Ebulliophobia - the fear of bubbles.
It’s a phobia that’s widespread in the startup industry, borne out of the ashes of the dot-com blowout. Right now, the debate rages on about whether we’re in another bubble.
There are over 103 ‘unicorn’ startups in Silicon Valley, many of which are yet to demonstrate a return. On the surface it seems not only likely, but all too realistic that we stand on the brink of a burst. In fact, prominent investor Mark Cuban says that now, it’s even worse, as this time around, private investors and crowd-sources have no liquidity for any of their investments.
Those on the other side of the fence however, point out that tech investments are actually much smaller despite higher numbers of Internet users. VC firm Andreesen Horowitz point out that the total amount of VC and IPO financing now only works out to 2.6% of today’s GDP compared to the 1999% of 10.8%. They also point out that earnings are growing while P/E multiples (price/earnings ratios) are staying steady, and due to the lack of IPOs compared to the dot-com bubble, the majority of value appreciation is going to private market investors. The conclusion is that this time around, 15 years on, the markets are different. In other words, there is no bubble, and the markets are still strong.
Bubble or no bubble though, both VCs and startup teams alike contribute to the growth of a bubble, so both need to protect themselves and the startup ecosystem. Here are 7 ways for startups (and VCs) to minimise ‘irrational exuberance’ and protect themselves better from the impact of a bubble (bursting).
1. Get the Valuations Right in the First Place
Don’t get caught up in ridiculous valuations. As a startup, understand the principles of valuation and market activity in your region.
2. Reduce Cash Burn
Set realistic expectations and plans for spending funds and make adjustments based on milestones and performance. Your startup office doesn’t need that glass whiteboard.
3. Reduce Your Churn
Create inseparable bonds between you and your customers - by providing them invaluable services and making them wonder what they’d ever do without you, they’ll never let you fail.
4. Hire Right
Startups are paying top-dollars for emerging talent. Make sure you hire only those essential to your growth, and not the “nice to haves” - it’s also a good idea here to abide by the “hire slow, fire fast” mentality.
5. Be Disruptive
Time has shown that disruptive companies who challenge their industries have a higher chance of surviving a bubble burst. This again comes down to making your customers wonder, “what will I do without you?” Your company needs to be built on truly innovative ideas that transform broken industries for the best chance of survival.
6. As VCs, Ensure Discipline Amongst Your Company Leaders.
Be active on the board, set milestones for further funding and insist on regular financial reports. Make sure you touch base with your teams to check up on their milestones, and give them examples of what kind of reporting you expect. This is especially important in an age where VCs arguably have less and less control over their portfolio companies.
7. As VCs, Ensure Consistent Mentoring
Startup teams become good startup teams through mentorship. VCs need to provide essential and consistent coaching that purge out any excesses in the budget and ensure that the startup is as watertight as possible.
Do you think a tech bubble is present? What are your best strategies to ensure you come out on top?