Too much cheap money and distorted market valuations

As of November 2015, what does "Finally, too much cheap money lets companies operate with bad unit economics and cover up all sorts of internal problems" mean in the case of distorted valuations? How does this make a startup less robust in the future?"

Let me tell you all about it! 

Interest rates are being held at zero by the Federal Reserve, using quantitative easing, in order to protect the economy from recession. Unfortunately, this has been necessary since 2008, and the Federal Reserve is continuing to postpone raising rates, i.e. monetary normalization, although it is increasingly difficult to justify.

...the entire public market is likely to go down—perhaps substantially—when interest rates materially move up, though that may be a long time away.

The Federal Reserve intended to keep interest rates low, in order to encourage businesses to invest in R&D, new ventures or make capital expenditures for plants, property, and equipment. The logic is that with interest rates so low, there is a strong disincentive to accumulate cash reserves, for both businesses and investors. For reasons that aren't entirely clear, businesses have not taken advantage of the ultra-low interest rate environment (the cheap money in your question) for building durable wealth, but instead, have been doing things like stock buybacks.

This recovery has been one of the weakest in U.S. economic history, and cannot seem to get past stagnant wages and persistently high unemployment.

In a world of 0 percent interest rates, people become pretty focused on finding new sources for fixed income.

Investors are chasing yield, which only drives speculative markets higher. Speculative markets include the stock market as well as venture capital. There are fewer sources of return on investment, despite easy credit for businesses due to extravagantly accommodating monetary policy.

Current tech investors don't want to sink lots of money into research and development with no expectation of a marketable product for seven, maybe 10 years. They would rather invest in an Internet company, with minimal fixed costs but a viral tech-lite product that will earn a lot of money quickly. Technological innovation seems to be accelerating, and keeps enthusiasm high for the technology sector. Or maybe, we are coasting on the tail of prior decades' discipline and the fruits of past business and government willingness to fund basic science and infrastructure...?

Frank Forte's answer*** described some of the more uncertain tech investing trends, e.g. in social media companies and data-driven advertising. Platforms such as Uber and Airbnb have distorted valuations. Truly, they are little more than apps! Uber might actually fulfill the expectations of its currently inflated valuation because its management has made the sound strategic decision to invest profits in something truly innovative, although the returns won't be realized for years and financial outlays will be sizable: self-driving vehicles. Willingness to make capital-intensive investments in projects with a longer term payoff, as Uber is doing, is the exception not the rule now.

Let's be more specific: Many tech startups and Internet companies are indulging in non-GAAP** financial reporting, which shields wasteful, risky, and money-losing management behavior from investors.

So I think many companies are hurting themselves with access to easy capital.

GroupOn and OverStock are examples. Don't jump to the conclusion that these companies are unusually greedy or unethical though! As long as investors are willing to buy their stock, for public companies, or fund them, if private, this will continue.

*Block quoted passages above are sourced from The Tech Bust of 2015 by Sam Altman (2 November 2015)

**GAAP = Generally accepted accounting principles 

***Frank Forte's answer: 

"If a company has no money and cannot borrow, that company will rely on their customers to buy their product. You know immediately if the company is worth anything; either they no longer exist (cannot pay employees) or they grow (getting more customers, affording them more employees).

If a company gets a ton of dough from investors, whether it is equity or debt, they can go on for a long time without customers, and it is hard to know if they can make any money. They can spend it developing a product and forget to sell the product, or see if there are real customers out there that are actually willing to buy what they are offering.

Compared to companies creating products or services for sale, social media is more complicated. Typically the product is the user base, and the customer is the advertiser. The above information still applies though.

• to attract advertisers you need enough users,
• just because you get the users, it does not guarantee you will make enough revenue from advertising to support the business.
• if there are problems with management or strategy, this does not come out until they are ready to monetize the platform, and by that time the company might have burned a lot of cash and not have much left to deal with internal issues, and it can have a hard time becoming profitable."