I Encourage Entrepreneurs To Ignore The Word “Bubble”

http://www.feld.com/wp/archives/2011/04/i-encourage-entrepreneurs-to-ignore-the-word-bubble.html

by joshfraser • 15 years ago

56 19 15 years ago

feld.com

joshfraser• 15 years ago

Putting things back in perspective...

"Always remember that one day you too will be dead."

wisty• 15 years ago

Unlike the big bubble, profitable tech companies are not just selling "picks and shovels" to unprofitable (but well funded) ones.

Ebay makes money. Amazon makes money. E-Commerce is alive and kicking (finally), and even if investor funds dry up overnight, there will still be lots of cash coming in.

In the first bubble, the only people making money were Yahoo (who sold ads to overfunded startups), Oracle (who sold database software), Sun (who sold servers), and the consultants (who supplied warm bods). This time, it is different. All bubbles are.

fleitz3• 15 years ago

Even if there was a bubble, Entrepreneurs are the ones vending so it makes sense to sell in an overpriced market.

If you're looking at selling your company when you retire or handing the large majority of it to your heirs then the bubble is irrelevant and you should focus on profit. (There could possibly be some tax benefits to transferring to heirs during a period of low valuations)

If you're looking to increase your liquid assets in the next 3 years it may be an idea to sell now (during a purported bubble) and diversify into more liquid assets.

Asset bubbles in the tech startup sector are primarily detrimental to VCs and their LPs. It could also be detrimental to startups with exits in the next 3 years (assuming the 'bubble' exists, and 'pops' with in the next 3 years) if your founding a company focused on profits it's irrelevant and if you're founding a company that will take VC you will benefit greatly from a bubble.

The only people that a bubble affects negatively are those planning an exit in the next 3 years and those buying tech startup stock. As a founder most of the bubble effects are positive if you can take advantage of them today.

If there is an asset bubble in VC funded tech startups it comes from VCs raising too much from their LPs and then having to spend it somehow and taking the easy route of spending more per startup rather than hiring more analysts to fund more companies. The herd mentality doesn't help reduce the bubble and I think that the perception of a bubble comes from the valuations reached by companies that every VC wants a piece of the action, thankfully this behavior leaves lots of really great investments at low prices, so there should be some great opportunities out there for VCs willing to stray from the herd. (I'm channeling buffet here 'be cautious when everyone else is greedy and be greedy when everyone else is cautious')

I think a large part of the increase in valuations that VCs see is due to incubators weeding out the pets.com and the VCs seeing companies at a more mature stage due to decreased capital requirements for a tech startup. Honestly, a shitty desktop PC with an SSD will run circles around a $100,000 DB server from 1999. If you can turn a profit with one server EC2 will let you scale infinitely with out needing any VC, hence Entrepreneurs don't NEED to take VC, hence they are in a much better position to negotiate an increased valuation.

Note: I don't think a bubble exists in the sector as a whole and is limited to the companies that every VC wants a piece of. Due to VC being a private market with private financials it's hard to evaluate these bubble claims independently. I'd love to look at the 10Q equivalents of the portfolio companies of people claiming a bubble.

rosenjon• 15 years ago

I wouldn't ignore it. There is the real possibility that there is too much capital being pumped into early-stage companies, and when they fail, there will be too little available to all. The best way to insulate your business from bubble economics is to find a profitable business model that is not reliant on the exuberance of others, and not easily replicated by someone else.

Someone likened Google's other businesses as the moat around their search castle in another thread. I would recommend that everyone think about how to build their own castle that repels competitors as well as the effects of economic externalities that are outside your control.

chailatte2• 15 years ago

I believe mortgage brokers were also encouraged to ignore the word 'subprime'. Nothing bad happened there.

fleitz3• 15 years ago

The asset classes of 'privately held VC funded tech startups' and 'residential real estate' are orders of magnitude different in their valuation, if valuations for every company in that asset class dropped to 1/10th it would make approximately zero difference to the economy as a whole as the risk is concentrated to those with enough assets to make risky investments.

