bubble in the same breath as that.

Again, this “Bubble 2.0″, if it does exist, is mainly just troublesome for investors. Smaller angel investors, in particular, are getting squeezed out of deals because early stage valuations are getting ridiculously high in some cases.

Undoubtedly it’s true that some of those startups should not be accepting so much money at such valuations, but that’s on them. If they fail, it will be a lesson to other startups. Maybe the motto is: go big and go home (at least in the early stage).

Another underlying current here is that many private investors aren’t comfortable with the state of the startup ecosystem. And yet many of them continue to do deals that they may not be comfortable with. Again, that’s on them. They’re all doing due diligence. If they don’t think a deal is worth it, they obviously shouldn’t do it. But some don’t seem to be able to turn down their name being attached to a high-profile investment — even if projections have it panning out to be a 2x exit. (The horror!)

Maybe some of them would actually be more comfortable investing in what Wilson calls “The Mess“. That is, startups in their awkward years. They’re neither new and sexy nor mature and money-making. Not surprisingly, no one seems to want to invest in those, besides current investors. But maybe those are where some deals are to be found.

In the press, there are two kinds of sexy stories to write: over-exuberance and death. We just got done with a week’s worth of over–exuberance surrounding the Google/Groupon deal. Holy shit, $6 billion dollars for a company that has only really been at it for a little over a year? That’s awesome! Let the good times roll.

The deal ultimately fell apart and in came the death stories. There needs to be balance in the world, after all. We know this just as well as anyone. The $6 billion Groupon deal made web investing as hot as the sun for a few days. And now it’s a bubble.

But wait. “Bubble 2.0″ has existed before. Here it is in 2005 — with Wilson worrying about some of the same things he’s still worried about. And here it is again in 2007 — with John Dvorak worrying that social media among other things would pop the bubble. And wasn’t it for sure a bubble later that year when Microsoft invested in Facebook at a $15 billion valuation? I was sure I heard that over and over and over again. Turns out, that was a pretty damn awesome investment, strategic or not.

There are dozens of other examples as well.

So maybe this is actually “Bubble 4.0″ or “Bubble 5.0″. Or maybe it’s not a big bubble at all. After all, if it pops and gum gets over only a few faces, will anyone do anything other than point and laugh, then go on with their lives?

[image: 20th Century Fox]

Best case scenario: the Volt is being sold at cost. The reality: it's being sold at a big loss and the taxpayers that have been footing the bill via the bailout and now via a tax abatement that will cost taxpayers some $42 billion over the next few years and that the media isn't reporting (Detroit News spews Obama propoganda: Feds to recoup $36 billion in bailout money, fail to mention GM receiving $45 billion tax furlough). Evidence that the Volt is being sold at a loss comes on page 4:

Q: How many batteries does the Volt have? What would be the cost to replace them? -- reader Michael Douglas

A: The Volt has one battery pack, assembled in Brownstown Township. It's 5.5 feet long, shaped like a T, and weighs 435 pounds. That battery contains 288 cells. The flat, laminated, 5-by-7-inch cells each weighs a little less than a pound, according to Prabhakar Patil, CEO of Troy-based Compact Power. The cells currently come from LG Chem in South Korea, but Compact Power, an LG Chem subsidiary, will start making them in Holland, Mich., in 2012.

Peterson declined to provide the current cost of the battery. For now, all you need to know is that GM will foot the cost of repairing or replacing the battery during the time covered by the transferable warranty. Once drivers start nearing the end of the warranty, GM expects the battery to cost less than it does today, Peterson said, as the technology becomes more common.

We can glean some information on the cost from a prior post of mine back in September: Stimulus: Granholm, Obama celebrate giving $368+ million to MI plant to produce $33,000 car batteries. The key snippet:

Costs are high. The government has estimated that a battery with a 100-mile range costs about $33,000, ...

If that's the government estimate, you know the costs are even higher. Try $45,000. The Volt gets about half that mileage, but we can't just cut the cost in half because 1) the control system has to be there regardless of size, and 2) an active vapor-compression refrigeration system is still going to be operating because of the tremendous heat generated by the batteries when discharging. So for the Volt, the battery cost with supporting subsystems will be around $30,000. As a point of reference, GM is selling the non-hybrid version of the Volt - the Chevy Cruze - at $16,000. That's right - the batteries in the Volt costs twice the entire non-hybrid vehicle. From that, one could estimate that the true cost of producing the Volt is $46,000. Add a profit margin and the Volt should be selling for $50,000, not $41,000. You could buy three Chevy Cruzes for that plus some luxury options on each.

The Volt is being subsidized at least twice by the federal government taxpayer: once at the front end (production - possibly as much as $9,000) and once at the back end ($7,500 purchase tax credit). Only in the world of government is this considered a winner.

Previously:

Sen Carl Levin (D-MI): Chevy Volt (that hasn't sold a single unit, fills up on coal and the feds have to pay you $7,500 to buy one) proves "doubters" wrong

PJM Article: Chevy Volt, Nissan Leaf Actually Get Only 23, 25 MPG

Good grief: COAL-powered 2011 Chevrolet Volt named Green Car of the Year

Nobel Peace Prize given to Obama's expensive, coal-guzzling car that the government has to pay you $7,500 to buy and hasn't sold one unit yet on open market

Detroit Free Press clueless that the Chevy Volt is a hybrid

Video of Granholm: Criticizing the Chevy Volt is un-American!

Top auto supplier CEO: Government too focused on electric vehicles, "ignoring" other technologies

Video: 'The Truth About Cars' Editor Edward Niedermeyer on why the Chevy Volt is a $41,000 electric lemon

That $41,000 price tag for the Chevy Volt? Could be $61,000

Robert Gibbs: Hey - I bet Rush Limbaugh doesn't drive one of those awesome GM F-150s

Granholm to Congress: Put battery incentives in energy bill because it will do for jobs nationally what it did for jobs in Michigan

Obama comes to Michigan, touts money he's giving to KOREAN battery plant to create jobs at $504,667 each

Irony: Michigan touts electric cars for economic growth, but denies permits for power plants to charge them

Detroit News: Buyers won't recoup extra cost of electric vehicles, but electric vehicles will save Michigan's economy or something

Confirmed: Chevy Volt 230 mpg claim is bs

Side-splitting headline of the day: GM touts Volt with 230 mpg city rating (by using Enron accounting methods)

Another Plug-In Hybrid False Mileage/Energy Savings Claim

Government report: electric cars won’t reduce carbon emissions and likely create more

UNTRUE! - Enron Accounting on the 100 mpg Hummer H3

DetNews: 12 projects expected to create 2,900 jobs

bench craft company scam

Wednesday, December 8, 2010

Being Right or Making Money

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