Bubble Talk Goes On: It's An Overshoot

Bono at the Vanity Fair kickoff party for the ...Image via WikipediaFred Wilson: Invest In The Mess
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Fred has said repeatedly that what we are seeing is a bubble. First thing I say is this is not a yes no question. Is this a bubble? If you force ask me, my answer is no. This is not a bubble. This is hyperactivity. Will many angel investors lose money? Sure. But that does not make it a bubble. Even a top notch VC like Fred Wilson expects one third of his portfolio to go down under. And these are companies that he did not invest in on day one knowing they will go down. You think you picked a winner, you give them sufficient money and guidance, you go to bat for them, and they still go down. If Fred Wilson is at peace with a 33% failure rate, there are VCs whose failure rates are 66% and 90%. Most VCs fail. Most entrepreneurs fail. By some estimates as many as 90% of new businesses fail within a year of getting launched. Looks like 10% is all capitalism needs to survive.

The 1999-2001 period was a bubble. Fred Wilson has scars to show for it. I have a few scars of my own, though not of his size. A bubble necessarily signifies imminent collapse. I see hyperactivity, I see many failures round the corner, but I see no imminent collapse. That is why I have been saying this is not a bubble.

How can someone like Fred Wilson call the same thing a bubble and John Doerr call it a boom? It is because this is not a black and white reality we are facing. It is not very obvious what is going on.

Some new realities are coming into play.

Let me give you an example. I am currently helping out a friend with a tech startup. It is scheduled to start generating revenue upon launch. He is putting in very little early money. Early revenues will pay for the entire early work. So you are looking at a startup that will hit profitability at zero cost. I don't expect this startup to ever get bought. I most certainly don't expect it to go IPO any more than some day I am going to become Bono. But I do expect it to make him a full time income.

The 1999-2001 bubble was about tech startups only seeking IPOs or getting bought. This time around most startups will attain profitability without getting bought or going IPO. I feel like Fred is discounting that. He is so used to playing in the big leagues, those non exits are not registering with him, I feel.

He might also not be giving sufficient weight to what I call super exits. A lot of super angels will get behind super exits. They will get into promising startups early with the express intention of selling them to big companies with lots of cash. These will be startups that will innovate outside of companies like Apple and Google on their behalf.

A lot of mom and pop store type tech startups are possibly uninteresting to Fred. I don't know too much about the indie music scene either.

I must give him this much. I do think there is a little bit of overplay. But then that joyousness in investing comes from the fact that we just got out of a recession. A basketball released from the bottom of a pool has a tendency to overshoot.

So, Fred, I don't think it is a bubble, but I do think it is an overshoot. Not to worry.
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