Bubbling Away — Who Cares?

I have been watching with more than some amusement as various commentators debate the presence of a new “Tech Bubble.” My friend Bill Flook wrote about it yesterday in the Washington Business Journal, and suggested that it’s passing DC by. Others make light of it, by posting blogs that deride the people who are feeding it – sort of smugly observing from the cheap seats the ‘stupidity’ of others. And, then there are folks who talk about the Tech Bubble as a real thing, and try to put it into historical context, juxtaposing it against supposed glory days of venture and angel investing. I am reading these pieces and somehow I just can’t get so worked up about it. Have I just lost my will to pontificate? Well, no.

As I hear more and more about a new Tech Bubble, it strikes me that the undertone in the coverage and observations is that “we are heading for a crack up again.” In other words, the aftermath of the last Internet Bubble in 2001. For those of you old enough to remember, it was a time of tremendous disappointment and dislocation. It wasn’t fun for the folks who were in the middle of it. Investors lost money. Entrepreneurs saw their dreams crumble. People lost their jobs. It was pretty lousy. Of course, the ride from 1997 to 2001 was as one well-known teenage singer says “pretty cool.”

Apparently, we are therefore heading for the inevitable crack up. Valuations are too high. Companies aren’t rooted in reality. And so it goes.

Guess what? In many cases that is absolutely correct. Many of the Angel investments that are being made, particularly in the Valley and NY where the most Angel deal velocity currently exists, will ultimately result in write offs.  This will also be true for most VC investing. Almost all start ups that are being funded today will face moments of existential crisis and many will fail. I guess my reaction to all this “so what else is new?” That’s always the case for start up investment.  The challenge in times like these, as it has been at any other time, is for investors and entrepreneurs to formulate business and financing plans that match up with reasonable customer adoption and exit possibilities. If you are in the middle of a “bubble” then you need to make sure that your business plan can be completed within the parameters of the market you are operating in. Otherwise, you have to have a business financing and growth plan that will match up your cash and exit requirements to the market that you will likely face in 2 to 5 years from now. In other words, plan for the financial and exit markets to be different than they are now. They may be better. They may be worse. But, they will surely be different.

What I am getting at most simply is that the issue here is not is there a bubble? The issue here is when you are creating a company with a likely 5 to 10 year history before it is worth someone else owning, you need to ensure that your business and finance strategy reflects the possibility that valuations will change over time. When investment bubbles burst, companies that were created to succeed within the environment of the bubble, will face a financing and customer adoption crisis. That’s just what happens.

My viewpoint on the Tech Bubble is therefore pretty simple. It’s just a fact of life for current investments, and should be factored into how a startup and exit is evaluated. As I am looking at investments and start ups I have the following core principles:

1.      Can the company obtain customers without a huge amount of external capital? If it cannot, and it is operating in consumer Internet or mobile, can sufficient capital be obtained to make the business important in the next 12 months?

2.      Is the business operating in Internet or mobile, particularly social? If so, then valuations and exits are being affected by the current Tech Bubble, and care should be applied to how the business will fare if the market environment changes. If it is not in those narrow fields, then the rules of the Tech Bubble really do not apply, and the investment should be evaluated the “old fashioned way.”

3.      Old fashioned entrepreneurship, lean start ups, and similar company creation models should always be applied. A start up should have a plan to obtain customers and uniqueness as soon  and as efficiently as possible. This is always true, and should never be forgotten, neither by entrepreneurs nor by investors.

What I have seen over the last five years of running Amplifier is that most experienced entrepreneurs build their companies the old fashioned way. They tend not to get caught up in the finance environment of the moment and look to the longer term. When their businesses are able to benefit from favorable market trends they will take advantage of these opportunities, but they tend to do so in a more balanced manner. The same is true for good investors.

My overall conclusion to the discussion of is there a Tech Bubble is therefore to say that it really doesn’t change what I do, and I’d recommend that it doesn’t change what you do as an entrepreneur. A bubble is merely a change in market expectations for valuations – valuations go up and down. What should be constant is the entrepreneur’s search for a business model that creates value and utility for customers.

When the financial market changes, and it inevitably will, many who are “caught up in the bubble” will be harmed. But, not all will be. As is the case for the last Internet Bubble, lasting businesses will endure and exits will have been obtained. And, as sure as the sun comes up the cycle will start again. Entrepreneurs will innovate and investors will invest.