I am tired of reading blog posts from “bubble predictors”

Posted on November 15, 2010. Filed under: startups, venture capital | Tags: , |

I am tired of reading blog posts from “bubble predictors.”  It’s such an easy position to say things are crazy, this isn’t sustainable, when you don’t set a timeline for when we will begin to see a correction.  Oh really? You think valuations are eventually going to come down after a period of growth.  That’s novel, way to go dude.  Even better when you hedge your call and say “this isn’t sustainable, but I’m going to keep playing, just in a smarter way then everyone else who is doing the same thing.”  I can’t wait for you to point back to your November 14th 2010 post 24 months from now and say “look, I called it, nobody listened.”  If the market corrects in 6 months, you got it just right, if the market corrects in 24 months, you got it just right, what a cowardly position to take.

What pisses me off even more is that every time you voice your nebulous position on the trajectory of our market, you negatively impact it and contribute to the fulfillment of your prediction.  What’s the best way to catalyze a bubble?  Start talking about a bubble.

Generally I’m a fan of Suster’s blog and perspective, but I love how he complains that Angel investing is “driving up prices beyond their inherent value.” Guess what Mark, every single Angel deal that has been done in the last 10 years has been done above it’s inherent value.  That’s because 2 guys and a dog don’t have an inherent value.  Value is entirely market driven at our stage of investing, and if you think the pre-traction consumer facing web application is “inherently” worth $2M pre, but is not “inherently” worth $4M pre, you’re wrong.  Guess how much it’s actually worth?  About $60K, or whatever number you can arrive at by multiplying the number of man hours that went into it by the market rate of that labor elsewhere.

It also pisses me off that people are complaining about the number of angel investors that have entered the market.  Sure, this makes it harder for you to generate returns as an venture investor, when prices go up, etc…but more angel investors mean more founders can start more companies, realize more dreams, and create more innovation than they could 24 months ago.  Personally, I welcome anyone who wants to cut a $50K check to support a new product and pull a smart mind out of wall street or advertising or any other industry that is not pushing the limits of what can be.  I’m not saying all these companies that are getting funded deserve the funding or valuations they are raising at, and many of them will die, but I’d rather see a slew of dead carcasses on the side of the road with a single world changing product leaping over them on the way to victory, than a road with no carcasses and a world that could have been changed but wasn’t because you scared all of the new angels out of the market with your fire and brimstone analysis of why “angel investors who think they are cool at parties aren’t really cool.”

So here’s the deal.  I’m not saying that there is no funding gap, there will be.  I’m not saying that people aren’t overpaying for deals, some are (and btw some are smart to overpay for deals.  You would have said the Bijan overpaid for Twitter and David Sze overpayed for Facebook, and they are both laughing all the way to the bank at the slew of investors who sat on the sidelines when prices got high).   I am simply saying that all of this entrepreneurial activity is a net-positive for the world.  Founders and investors, take note that you are playing in risky waters and lots of you are going to lose lots of time and money over the next 5 years.  Some of you are going to make gobs of money, change the world, and do it on your own terms.  If you don’t like that setup, go be a lawyer.  If you do like that setup, put your head down, make the smartest decisions you can, and play.  Don’t complain about it.

P.S. I realize there is a very good chance I am going to have to eat these words in the foreseeable future, but I have no interest in hedging.  Suster: it’s all love, but I hated your most recent post.

 

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6 Responses to “I am tired of reading blog posts from “bubble predictors””

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You make some good points, but I particularly like the carcass one. I don’t mind if a bunch of investors lose their money if one or two really game changer companies come out of the melee – and I am pretty sure that most of the investors in those few lucky companies will do pretty well. And that is the name of the game.

But there is still a bubble. <-there, now I called it too!

😉 funny guy. put a timeline on it

Wow, that is a lot of ire for my simply having expressed my point of view on the topic. I can see somebody arguing the opposite point-of-view (which I note you didn’t do), but I’m not sure why I deserve so much anger. I feel like a touched a raw nerve for some reason and I certainly didn’t intend to. So for specifics:

1. “inherent value” – of course you’re right. but for angel investors to make money they need companies to ultimately exit at a positive return. Same for VCs. So some simple math – if IPO’s are largely dead you need to look at average M&A prices. To know if you can make money (consistently, not one lucky bet) you need to back into a valuation that you can afford to pay at each stage. The does tend to imply some “inherent” valuations – like it or not. I agree, though, it is of course not determined by a DFC analysis with terminal value and a risk-adjusted interest rate.

