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If We’re in a Bubble, What Should an Entrepreneur Do? (benjamingilbert.net)
37 points by treblig 937 days ago | hide | past | web | 24 comments | favorite



My 2 cents... In 2008 and 2009, when so many of my most talented friends were unemployed for the only time in their career, I observed, "It's a once in a lifetime opportunity to start a company. Better to be starting a firm when talent is plentiful and money is scarce than the other way around."

So what to do now that it's the other way around? (Independent of calling it a bubble, money is relatively more plentiful than talent than any time in the past 15 years)

An entrepreneur should take the money and use it to build talent. What's this mean? Be selective about money, get it from investors with as long a time horizon as possible, and make sure that it's enough to last a while. Then hire people with great potential who may be overlooked by the market. Use the money to grow them as they grow the company, and create an environment where they might want to stay.

If you're not that patient, just take the high valuations and use it to buy 1 or 2 superstars whose equity is underwater at Google.


Great insight. I'm frustrated in general by the amount of bellyaching about the difficulty of finding talent in conjunction with the apparent unwillingness to invest in developing it. If there's a time for cash-rich, talent-poor companies to invest in training, now is it.


Thanks for this.

get it from investors with as long a time horizon as possible Can you elaborate on how to evaluate this? I'd imagine you could just ask them if you already have a relationship, otherwise by looking at the age of their fund?


You hit the first two suggestions - age of fund is a big clue, and just asking them. Reputation of the firm matters a lot too.

If you're up front about your expected burn rate and the amount of funding you're asking for, that will help select the right group too. (You can't ask for 10 years of funding, but you can go for more than the year that many settle for)


It's difficult for many entrepreneurs to hedge, particularly young or first-time entrepreneurs, because a supermajority of their net worth is in their company. If you own a software company and have $10k in your IRA there is no option available which causes that IRA to suddenly be worth an appreciable portion of the value of the software company given some event which severely compromises the worth of the software company.

The best option available if you're concerned about sector-specific or firm-specific risk is to decrease your exposure to your own company. For example, if your company has already created tangible economic value, you'd do something like a secondary sale while raising a new equity round, such that part of the round goes into your pocket rather than the company's coffers. You'd then take that money and then do anything other than putting it into a high-growth tech company.

This is becoming much more common than it used to be, to my understanding. Historically VCs preferred to have founders be "hungry for an exit" (which was, ahem, so that VCs would have a superior negotiating position), but these days social acceptability of cashouts is increasing as a) the market favors entrepreneurs and b) VCs are starting to cotton onto the fact that early acquisition offers (which murder VC returns) are radically more attractive when you have $600 in your checking account than when you can comfortably contemplate e.g. a wedding, childbirth, or a home purchase (well, OK, maybe not a home purchase in the current real estate market) without suffering crippling amounts of financial anxiety.

Given that one has a non-trivial portion of their net worth outside the company, there exist options for hedging, but given that you're probably better at selling software than on financial alchemy you should probably stick with what you're good at.

That said, you might do something like I did, which was e.g. pick a publicly traded company which would get shellacked if your sector got hit and buy deeply out-of-the-money puts on them. (I picked Salesforce and spent ~$500 on an options position which pays out only if they either have Enron-sized accounting issues or SaaS gets punched in the face. It expired valueless. I'd have re-upped it for another year but didn't anticipate my net worth and professional career to both be 90%+ SaaS-weighted for most of this year.)


> That said, you might do something like I did, which was e.g. pick a publicly traded company which would get shellacked if your sector got hit and buy deeply out-of-the-money puts on them. (I picked Salesforce and spent ~$500 on an options position which pays out only if they either have Enron-sized accounting issues or SaaS gets punched in the face. It expired valueless. I'd have re-upped it for another year but didn't anticipate my net worth and professional career to both be 90%+ SaaS-weighted for most of this year.)

This is not good advice. Buying options is a fool's game. The vast majority of retail options buyers lose money, which isn't surprising given that upwards of 70% of call and put options expire worthless. When it comes to losing money, buying deep OTM options is by far the best strategy.

If you want to play the options game, you are statistically far more likely to not lose money, and to make it, by selling options.


That's the point of an insurance policy: you want to say next year "Darn, I spent a small predictable amount of money and nothing bad happened so I got nothing for that money."

The more pertinent criticism of this strategy would be "Patrick, there are all sorts of ways for the value of your company to go to zero, including in the middle of a sectoral decline, without causing the options you purchased to be worth enough to meaningfully cushion the blow."


A protective put against an equity position can function like an insurance policy. For example, if you owned a large position in CRM stock and were sitting on significant unrealized gains but didn't want to sell, you could buy CRM puts to protect your equity position. Of course, there are other strategies (like a collar) that are probably going to make more sense in many scenarios.

Buying a deep OTM put in a single company as an "insurance policy" for your privately-owned SaaS business is patently silly. The correlation, if any, is far too weak to be meaningful but even if you believed there was some correlation, to follow your own criticism of your strategy, I find it hard to believe that $500 worth of puts would provide protection unless you have a tiny business. Even if the value of your puts grew by, say, 3900%, an entirely unlikely scenario, your dollar gains would still only be $19,500.

