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There really is no Seed Stage bubble because there is no market mechanism that will force a "correction". First, if you add up all the seed investments happeni

by asanwal 14y ago

There really is no Seed Stage bubble because there is no market mechanism that will force a "correction". First, if you add up all the seed investments happening in tech and assume that 100% fail, the money lost would be the equivalent to a few medium to large'ish VC funds failing. It's not a huge deal in terms of $. But 100% failing is not going to happen. So there will be stories of some angel or seed investor making a killer return on a deal and that brings more people into the market trying to emulate that. So even though some angels/seed investors will get totally washed out and stop making investments, there will be a new supply coming in. The "corrections" will be mini-corrections, i.e. people stopping angel or seed investing cuz they didn't make money. But there will always be someone new who fancies themselves as a "smarter picker" of companies and who will continue to make these investments. The only thing IMO that could trigger a correction would be if all the prominent seed & angel investors came out and said they're stopping making investments. That would change the supply/demand characteristics as well as the overall sentiment towards these deals, but that is not going to happen because each thinks they are smarter than the other, has better proprietary dealflow, is more disciplined, etc. We're seeing (my company sells data to investors) lots of people try to set up Seed VC funds these days ($25 to $100M) so this appears to just be getting started to be honest.

ChuckMcM 14y ago
Exactly right, calling it a 'bubble' is just trendy. As long as there are more jobs than qualified engineers acquihires will be a way to get talent. And looking at the 12 - 24month forward engineering graduation rate its looking like this trend probably has at least 5 years of legs to it.
- gruseom 14y ago
  It's fascinating how the economics of the market for programming talent and the economics of startups are intertwined.
  - eli_gottlieb 14y ago
    It's the old Ricardo's Law of Rents in action. The barrier to entry for a programmer to shift from worker to capitalist is very, very low, so many try it.
    - gruseom 14y ago
      Thanks - that's an interesting connection that was far from obvious to me.
TheEzEzz 14y ago
Can you elaborate on how this reasoning doesn't apply to the first dotcom bubble? Is it that more companies were publicly traded during the first dotcom bubble? How do companies like Zynga and Facebook factor in to your analysis? (I was just a kid during the dotcom bubble, so I appreciate any insight you can shed.)
- jfarmer 14y ago
  The first bubble was characterized by massive speculation in public tech stocks completely detached from fundamentals. Facebook, Groupon, and Zynga getting kicked in the nuts on the public market is the opposite of that.
- dm8 14y ago
  Facebook et. al. are generating healthy revenues and profits. That was not the case in first dot com bubble. During first dot com bubble going public was just fashionable. Now it's very very hard to get company to an IPO.
- asanwal 14y ago
  I left a similar comment below. I believe it's different because returns data for seed investing is so opaque In the stock market, you have a very public scorecard at the end of each day telling you and those who know what you've invested in how you are doing. With seed investing, there is no such mechanism and the time horizon is much longer. Not a daily scorecard but one over many years. Add to this that the scoring is imperfect, ie prone to spin as failed companies get dressed up as acquisitions instead of asset sales for example. For this reason, this trend for seed investing will carry on much longer. As for Facebook and Zynga, they may sour opinions on certain sectors of tech but then you see folks like LinkedIn, jive, etc doing well after going public, this just highlights that not everyone can be above average. I personally think there will be a huge shift in companies targeting the enterprise but that's a story for a different day.
eli_gottlieb 14y ago
There really is no Seed Stage bubble because there is no market mechanism that will force a "correction". The market will not sustain unending losses. A field in which most investments have a negative expected value will eventually find itself without investments. It's still not different, this time.
- asanwal 14y ago
  Agree actually. The problem with seed stage financing is the opacity of the returns data. In the stock market, you have a very public scorecard at the end of each day telling you and those who know what you've invested in how you are doing. With seed investing, there is no such mechanism and the time horizon is much longer. Not a daily scorecard but one over many years. Add to this that the scoring is imperfect, ie prone to spin as failed companies get dressed up as acquisitions instead of asset sales for example.

by asanwal 14y ago

ChuckMcM 14y ago

Exactly right, calling it a 'bubble' is just trendy. As long as there are more jobs than qualified engineers acquihires will be a way to get talent. And looking at the 12 - 24month forward engineering graduation rate its looking like this trend probably has at least 5 years of legs to it.

gruseom 14y ago
It's fascinating how the economics of the market for programming talent and the economics of startups are intertwined.
- eli_gottlieb 14y ago
  It's the old Ricardo's Law of Rents in action. The barrier to entry for a programmer to shift from worker to capitalist is very, very low, so many try it.
  - gruseom 14y ago
    Thanks - that's an interesting connection that was far from obvious to me.

TheEzEzz 14y ago

Can you elaborate on how this reasoning doesn't apply to the first dotcom bubble? Is it that more companies were publicly traded during the first dotcom bubble? How do companies like Zynga and Facebook factor in to your analysis? (I was just a kid during the dotcom bubble, so I appreciate any insight you can shed.)

jfarmer 14y ago
The first bubble was characterized by massive speculation in public tech stocks completely detached from fundamentals. Facebook, Groupon, and Zynga getting kicked in the nuts on the public market is the opposite of that.
dm8 14y ago
Facebook et. al. are generating healthy revenues and profits. That was not the case in first dot com bubble. During first dot com bubble going public was just fashionable. Now it's very very hard to get company to an IPO.
asanwal 14y ago
I left a similar comment below. I believe it's different because returns data for seed investing is so opaque In the stock market, you have a very public scorecard at the end of each day telling you and those who know what you've invested in how you are doing. With seed investing, there is no such mechanism and the time horizon is much longer. Not a daily scorecard but one over many years. Add to this that the scoring is imperfect, ie prone to spin as failed companies get dressed up as acquisitions instead of asset sales for example. For this reason, this trend for seed investing will carry on much longer. As for Facebook and Zynga, they may sour opinions on certain sectors of tech but then you see folks like LinkedIn, jive, etc doing well after going public, this just highlights that not everyone can be above average. I personally think there will be a huge shift in companies targeting the enterprise but that's a story for a different day.

eli_gottlieb 14y ago

There really is no Seed Stage bubble because there is no market mechanism that will force a "correction". The market will not sustain unending losses. A field in which most investments have a negative expected value will eventually find itself without investments. It's still not different, this time.

asanwal 14y ago
Agree actually. The problem with seed stage financing is the opacity of the returns data. In the stock market, you have a very public scorecard at the end of each day telling you and those who know what you've invested in how you are doing. With seed investing, there is no such mechanism and the time horizon is much longer. Not a daily scorecard but one over many years. Add to this that the scoring is imperfect, ie prone to spin as failed companies get dressed up as acquisitions instead of asset sales for example.