Honestly, tell me how Facebook being valued at $7 billion instead of $70 b will tank the global economy? The reason the economy tanked because of the real estate bubble is because consumer spending was largely fueled by increased liquidity of equity and that we lost about $12 trillion in asset valuations. There isn't $12 trillion to lose in the tech sector, let alone $12 trillion from a 25% price correction.

chailatte2• 15 years ago

"the risk is concentrated to those with enough assets to make risky investments." Meanwhile, Zynga raises $500 Million from T. Rowe Price, Fidelity and Morgan Stanley. With 401k money from ordinary folks.

"how Facebook being valued at $7 billion instead of $70 b will tank the global economy" You're right, it won't. But the continuing culture of extreme risk taking will ultimately bring down the global economy.

d2• 15 years ago

So brad is asking us to ignore the irrational exuberance that surrounds funding and acquisitions in our sector? That sounds like bad advice. Business is not done in a vacuum and if you ignore the weather you risk freezing to death or dying of heat-stroke.

The example he uses of the 2008 economic crisis is a bizarre one because the only short term effect it had on startups, since we don't use the money markets, is that we all made sure our money was below the FDIC deposit insurance limit. Other than banks going under, it had little short term effect on us. [Longer term it resulted in a recession and less customers]

Not being able to raise money has a profound effect on cash flow planning and the competitive landscape. Asking us to ignore that is not good advice.

bballant• 15 years ago

To use your analogy, I don't think Brad is saying to wear shorts outside during a blizzard. He's saying that if it's a sunny day, you shouldn't wear earmuffs just cause it's unseasonably warm and may or may not snow tomorrow ;-).

edit: Perplexed at the down-votes. Is it the smiley face?

dagw• 15 years ago

if you ignore the weather you risk freezing to death or dying of heat-stroke.

I don't think he's saying ignore the weather, he's saying don't use the weather as an excuse for staying at home, when all you have to do is dress appropriately .

pnathan• 15 years ago

There is no bubble. Move along, citizen. Do not look at the man behind the curtain.

hammock• 15 years ago

Best advice- "Don’t get distracted by speculating about “bubbles” other than the ones in your bathtub. Instead, spend your energy creating amazing products, thrilling your customers, building an awesome organization, and living your life."

thecaptain• 15 years ago

"I refuse to make predictions as the only thing I know with certainty is that some day I will be dead"

Umm, ok? If you really want to get technical about it, indeed there is nothing with 100% certainty, even your own demise. However I think it's worth analyzing past trends with current trends in order to make an educated guess on what may happen.

I understand what the author is trying to promote here, but going at it completely blind isn't just unwise, it's plain stupid.

A1kmm• 15 years ago

Rational planning means taking into account threats into your business plan.

If you have an established company, I'd suggest strategising on how you can survive a bubble burst event and the resulting downturn in investment, spending from new investment backed companies and so on. The bursting of the bubble will have opportunities for a well positioned business - less competition, more reasonable prices for advertising on other sites, for example. Be careful with debt your company can't pay back if the bubble bursts, and keep a majority of people who want panic on the board.

Until it bursts, there is lots of money to be made from the bubble for appropriately positioned companies.

onan_barbarian• 15 years ago

Another good reason to ignore this stuff is that it will be frequently used as a face-saving excuse to not spend money on something or back a company.

It's a lot easier to say, "Oh, we're not going to license your software any more due to the Global Financial Crisis" or "We're not going to put money into this venture because of the tech collapse" than it is to say "We're out of money" or "Your company and ideas suck".

hartror• 15 years ago

The answer to the question "When should I start a business?" is always "now".

Waiting will never provide an advantage. Obviously conditions have an affect on how you plan, but not when to start.

I Encourage Entrepreneurs To Ignore The Word “Bubble”

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