Is there a bubble?

I remember back in the 90s when it seemed like the freight train of the tech world would just keep barreling along. They were heady, ridiculous days and I honestly thought that the world had changed, just like so many other young, excited techies. But, just as soon as that euphoria had spread to the masses, I and many others started to get a sinking feeling that it could not last and that something was going amiss. I saw too many ridiculous companies being created, too many bad products, and just too much excess from people near me in the tech space. I saw lots of bad ideas being worked on for no reason other than money seemed to be easy to get and spend. I saw lots of people get jobs that had no real idea what to do, let alone solid credentials or a legitimate track record. I remember the obsession among a lot of new techies with certifications – sets of flimsy credentials from technology providers that were intended to prove that an individual was qualified for the work they were doing (or trying to do), but which so often only proved that someone was able to afford a set of thick textbooks and to sit still for some multiple choice tests. The moment when I knew it was going to end, and end badly, was when I was riding in a cab in NYC. Jammed in between the seats was a stack of MCSE books – the cabbie was studying to become a network engineer. I have nothing against a cab driver, or anyone not in a technically oriented job, working to develop the knowledge and skills to change careers and earn more income. In fact, more people should do exactly that. But, something about a guy with no real skills believing that simply reading books and taking a test struck me as a sign that we were headed for trouble – the Kool Aid had been poured in too many glasses and we were all about to lay down and die, or at least the stock market would.

So, are we really going through all that again? No. There are loads of reasons why I do not think this is a bubble, although saying it is not a bubble is not the same as saying that there is no irrational behavior going on. It is the stock market after all and there will always be some silliness going on. And I am definitely concerned about the hype surrounding tech these days, but this is not 1999 again and here is why:

First, the business models of many newly minted tech companies are not complete nonsense. Some are, but that will always be the case. The rest exhibit more sound ideas, with functional product, strong adoption, and largely monetizable businesses. Profits in the startup world are still fleeting, but the big change is that we are talking about profit at all. Back in the late 90s, nobody seemed to really care, the mantra being that it was more important to be “first mover”. Being first was supposed to be directly linked to long term revenue, but that only worked out in a handful of cases. And, looking back, it is more obvious that being second or third or fifteenth might actually be best. Google, Facebook, LivingSocial…three quick examples of companies that were most definitely not first and had amazing success.

I am a bit concerned about the thin value I see being created with many new startups. Building point solutions on top of someone’s platform, the platform itself built on top of other services and technologies. So many layers piled up and the problem that is being addressed can be easily solved by someone else in a very short period of time. Not defensible, not monetizable, not lasting in any way. It creates a great training ground and an ecosystem in which tons of ideas get played with, though, hopefully leading to the next great wave of tech companies. I just worry that if this aspect of the bubble begins to collapse, it may take down a lot of the younger, more entrepreneurial types with it.

Second, there is far less of a rush to just go public. It may be easier to get funding that it was a few years ago, but that money is generally smaller and the push to have an IPO seems to be far less obvious. Some companies will do it, particularly those that raise container ships of cash. They don’t really have any choice. But, there just are not that many heading down this path and I’ve not seen any evidence to the contrary. If we start to see every idea, ideas that are features pretending to be products, raising tens of millions and looking for big exits, then you will know it is time to buckle your seat belt. But, like many have said in the past year or so, we seemed to have learned a few lessons since the last big tech bubble and ridiculous valuations have likely gone by the wayside, at least in general.

Third, and really a summation of the previous two points, is that I think there is more rational thought about startups these days. Barriers to entry have come down, which has meant some really useless and dumb stuff is being built. But, at the same time, it means that mistakes can be made at a low cost and final products can be developed that are much more tuned to customer needs. This is a very, very good thing. There is always going to be room for the dreamers, but most of us need to build practical stuff for pragmatic people. And an increase in the activity that leads to clear, near term value is beneficial to us all. Additionally, this new rationality is leading to discussion and adoption of more management and process oriented approaches. The application of lean manufacturing concepts to software development and technology entrepreneurship strongly suggests a maturation of this market and better average outcomes for all.

I think I agree with guys like Mark Suster, Fred Wilson, and Ben Horowitz (no lack of deference to Steve Blank). There is no bubble, but things are definitely getting bubblicious.

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