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July 22, 2014

There are a lot of folks that think that the private tech market is pretty frothy right now.  Some may disagree about whether or not we are in a bubble. But it’s hard to argue against the observation that more bubble-like things are happening currently than in what would be considered a “normal” market.  For example:

  • We are seeing extremely healthy valuations for companies, some with very limited traction or semblance of a business.
  • Very large scale acquisitions are happening for companies with little or no revenue for strategic reasons.  These always happen from time to time, but they seem to be happening more frequently and at higher multiples at the moment.
  • New and unusual participants in financing rounds are appearing.  This includes both new funds being started with unusual backers, as well as later rounds being led by non-traditional entities.

Take your pick, weird stuff is happening.  For participants in this ecosystem, what is one to do? How should you operate in frothy times? Here are a few thoughts, but I’d be curious to hear what others think too.

1. Stay in the game. It’s very hard to tell whether things are on the verge of collapse, or whether we are still in relatively early innings of a massive bull market in tech. Even if the activity in the market seems puzzling, it doesn’t mean that you shouldn’t be a beneficiary of it if you can. Even though many businesses in the first internet bubble were complete failures, some worked and are among the most important companies in existence today. Even though many people saw their wealth multiply on paper only to come crashing down, some made life changing wealth that did not evaporate. And almost everyone walked away with incredible experiences, skills, and a better intuition for the future.

2. Don’t be discouraged. It’s easy to get discouraged from time to time when blockbuster things are happening around you, but not to you.  Hey, as a VC, I could get discouraged too.  The day I started writing this post, RelateIQ (a 3-year old company) was acquired for ~$400M and RapGenius raised capital at a valuation of $400M. These things didn’t happen to companies in our portfolio that day. Nor did it happen to 99.9%+ of companies out there, some of which are excellent companies. To some degree, all participants in this market benefit from frothy times, but the headline grabbing events are still happening to a very small minority of companies. Don’t let yourself get too cynical or discouraged by this. Stay in the moment and play your own game. It doesn’t help to benchmark yourself with the outlier events because they are unpredictable and take a magical combination of being right, working hard, and being really lucky. Don’t give up – the harder you work, the luckier you’ll get.

3. Be realistic about what’s going on. If things are going really well, keep in mind that these are unusual times. Be humble, and remember that ultimately, the best companies in the world are real businesses that solve meaningful problems and capture some of the economic value they create (and that value is more than what it costs them to create it). When your company raises money at a sweet $1B valuation, remember that does’t mean that your company is worth $1B, nor does it mean that you are worth your ownership x $1B. It only means that someone who loves your business was willing to buy a fraction of your company’s shares with preferences at a $1B valuation. Besides, there is a lot more to happiness and self-worth than the dollars in your bank account or the value of whatever equity you own.

4. Maintain agility. Good times eventually give way to not so good times.  Things could also get ugly pretty fast.  Be ready to turn on a dime – the end of good times doesn’t mean the end for you, your company, or the prospects for (fill in your hot sector of choice: Bitcoin, IOT, Mobile, etc). Remember that wonderful companies like Paypal and Netflix survived the dot com crash, and companies like LInkedIN and Yelp were started in the wake of that crash. Twitter was started before the financial crisis hit, and survived, and is thriving. But raise a bit more money a bit sooner than you can. Keep in mind that you may need to get extra creative if things start to go south. Don’t get too far ahead of your skis, and you can navigate whatever lies ahead if you really have a great company.

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  • Rob Go
     - 20 hours ago
    Cool design focused event @bladebos Nov 6. Limited seats available! http://t.co/qHjU4WBeTx
  • Lee Hower
     - 1 day ago
    @vcparty agree. some LPs have to bend their model, though best LPs don't care much about concentration - they focus on accessing best funds
  • Lee Hower
     - 1 day ago
    @vcparty that statement is true. FRC's LP base looks pretty similar to Sequoia's though
  • Lee Hower
     - 1 day ago
    @vcparty thx - would slightly disagree trad'l LPs & smaller funds are misfit… best seed funds have trad'l LP base (albeit concentrated)

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