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The real driver of a bubble is the idea of a "get rich quick" investment mechanism that pulls in rewards out of proportion to risk, which inflates the capital w

by beat 13y ago

The real driver of a bubble is the idea of a "get rich quick" investment mechanism that pulls in rewards out of proportion to risk, which inflates the capital within that investment, which inflates the bubble. Are we there yet? I don't see it. When I think "bubble", I think of two - the old dotcom bubble, and the housing bubble. The housing bubble was driven by those nasty CDOs, which produced abnormal rates of return on AA/AAA securities, while leaving their value vulnerable to problems with the sub-prime market. Money pours into the housing market thanks to excessive returns, which both drives up housing prices and drives demand for more mortgages, which reduces proper risk management... a vicious cycle, til the subprimes start defaulting and the prices drop and then the bubble pops. The old dotcom bubble was driven by IPO money from unsophisticated investors, so there was a massive push to get companies public as soon as possible, well before they had solid business models. This drew institutional money into the venture capital market, and again, things got all out of wack, and capital supply was driving startup demand, and weak businesses were getting funding they didn't deserve. So the real marker for a bubble now, imho, isn't whether prices for early stage startups are going up, but rather whether a lot of bad startups are getting funded. Is that really happening? An increase in price suggests otherwise. Supply and demand, people. Sure, demand may be up, but either that increases price, or the market responds by increasing supply. And since the number of quality startups is basically fixed, supply increase means introducing bad startups. And this doesn't even bring in other factors, like pg's marvelous observations about how startups need less Series A money these days generally, and the rise of super-angels, angel syndicates, and online tools like AngelList and Gust. tl;dr Demand != bubble

JonFish85 13y ago
> The old dotcom bubble was driven by IPO money from unsophisticated investors Curious how the advent of companies like WeFund et al. will change this. As much as people like the "feel-good" aspect of the common man being able to invest in start-ups, I'm interested in seeing how this turns out. It's been said a thousand times, but for every Facebook / Google startup there are many, many more that crash & burn that simply don't make headlines.
- ericd 13y ago
  Yeah, I'm pretty worried about what's going to happen there. I don't think that normal people have any sense of the level of risk involved, and it's probably a matter of time before companies start driving hard to get investment money from unsophisticated investors by highlighting the few massive successes. I'm very happy to have the chance to invest in startups, I'm just not sure it's a good thing overall.
- beat 13y ago
  When I saw WeFund, I thought "Kickstarter for penny stocks!" Ugh. If this is being done in a way that hordes of non-qualified investors are actually getting stock, it could well handicap any startups that go that route, because the professional investors they'll need in later, bigger rounds will consider them toxic. Consider what this does to the cycle... startups good enough to get real angel money will probably be wise enough to not take on a bunch of high-risk unqualified capital, and so they won't be on WeFund at all. This leaves WeFund to the ones that are more idea than startup, not good enough to get in the real capital game. So the likelihood of hits is very low. So, how much money can be poured into the system this way? Not enough to distort the entire market the way the dotcom boom did, I think. It would take a million thousand-dollar investors to just get a billion, which isn't enough to really kill anything - and $100M or less even less important in the big scheme of things.
- prostoalex 13y ago
  There will be pressure on them to perform and show some quality exits. Retail investors are a finicky bunch and generally do not expect their capital to be locked up for 5+ years even if repeatedly told so.
001sky 13y ago
tl;dr Demand != bubble Demand is a linear function of Leverage, and today comes by the Fed. CDO and mortage backed securities; Public Investors; The Fed. Its not a difference in kind that matters. Bubbles are caused by excess liquidity.
- beat 13y ago
  Good point, but I still don't think it's a true bubble until it starts feeding on itself, responding to liquidity-driven demand in toxic ways. And I think the toxic way we'll see here is bad startups getting funded. Another possibility we'll see is startups getting overfunded and drowning in their own capital (another thing that happened in the old dotcom era). But the true quality startups shouldn't allow themselves to get overfunded anyway. I also think we should see a drive to IPO to drag unsophisticated money in, like back in the day. We're not, I don't think. Exits these days seem to be primarily M&A driven, and how vulnerable is that to liquidity surplus?

by beat 13y ago

JonFish85 13y ago

> The old dotcom bubble was driven by IPO money from unsophisticated investors Curious how the advent of companies like WeFund et al. will change this. As much as people like the "feel-good" aspect of the common man being able to invest in start-ups, I'm interested in seeing how this turns out. It's been said a thousand times, but for every Facebook / Google startup there are many, many more that crash & burn that simply don't make headlines.

ericd 13y ago
Yeah, I'm pretty worried about what's going to happen there. I don't think that normal people have any sense of the level of risk involved, and it's probably a matter of time before companies start driving hard to get investment money from unsophisticated investors by highlighting the few massive successes. I'm very happy to have the chance to invest in startups, I'm just not sure it's a good thing overall.
beat 13y ago
When I saw WeFund, I thought "Kickstarter for penny stocks!" Ugh. If this is being done in a way that hordes of non-qualified investors are actually getting stock, it could well handicap any startups that go that route, because the professional investors they'll need in later, bigger rounds will consider them toxic. Consider what this does to the cycle... startups good enough to get real angel money will probably be wise enough to not take on a bunch of high-risk unqualified capital, and so they won't be on WeFund at all. This leaves WeFund to the ones that are more idea than startup, not good enough to get in the real capital game. So the likelihood of hits is very low. So, how much money can be poured into the system this way? Not enough to distort the entire market the way the dotcom boom did, I think. It would take a million thousand-dollar investors to just get a billion, which isn't enough to really kill anything - and $100M or less even less important in the big scheme of things.
prostoalex 13y ago
There will be pressure on them to perform and show some quality exits. Retail investors are a finicky bunch and generally do not expect their capital to be locked up for 5+ years even if repeatedly told so.

001sky 13y ago

tl;dr Demand != bubble Demand is a linear function of Leverage, and today comes by the Fed. CDO and mortage backed securities; Public Investors; The Fed. Its not a difference in kind that matters. Bubbles are caused by excess liquidity.

beat 13y ago
Good point, but I still don't think it's a true bubble until it starts feeding on itself, responding to liquidity-driven demand in toxic ways. And I think the toxic way we'll see here is bad startups getting funded. Another possibility we'll see is startups getting overfunded and drowning in their own capital (another thing that happened in the old dotcom era). But the true quality startups shouldn't allow themselves to get overfunded anyway. I also think we should see a drive to IPO to drag unsophisticated money in, like back in the day. We're not, I don't think. Exits these days seem to be primarily M&A driven, and how vulnerable is that to liquidity surplus?