2. People always espouse the positive benefits of bubbles while overlooking the consequences when bubbles pop. I believe there are many including (as you point out) lost time, money and productivity. Importantly, after the tech bubble burst in Germany, for example, a whole generation of people said they’d never invest in tech startups again. This set back innovation in the country for a long time.

3. VCs do fine out of all this mess. The more companies funded the more opportunities to look for investments because there is more supply. I made that clear in my post. I was simply making a commentary about bad trends that I’m seeing.

4. Burning through a bunch of over-priced investments can also hurt our industry. LPs are reluctant to put money into VC funds now because 2000-2010 had some bad returns for the asset class. This makes it tough for even good funds to raise money. If the current class of micro vcs (fka super angels) burns through a bunch of money it will make that asset class harder to raise money in the future. It’s not zero cost to society.

5. Finally, Jordan, I can tell you that this is the 3rd bubble in tech investment I’ve seen in my career. Not everybody agrees that it is a problem. But for me to raise my hand to people who haven’t been through the last 2 and say “caveat emptor” to new angels who might be about to invest good money I see that as a public service. I’m not sure why it’s worthy of such cynicism. If the market was all in consensus that the market was so overvalued then you wouldn’t have people throwing all this money around as they are.

On mobile, will reply when I get to computer

Hey, so I wanted to write this last night, but got home to late. Re: the ire, I don’t think you can take the position that you are a victim here given the tone of your post. Go read your early posts, which I have and continue to point people toward as major contributions to our community and thinking. They embody a humility that is absent from this last post. The nerve you struck is the one that responds when someone attacks a group with which I identify. In the case of your last post and subsequent tweets you suggested that both angel investors as a class and one of my portfolio companies specifically, somehow have not earned whatever credit or validation they have received in the market. You’re portrayal of angel investors and microvc’s as dumb, unsophisticated money, even if you are just speaking about a subset of us, by association discredits the work that I and my partners have done and the contributions we have made to the startup community. Further, to point to a specific young company with two first time founders as an example of the venture market’s irrationality immediately presumes that they have not earned whatever it is they have received. I didn’t like that. To your specific comments: 1) doesn’t make sense. You can’t arrive at inherent value based on the need of an investor to generate a specific return independent of the risk profile of the investment. Markets correct for that concept. 2) fair, but personally don’t see that happening based on my admittedly limited experience w bubbles. 3) I believe VCs will do fine, but we should recognize that the class of investors that you criticize in your post have and do represent a disruption to the traditional VC model and further might reflect and expose changes in the broader market that have serious implications for the size and structure of big VC funds. I have all the confidence in the world that big VC’s and microVCs will all figure out how to respond to these changes and merge into one asset class again, if they haven’t already. 4) good point 5) I welcome “caveat emptor” and value the experience and words of those with your depth of experience. I will challenge you to channel and disseminate that experience through more constructive channels and words than are represented in your post.

Jordan –

I don’t really have much to contribute when it comes to the angel investor / valuation / bubble conversation that hasn’t already been said.

However, what I do applaud you for, and what hit me as spot on – is this sentence:

“Personally, I welcome anyone who wants to cut a $50K check to support a new product and pull a smart mind out of wall street or advertising or any other industry that is not pushing the limits of what can be.”

That is so well said and so exactly right that I wish it was emphasized more by entrepreneurs and the technology community. There are so many brilliant minds out there going ‘untapped’ that could substantially change the way we interact with things, and the way our society consumes product, online and offline.


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    I’m a NYC based investor and entrepreneur. I think there is one metric that can be used to measure the value of a human life and that’s impact. How did you change things? How many people did you touch? How different is the world because you lived in it and how positive was the change that you affected? (p.s. i don’t use spell check…deal with it) You can email me at Jordan.Cooper@gmail.com

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