Ten Signs You Might Be In A Bubble
Having lived through the last Dot Com bubble (socalTECH was started right before the dot com bubble),and with all the speculation about bubbles lately, I thought I’d throw a few observations out there about bubbles, given my prior experience. And, instead of calling whether or not we’re in a bubble, I thought I’d instead give you some telltale signs of bubble mentality (in my humble opinion–I’m not an expert), and let you be the judge of where things are at any one time.
Ten Signs You Might Be In A Bubble
1. Valuations and companies are being funded on artificial metrics, not financials and management team. During the Dot Com bubble, companies were driven to lofty valuations by non-financial metrics (hits, pageviews, unique visitors). When you start seeing companies valued not on their profits, revenues, or customers, but instead on their Twitter followers, Facebook “likes”, or how many downloads they have in the Apple App store, look out!
2. Greed and startup euphoria is spurring startups, not market opportunities. During the Dot Com bubble, many new startups were created solely because people wanted to “cash in” on the rise in dot com startups and many acquisitions/IPOs. Those companies were not created because an entrepreneur saw a market gap, or because of a market need or opportunity–they were solely created for cashing in on rising valuations and exit activity.
3. Ideas and MBAs, not businesses and experience, are finding funding. In the Dot Com Era, we used to call them “MBAs with a powerpoint” companies — companies where the only thing they had was a PowerPoint and a newly minted MBA, but who received millions in funding due to the euphoria over the startup market. Some of those may have been successful, but out of hundreds of those startups many flamed out due to not having such things as technical talent, a market, customers, or revenues, or any idea about their own industry.
4. “The Next” Companies are getting funded. Nowadays, it would be the Next Facebook, the Next Twitter, the Next Zynga. Rather than being new companies with new ideas and markets, they are the startups who think they have the better “X”, that being whatever the leading company in a category is nowadays. VCs might call these the “feature” not product companies.
5. People are hiring without a job description. In a bubble, there is such a frenzy for the best talent, that people are hired without any job description, idea of what they are doing, or even understanding of who they’ll work for, just to make sure you snag them off the market. This was common in the last bubble, when anyone with a decent record was snapped off the market just to make sure their competitors didn’t hire them, even if they had no idea who/where/what they would be doing at a company.
6. Everyone is trying to join a tech company, even if they have no clue about technology. In the Dot Com boom, everyone and their next door neighbor was jumping ship from whatever industry they were in (here, it was lots of people who were mortgage processors, Hollywood, consumer product firms, etc.) into anything technology related–and particularly, companies that had no relation to what they were doing–just for the stock options and hopes of hitting it big with an IPO.
7. Multiple competing companies are being overfunded all at the same time. Multiple (4+), competing companies with nearly identical business plans are all being overfunded by over-eager investors, resulting in over-saturation of very small markets. Whereas one or two startups in a segment might be able to develop a market and build a valuable business, when you start getting 4, 5, 6, or even a dozen startups it ends up taking down everyone from too little customers for too many companies.
8. Novice investors are leading the charge for startups. In the Dot Com boom, the newest investors were soon leading the charge in funding startups, paying the most for those companies, leading investments in those companies, as the (smarter) professional money started to sit out. The long time investors (think Tier 1 VCs) started to hang back because of astronomical valuations. During the Dot Com bust, those novice investors were late stage investors who suddenly got early stage religion and strategic investors. Today, you might watch the “super angel” world and compare.
9. The more money a company is making, the more dollars it ends up shipping out the door. In the Dot Com era, this was where it cost more for companies to ship you a product than the product was worth, where companies were taking a net loss on every order, where it took subsidies of venture capital just to allow a company to ship products to customers. In other words, the fundamental business model was broken (ie, the more revenues you have, the more profits, not less). Essentially, for part of the dot com boom, the business math was broken; companies were trading dollars for Internet traffic metrics, rather than using dollars to make more dollars. This is still possible today — for example, there was a shakeout a few years ago where online video sharing sites (well funded) imploded due to the high cost of hosting those free videos (ie. hosting, streaming, and storage costs exceeded ad revenues).
10. Your next door neighbor starts telling you about hot technology investment opportunities and companies. Back then, it was the plumber giving out tech advice, the doctor talking about his Netscape shares, the grocery clerk talking about buying Pets.com stock.
