In several conversations recently with venture capitalists and service providers within the industry, I’ve heard people express how things feel like it’s almost — but not quite — like 1999, during the Internet bubble. There’s a little nervousness on the part of a lot of people in the industry because things have been absolutely hectic in terms of deals, venture funding, and business in general. Business could not be better for the attorneys, recruiters, Internet hosting firms, PR firms, and other service providers–causing some of them to pause, because the last time things were this good was during the dot com boom.
I’ve been covering the technology industry through socalTECH and my daily email newsletter since 1998, having lived through the last up and down. A few of signs to look for (in my humble opinion), to decide for yourself whether or not you might be in a bubble:
1) Too many cooks in the kitchen. Are there more than two or three funded startups focused on the same, narrow niche market? Generally, in a healthy startup cycle, you’ll find two or three companies who manage to get funding to tackle a specific need or new market–the founders generally see the need for something, come up with somewhat similar plans, and manage to connect with venture capitalists willing to fund their idea. Generally, one or two of those companies do well–either getting purchased for their technology, or breaking through to dominate a space. However, when you start seeing five or six (or more!) companies in a space–it’s oversaturated (and a sign of a bubble economy)
2) Lots of companies with a lack of plan to generate revenues. During the dot com boom, I constantly talked with companies who stressed eyeballs, eyeballs, eyeballs
and totally ignored monetization. It’s not that traffic is bad, it’s just that if you can’t convert it into dollars (through advertising or some other means) it’s just traffic for traffic’s sake.
3) “Building to sell” rather than “building to run”. In other words, are companies building in hopes of “someone” — Google, Yahoo are favorite names to drop–will buy them for some extravagant valuation, or are they actually building a business that is useful to someone–and that people are willing to pay for? Of course, venture capitalists want to see you sold to someone eventually for a return–but in general most acquirers buy companies that they can build into bigger businesses, that fundamentally are companies that could become profitable businesses or provide the technology behind a profitable business. The acid test for this is to ask the founder, what’s your plan for the business in five years? The answer, during the dot com boom: “I’ll have cashed out by then and living on my own island in the Caribbean!”
4) I don’t know the industry, but I’ll conquer it anyway. How experienced are founders starting companies in the particular industry they are tackling? Do they know who they buyers of their product will be? Do they have the relationships with the strategic partners they will need to succeed? During the bubble, there were a ton of well funded companies with executives who didn’t know anyone or anything about the industries they were looking to sell to.
5) Funding an idea, not a business. A huge marker for a bubble. During the dot com bubble, almost every other company I saw funded was just what I called “an idea plus an MBA” — a newly minted MBA student with an idea, but no track record or ability to execute, no technical background or technical co-founder.
6) Funding to put a “Corner store” business online–at a fantastic valuation. This was probably a dot com era phenomenon, but the idea that what you get at any corner store (pet food, groceries, etc.) and plugging it into the internet would be worth billions. The idea that your company would be able to take what traditionally had been a “corner store” business and scale it to conquer the world — beating out the other 150 people who had the same idea, where there is no technological innovation, and no barrier to entry.
7) Lots of funding technology for technology’s sake. During “good times” lots of companies with very neat technology–but which do not have market demand–often get funding. These are firms that might very well have great and grand technology but where no one, for the life of them, can find more than 10 customers who’d want to buy it–but where everyone pretty much agrees it’s “cool”. Here’s where there’s a lot of risk lies with Web 2.0 companies–where they have a “really neat” web service but no one can figure out if anyone would use it or buy it.
8 ) More PR than product. This is most obvious from a journalist’s standpoint, but it’s also readily observable by watching coverage of companies in business magazines. How much hype and PR are companies getting or generating, versus how much traction are they gaining with customers? During the dot com boom there were many, many founders of companies being heralded as “breaking the mold”, having the “next best thing” well before any customers were using their products and before there was proof in the market.
9) Hiring for hiring’s sake. One bubble era marker is hiring just for the sake of hiring. During hyper-growth of the dot com bubble, I talked to lots and lots of recruiters and others who told me companies were hiring simply for the sake of hiring. This was usually expressed by saying “We just hired 10 people, but we’re not sure what they’re going to do yet,” or “Competition is so fierce for employees, we went ahead and hired (Joe, Bob, Nancy) even though we don’t really need them,” or “I’m not sure what half the people in my department do, because they’ve only been here for a week.”
10) The Aeron Chair Index. When you walk into a startup, have they scrimped and saved to make their company as sustainable as possible, or is everything brand new, does everyone have an Aeron chair, and is there a foosball table, and an espresso machine? The more companies with all the perks, the more bubble-like the economy.
11) Spending your first VC round on a party. There are hundreds of examples of bubble-era parties which were held–not after major customer deal or being acquired, but just in having landed a VC round. Even though a big chunk of that round just went to rent the hottest nightclub/venue along with a well known celebrity musician/band for your launch party.
