 I'm John Furrier with Extraction Point with Andy Kessler, author of the book Eat People here in Silicon Valley, Palo Alto, our studio at Cloudera, the home of Big Data. Andy, you've been an investor. I think the stat was you raised a couple million bucks for start a hedge fund or an investment fund and grew it to a billion dollars and people throwing money at you. The book you wrote, what was the book? We're not running money. Running Money and Wall Street Meet was the first book you wrote about the hedge fund. Yeah, Running Money. Running Money. It's a great book. You've got to get that one. You've come up with limos, billion dollars being thrown at you. You made some good money and then you shut it down, right, when the bubble burst. It got, you know, frothy was one of the words, but it got out of control, yeah. So you've played and made a lot of money and did the pre-bubble stuff now. What's your take on Silicon Valley? You got Twitter, $10 billion rumored valuation, CORE and the $300,000,000 valuation, Facebook at $60 billion valuation, Zynga at $9 billion. LinkedIn's going public at $1 billion plus. What's the valuations, bubble or not a bubble, are we in a bubble and what's your angle on all this? And you've got the secondary markets basically selling out, shareholders are getting liquid prior to a market. Is that a public market, you know, you've got the secondary little private markets going on. What the hell is going on out there? I don't know. Bubbles are in the eye of the... Beholder. Beholder. And I've got to say the eye of the deceiver, but it's the beholder and, you know, bubbles can last for a long time. But I will say, because of Sarbanes-Oxley rules and other SEC rules, I think, you know, it's expensive to go public. So less companies are going, you know, Facebook is trying to put it off as long as they can. And so there has developed these private markets and, you know, the nice thing about the stock market, everyone beats up on the stock market, but the stock market is all about price discovery. There's a lot of sellers and there's a lot of buyers and they match in the middle and every day, you know, they discover what price the profit stream from some company is worth. And it only works because there's millions of people plugged into that stock market with the free will to buy and sell every day. In the bubble of 99 and 2000, it wasn't a free market. You know, IPO's had lockups and there was problems with NASDAQ trading. You know, there's all sorts of things that I think helped inflate the bubble. This time, it's not even in the public markets. It's these private exchanges where there's a very limited number of sellers and there's a lot of venture capitalists who missed investing in Facebook who are clamoring for shares. And so, limited number of sellers and hungry buyers. And some of those other companies, Zynga and Twitter, was invested by NVCs that weren't even located in California. Yeah, well, actually it's Russian who's done, who have done quite well because the private market value isn't up. Boston and New York VCs actually invested in some of those companies. You can tell me that Facebook is worth 52 billion or that Twitter and Zynga are worth 8 billion and I say, okay, you can make whatever number you want. It's where those buyers and sellers match. But unless there's a large number of buyers and sellers, I don't believe the numbers. Maybe it's more than that, maybe it's less than that. And it's not until you get the public market valuations. By the way, even public, when you go public the first six months, not all the shares are freely tradable. And so, you know, I would say, buy or beware. Be very careful. And that's true because it's leaked over into the public markets. What I found and what our investment fund did 10, 12 years ago is when money's being thrown at these service companies, you know, back then, we talked about, eatmyshorts.com, you bought shares in the infrastructure companies. Those that were selling the tools and the network equipment and the hard drives and all that kind of stuff. And you know, you're seeing values of those. A lot of these things are being taken out of them. How legit. A legit values because they actually are making money. They've got terrific business because the money that is going into these new startups is flowing into the equipment companies and the infrastructure companies. So that's a, call it a little more. What would you be doing if you were running a fund right now? I mean, would you be doing early stage deals? Would you be running for the hills? Would you actually, if you were, if you were doing it, what would you be doing? Now you know why I retired from the investment business because running other people's money is fraught with daily questions of, you know, what the hell is this thing worth and why and who's doing what to who and what's the competitive analysis and the like. I think it's all teed off of what's going on at the Federal Reserve. The Federal Reserve has short-term interest rates. Effectively, it's zero. Zero interest rate policy. And all the models of valuation are driven off of short-term rates, right? So if short-term rates are 4% and they go to 5%, then valuations go down. If they go to 3%, then valuations go up because the alternatives to investing just in, you know, low-risk bonds is better or worse. When interest rates are zero, it tells you that every company is worth infinite. You just put an infinite valuation because, you know, you're divided by zero on these models. Interest rates will not be zero forever. Interest rates will back up to 1%, 2%. Whatever the number might be as the economy picks up, as jobs are being created. I won't want to be holding the hot potato when interest rates back up. Are they going to back up tomorrow? No. Next day, maybe. Six months from now. So do you think it's fair that these big companies can sell their shares in these secondary markets when their investors aren't able to sell them? And there's been some talk about some Silicon Valley companies where the founders can sell, but the VCs can. I mean, it's kind of a mismatch. I mean, I'm kind of a pro-founder, obviously, but that's good. I mean, the founder can get some cash. I mean, well, it turns out there are both there, you know, there's both shares being sold to fund the companies, there are shares being sold by the founders. And in some cases, there's shares being sold by the early venture capitalists. A lot of the money that went to the Russian Investment Fund were both founders and VCs of Facebook and is he a sucker or what? I don't know. I mean, you know, if he comes in, I want to buy your stock. Facebook had a $10 billion valuation. He's a genius. It's $50 billion. It looks pretty smart. On the other hand, maybe he's the one driving the price up from $10 billion to $50 billion and the... We don't know the lock-ups. All this public information is not available. The future profit stream of Facebook may be considerable. I think they have a lot of work to do in developing a business model. If you look at what makes Google successful, we talked about it before, is if you're buying a Plasmin TV, you go to Google and type in Plasmin TV and advertisers will pay a market price to get you to click on their ad so that they are the ones selling you a Plasmin TV. It's usually not best buy. It's two guys in Brooklyn who are selling it out of a warehouse in the back. And who cares who you buy it from? It's that nice Plasmin TV. But Google has made a business of capturing a lot of the gross margin of those sales. Has Facebook done that or Twitter done that or others? Groupon has a funky model that may be emulating that, but those others, not really. Facebook and then, of course, Zynga have created a model of selling virtual goods. Give me a dollar and you can send a balloon to a friend, a digital balloon. You go, well, that's pretty cool because you sold for a dollar, something that cost you absolutely nothing. Is that a big enough business? It might be. It might be a lifestyle business. If you look at the gamer world we were talking about before, the ability to buy virtual goods and virtual services in these online worlds, it's a multi-billion dollar business. Is it a $100 billion business? I don't know. So it's not a multi-billion dollar, a million dollar business. Eventually you've got to wear clothes and eat food and watch ESPN and stuff like that. So we're in Andy Kessler who wrote the book Eat People, seeing the multiple cycles, entrepreneur himself now as a writer, publisher, Wall Street Journal analyst, investor.