The Great Bubble

Winter is coming, the bubble is coming. It’s in the air, it’s in the news, for quite some time already, more and more... Yes, startups are raising a lot of money, they are also burning a lot and you can be worried: some apparently great startups will collapse.

This being said, Venture Capital has always been about paying for the short/mid term value of companies that investors expect to be worth a lot more on the mid/long run. Those startups are supposed to grow faster than standard companies, on a non-linear path that is unpredictable. Also, Venture Capital has always been about investing and loosing half of your money until outliers emerge. That’s just the way it is, there is nothing new under the sun.

We all expect singular teams to build monopolies around new or growing trends, habits, pieces of technologies, breaking and weakening historical players that have become too slow, less agile, afraid of reshaping their fortress and which therefore are suffering from some kind of inertia that will eventually kill them.

Uber, Airbnb, Slack, Facebook, Snapchat and a bunch of others… They did not exist 10 years ago, yet their aggregated value exceeds the total amount invested by the whole venture capital industry in the US for the past 10 years ! And I’m not talking about the hundreds and thousands of other successful startups.

So Please Relax :)

Don’t get me wrong neither, it’s not always sunny in startup land. The downsides of so much money invested into fast growing companies are obvious:

  • Their burn rate can be super high while their model equilibrium still remains pretty weak (Homejoy)

  • They want to grow super fast, they hire a lot, inflating the cost of salary & living (Zenefit)

  • They grow big but sometimes dirty (Groupon)

However one should not forget what a bubble looks like:

  • It’s basically market makers gone wild. People buy and sell things that actually don’t exist or were made up just to serve a greedy market.

  • It has a systemic effect on all the players of the industry once it collapses.

  • The underlying asset, that was inflated to serve the purposes of the market makers, is so huge and impactful for the whole economy that it takes ages to clean up and recover from the burst.

Also, there are some very big differences between the venture capital industry and other industries like real estate or commodities.

  • You don’t borrow money for 30 years nor leverage 20 times in order to take a position.

  • You can’t short neither create derivatives of venture capital stocks. Yet ! So there were no systemic effects besides the VC firm and its LPs when a startup collapses.

  • The returns have always been held by few hands in this industry and the majority of the firms don’t provide decent returns, even one third of all the venture capital firms end up closing shop.

Give this bubble a break, the collapse or decrease of a bunch of well funded unicorns will be great for the sake of the ecosystem. The inflation will remain high in the Valley (even though it might decrease a bit). Valuation will remain high as well but so will be the expectations.

The market is currently racing at full speed. The costs of growth have skyrocketed and the results have yet to show up, so it’s normal that the venture capital industry is starting to shrink a bit.

Entrepreneurs, watch your burn. Don’t fantasize on this euphoric market and keep building products and services that people want to use and buy everyday.