Bubbles, backlash and grim reapers

There is a truism that markets are discounters are all known information.  So, for example, when you are inundated by stories in the media and online that the economy is going to pot, markets are over-priced and the next plague is upon us (oh, I just wrote that post), that is actually a bullish indicator. 

Why? Because such thinking is collectively "priced" into the market once the information becomes known. 

Relative to stock markets, someone once said, that the time to buy is when you see Fortune running cover stories on "The Death of Equities."

Which brings us to the backlash and bubble questions around that nebulous bucket known as Web 2.0.

Over the past couple of weeks, I have noticed a major increase in the number of articles, blog posts, T-shirt spoofs and the like calling out that we are in a Web 2.0 bubble, that innovation is dead, that everything is me-too, a feature not a product, etc.

Just in the past day, I have read posts which assert that:

1. Innovation is nowhere to be found in the Web 2.0 world: I have written a pretty detailed response in the comments section of this blog by Russell Beattie, if you scroll that post to the bottom.
2. The blogosophere is comprised of a bunch of irresponsible hacks:  Again, when mainstream media feels compelled to attack, I would argue that it is a bullish indicator for the space.
3. There is "proof of an emerging Web 2.0 bubble: The example cited is actually pretty funny, but I would counter that an example does not a fractal make.
4. Attack the Flickr for Video wannabe's (and all Flickr for...derivatives for that matter).

First a disclaimer.  I agree with a lot of the underlying commentary, and actually if you read these posts, the positions are to their credit fully formed. I guess my counter is, "Do you have a thesis that drives your investing strategy?"  Hope and following the herd is not a strategy. 

So let's just say that like any evolutionary system, marketplaces gravitate to wherever the resources are, whether they be cheap-easy-free money, cheap-easy-free open source and mashable software or motivated (cheap-easy-free) people. 

Let's further say that the majority of these entities are bound to fail or be acquired for "undisclosed terms."  That's just survival of the fittest.  Hence, the grim reaper.

Finally, let's just say that the perspective of doom/gloom, discriminating analysis before investing or whatever you want to call it is now being priced into the market. 

This will and should effect what get's funded, valuations, where entrepreneurs invest their time and how survivors and thrivers think about strategy.

I guess the nut of it is, do you have a thesis about why what you are doing REALLY matters, how you will monetize it, what your unfair advantage is and how you will grow your venture? 

If so, codify that thesis, establish clear metrics of success for measuring how well you are doing, broadcast the indicators and trend lines and iterate as much as necessary.

Conversely, if you really don't have a thesis beyond, "We invest in big growing markets," the time is NOW to start baking one up.

Comments

[Daniel Nerezov]

Excellent Post!

So what you're saying is that people should go out and build real companies.

How obscene.

[John "Z-Bo" Zabroski]

I understand what you are saying, Mark, but you may or may not miss mentioning something very important.

A lot of these companies are being run by Programmer/Analysts and Engineers who simply do not care about making money. They care about making things cool. They care more about innovation. These are the kind of people who would rather work for Google to be surrounded by nerds (for lack of a better term) than to work for Google for the money and benefits.

Therefore, they don't "have a thesis that drives [their] investing strategy" mainly because the project is not seen as an investment in the typical sense.

Its the doppelgangers, the investors who believe they can simply copy an existing technology without differentiating themselves, who could use "a thesis that drives [their] investing strategy."

Just my humble opinion, of course.

Also, the reason for any "bubble" bursting is precisely because of investors who are unable to pay off debt. Stock prices collapsing has nothing to do with bubbles, bubbles are the result of people taking out loans to fund their investing. Then, when the stock price goes down, they have no way to liquify their assets to pay off their debt. It did not seem to me like any of those articles made that distinction, which is stupid.

Now it's time to watch football.

[Mark Sigal]

To be clear, and somewhat intersecting Daniel's and John's comments, I think that it is TOTALLY cool when techie types or even business-ey types build projects or ventures that don't specifically aspire to grow into a formal entity.

It is when hobbies become confused with venture-finance-able startups that the potential for money sinkholes, bad feelings and crash and burn outcomes magnifies.

Frankly, the tough part for investors is that entrepreneurs aren't always clear on the outcome that they are aspiring to since the premise of a sugar daddy just seems like a "DUH, why not?" That's where clear thesis and good due diligence (i.e., real underwriting) becomes key.

One of the leading questions I ask entrepreneurs that I work with is whether they would be thrilled with a $10M outcome if they were owning half the company. The key point I want them to understand is that if you take $4-6M from a VC, you are committing yourself to a different velocity.

As the post alludes, some of the best early innovations in this emerging wave will start in the hobby realm before growing into serious business.