So I'll repeat: folks should not consider buying puts (and deep OTM puts at that) as you suggested.


Back during the first dot-com boom I was working for a Swiss Bank and they were marketing something called "Proxy Hedges" to entrepreneurs. The idea was that if your start-up was, say, a tech company, you would buy shares in companies that were in an industry that tended to do well when tech industries didn't. No idea what. Maybe supermarkets or mining something .


You'd then take that money and then do anything other than putting it into a high-growth tech company.

Yep, that's one way to hedge :)

I guess the main thing I was getting at is - is there any high-growth tech company that you could start that has more opportunity in a bubble burst?


All good tech start-ups benefit more from a bubble bursting, than from the roaring times during the bubble.

Others have written about this before; in fact every time this happens it gets historically summarized by someone. If you look at the numerous boom / bust periods in tech, whether the '80s, '90s, or '00s, the best tech companies roared right through the downturn and came out the other side in great shape.

It's the same reason Intel always believed in investing right through the bust periods, to gain ground against everyone else that either can't do that or is foolish enough to go into lock-down mode.


Bootstrap. None of this has any impact on you if you bootstrap your company, and run it profitably, with the intent to keep running it profitably.


This is partially true.

The non-true part of it, is that if you see half of your business vaporized in the downturn, your profit margin while bootstrapping will be erased and you'll lose money. That can easily happen at nearly all sizes in terms of costs drowning you.

$2m in sales, $200,000 in profit. Your sales suddenly fall to $1m (and in a bubble bursting scenario, that happens at warp speed, it'll make your head spin), I'd almost guarantee your costs will wipe out your profit in that situation (assuming you're not a one person shop). Then suddenly you're firing people, and it rattles your entire organization; existing customers lose confidence and switch to bigger competitors or back to internal solutions.

The dotcom bubble bursting was a very dramatic example of this, and the speed at which it killed good companies was intense. Where good companies that were modestly profitable still saw half their business killed off, and it was simply too much to bear because all of that damage doesn't happen in a linear fashion, it has immense knock-on chaotic effects to your business.


Those risks can be mitigated with a scalable business model, which scales up or down. When I first starting getting into the details of running a business, I was taught to always build in a core transaction that is the basis for the revenue. You then budget your expenses based on the actual costs and profit from a single transaction, and scale based on how many transactions actually occur. If your sales slip, your budgets decrease, and you may need to let people go, or take other actions to scale down... but the business itself is still running at a profit. The scenario of having to scale down sucks. But it doesn't have to move you into the red.

I admit that not all business plans can follow this philosophy, in particular if you are of the thinking to get traffic now and monetize later. And I'll work for people running companies who don't follow this philosophy, but I won't run one myself.


This "run it profitably" thing.. it might have something to do with the macroeconomic climate perhaps.


There's a bunch of options.

One of the most obvious, as an investor, is to hoard cash now. When the bubble bursts, your dollar will go further; you'll get better valuations, companies will be more desperate, etc.

As an entrepreneur, time to make hay while the sun is shining; raise cash now.

Looking for hedge? Consider SF real estate. A big part of what's keeping it sky high is the proliferation of startups in SoMa, making living in the city an attractive option. If those jobs all disappear, I doubt there will be more than enough Tech shuttles to bring all those people back down to the valley - and the depressed labor market should lead to lower wages.

I do think there's tremendous opportunity in the hiring space for a good startup, but I have no idea what that is. The "Bad Hire" risk is magnified for small companies... so if anything, that's something that does better in this phase of the business cycle, when hiring is high.


How would SF real estate be a hedge if the regional tech labor market becomes depressed? Lower wages in SF and the surrounding area should depress real estate prices in SF, not increase real estate prices.


It won't be a good hedge. You'll take a bath on that real estate if the venture capital market seizes up (eg with higher interest rates and were a bubble to pop). Rents will fall, vacancies will soar, and a lot of construction will halt.

I can't see what the parent meant, such that it makes sense as a hedge. The hedge (if one were really worried about a bubble popping) on SF real estate would be to sell right now - if you can get a high price - and rent.


I'd never enter the SF renter market as a landlord, given that it can basically only go down.

I meant to suggest it as something you could short - it's an asset class that is tied to the health of the sector. Since it's hard to short the companies in the sector, you could short the RE as a proxy.


I meant to suggest SHORTING real estate as a hedge. Not buying it.

You can accomplish this through companies that own property in the area.


I have been worrying about the economy being in a bubble for the past year. It stagnates you. It's best not to obsess over it. It's only a bubble if a crash occurs, and no one can predict that, only play the guessing game.


Why are there bubbles in the first place?

Would it not be in the interest to prevent trillions of dollars in losses due to economic bubbles bursting? Or is that part of a finance game where shorting companies becomes very profitable?


If you can figure out why bubbles happen and are able to predict them then there's a Nobel in economics waiting for you


Why a particular bubble progresses is easy, especially in hindsight. It's predicting its future that's hard.




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