In my most recent newsletter, I suggested that businesses would do well to anticipate the consequences of a valuation bubble bursting in Silicon Valley with so many private companies valued at more than a billion dollars, with few signs that the investor spigot is going to turn off anytime soon. I ran across this great article by Mark Littlewood of Business of Software conference fame that adds additional support to the thesis that we are in a bubbly moment.
If you’re an entrepreneur, bring it on, of course. But if you are an investor – and folks, via pension funds and mutual funds we are all investors – the bubble ending badly is not good news. So what is are entrepreneurs and investors to do?
The first thing I would suggest is mentally preparing yourself to get comfortable with the idea that not all the unicorns are going to make it. The ones that need outside investment to fund the scaling and build-out of their strategies are going to be the most vulnerable. This smart post from someone who has been through it before has a lot of specific suggestions, as does this set of observations from a serial entrepreneur.
And not everybody is in love with what is going on in the tech sector. To quote a piece from Vanity Fair,
“Now countless people from all over want this to be a bubble and they want it to burst. There are the taxi drivers who have lost their jobs to Uber; hotel owners who have seen their rooms sit vacant as people sleep in Airbnbs; newspapers that are at the mercy of Facebook’s algorithms; booksellers and retailers who have been in an unrelenting war with Amazon; the elderly, who can’t keep up; the music industry; television producers; and, perhaps most of all, San Franciscans, who would rejoice in the streets if their rents fell from totally insane to merely overpriced, or if they could get into a decent restaurant on a Monday night. The bloggers who cover the technology industry would write a thousand jubilant think pieces saying “I told you so” to the venture capitalists who sneer and scoff when anyone comes close to mentioning the word “bubble.” As one prominent tech reporter told me, “Frankly, wiping that smug look off Marc Andreessen’s face—I can’t wait for that.”
And investors? Don’t trust the “this time is different” story. Invest in companies that are operating with discipline, that have a clear path to real revenues, that are using honest metrics to assess their progress (not ‘eyeballs’ friends), that are husbanding their resources and that fill a real and sustained customer need. Watch out for the ‘me too’ firms that are all mimicking someone else’s strategy. And think ahead about how you might take advantage.
- A whole lot of talented people will lose their jobs – instead of offering foosball tables, Friday massages and parties that rival weddings, you might be able to attract them by simply offering a steady paycheck. Remember, a lot of these folks have never been through a bust.
- In a sure sign of competition for competence, firms are building massive new buildings all over San Francisco. Similar building mania preceded economic downturns in many earlier eras – see the fascinating analysis in the book BoomBustology. Office space is being added at a breakneck pace – in a bust, developers may not be able to fill all that new real estate and will potentially come down on prices.
- Similarly, people without jobs can’t afford to finance those insanely expensive home mortgages, or hyper inflated rents, and we can anticipate downward pressure on prices.
- Cool technologies and patents will come on the market as firms lack the ability to commercialize them themselves.
Those who have cash in the bank and can demonstrate real value to real customers might well find this is all a source of tremendous opportunity. And that’s worth thinking about.