Bubble Thoughts

I have been tweeting about some unease I have about the local economy, not out of any great wisdom or experience, but just noticing some random signals. Since then, of course, a conversation has exploded around bubbles, burn rates, and every investor transforming into an armchair economist on Twitter. Offline, this topic comes up so much in conversation, i wanted to briefly outline my point of view on the matter. I thought about doing a Tweetstorm, but I tweet so much that I thought if I do a Tweetstorm, my followers would kill me. So, here are my thoughts on the matter:

1/ Difficulty In Defining Terms: It’s hard to have a discussion about “bubbles” because different people define them differently. For me, I define a bubble as having two characteristics — one, an environment where overpriced assets have no buyers; two, where people take on debt to buy those assets; and three, where the pain associated with the bubble popping is widespread among a population.

2/ Bubbles As Geometric Shapes In Motion: Additionally, it’s not quite right to ask “Are we in a bubble?” The answer to that is “yes.” The more pertinent question is: “In the bubble we are in, how big is the sphere and how fast is it expanding?” The shape, size, and speed is important.

3/ Current Mood Of Public Markets: It’s not totally easy to go IPO right now. A few handful of tech companies have tried and been rebuffed. The public markets are accepting IPOs with certain fundamentals but rejecting others, and are especially harsh on ones with high sales and marketing engines.

4/ Private Market Slices: The private market is so big now as a result of stricter IPO requirements and more patient capital. Crudely, I slice it into three sub-markets: Amateurs, Pros, and Greed. The amateurs (where I sit) consist of the crowdfunding platforms, the accelerators and incubators, and people like me who invest very early. The Pros outsource this risk to the amateurs, and both sides are happy. The Greed (not stated in a bad way) are there to provide growth, patient, and leveraged capital cheaply to companies which want to stay private longer. (The late-stage greed rounds is where many think a mini-bubble has formed or is forming.)

So, therefore, I believe…

5/ Mini-Bubbles Will Concentrate Pain: My belief is that between the companies funded by the amateurs and the greed rounds, many of those will not live on. Many will be subsumed through M&A or go away. The pros are looking for more and more proof points, willing to pay more for more de-risked opportunities, and the public markets have welcomed a good number of companies with open arms, but also given the Heisman to a few, as well. This time around, folks may be hunting for the small acqui-hire exits or the big M&A exits, and some of those may come at prices below what the cost of capital in the previous rounds.

And, so here we are…what to do? For most people in the early-stage, it’s just the same. Maybe we all should be even more sober about the realities of what’s needed for real institutional financing? Maybe we’re about to hit a zone where AngelList backers and newly minted tech millionaires who dabbled in angel investing start putting up big zeroes on the board? But, we all knew that going in to it. For the later stage folks, tech is still hot — and there’s a vibrant secondary market, so maybe the really expensive shares purchased at $10bn can still find a buy tomorrow at $20bn. It all seems plausible until there’s no one left to buy a share.

People won’t say this publicly, but I hear it all the time — many folks across companies, investment firms, and media properties sort of want a bit of a correction. Talent is very fragmented across companies. Consumers are running out of time in the day to try new apps. Today’s exciting new platforms will take time to bake and get market-ready. That doesn’t mean folks should stop trying — but just a little fear might turn out to be a gift for the ecosystem at large.