
I Encourage Entrepreneurs To Ignore The Word “Bubble” - joshfraser
http://www.feld.com/wp/archives/2011/04/i-encourage-entrepreneurs-to-ignore-the-word-bubble.html
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rosenjon
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.

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fleitz
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.

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wisty
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.

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hartror
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.

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d2
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
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?

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hammock
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."

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joshfraser
Putting things back in perspective...

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

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onan_barbarian
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".

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A1kmm
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.

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thecaptain
"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.

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

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

~~~
fleitz
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.

~~~
chailatte
"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.

~~~
fleitz
Unlikely, the issue from subprime was that the advent of CDO changed the risk
model of the underlying asset. This allowed CDOs to the classified as Triple A
which were not triple a worthy. The problem was not the risk, but that the
risk was not communicated because it was largely unknown and that the system
incentivized rating agencies to exaggerate credit ratings. Everyone in vc
knows the risks and fully communicates the risk, almost anyone can buy real
estate on 20x leverage (5% down) very few people can buy private tech sector
stock on 20x leverage.

When 60% of the population holds the vast majority of their net worth in tech
sector stock at 20x leverage there may be larger issues, the risk taking
culture in tech is very appropriate because they can bring large improvements
to the lives of millions, your house is not likely to be 100 times more
productive in the next 5 years. Thus taking huge risks on housing is
inappropriate where as it's very appropriate in tech R&D.

