I have been worrying about the economy being in a bubble for the past year. It stagnates you. It's best not to obsess over it. It's only a bubble if a crash occurs, and no one can predict that, only play the guessing game.
If We’re in a Bubble, What Should an Entrepreneur Do?
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Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#12Bootstrap. None of this has any impact on you if you bootstrap your company, and run it profitably, with the intent to keep running it profitably.
This is partially true.
The non-true part of it, is that if you see half of your business vaporized in the downturn, your profit margin while bootstrapping will be erased and you'll lose money. That can easily happen at nearly all sizes in terms of costs drowning you.
$2m in sales, $200,000 in profit. Your sales suddenly fall to $1m (and in a bubble bursting scenario, that happens at warp speed, it'll make your head spin), I'd almost guarantee your costs will wipe out your profit in that situation (assuming you're not a one person shop). Then suddenly you're firing people, and it rattles your entire organization; existing customers lose confidence and switch to bigger competitors or back to internal solutions.
The dotcom bubble bursting was a very dramatic example of this, and the speed at which it killed good companies was intense. Where good companies that were modestly profitable still saw half their business killed off, and it was simply too much to bear because all of that damage doesn't happen in a linear fashion, it has immense knock-on chaotic effects to your business.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#13Bootstrap. None of this has any impact on you if you bootstrap your company, and run it profitably, with the intent to keep running it profitably.
This "run it profitably" thing.. it might have something to do with the macroeconomic climate perhaps.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#14Bootstrap. None of this has any impact on you if you bootstrap your company, and run it profitably, with the intent to keep running it profitably.
This is partially true. The non-true part of it, is that if you see half of your business vaporized in the downturn, your profit margin while bootstrapping will be erased and you'll lose money. That can easily happen at nearly all sizes in terms of costs drowning you. $2m in sales, $200,000 in profit. Your sales suddenly fall to $1m (and in a bubble bursting scenario, that happens at warp speed, it'll make your head…
Those risks can be mitigated with a scalable business model, which scales up or down. When I first starting getting into the details of running a business, I was taught to always build in a core transaction that is the basis for the revenue. You then budget your expenses based on the actual costs and profit from a single transaction, and scale based on how many transactions actually occur. If your sales slip, your budgets decrease, and you may need to let people go, or take other actions to scale down... but the business itself is still running at a profit. The scenario of having to scale down sucks. But it doesn't have to move you into the red.
I admit that not all business plans can follow this philosophy, in particular if you are of the thinking to get traffic now and monetize later. And I'll work for people running companies who don't follow this philosophy, but I won't run one myself.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#15It's difficult for many entrepreneurs to hedge, particularly young or first-time entrepreneurs, because a supermajority of their net worth is in their company. If you own a software company and have $10k in your IRA there is no option available which causes that IRA to suddenly be worth an appreciable portion of the value of the software company given some event which severely compromises the worth of the software co…
> That said, you might do something like I did, which was e.g. pick a publicly traded company which would get shellacked if your sector got hit and buy deeply out-of-the-money puts on them. (I picked Salesforce and spent ~$500 on an options position which pays out only if they either have Enron-sized accounting issues or SaaS gets punched in the face. It expired valueless. I'd have re-upped it for another year but didn't anticipate my net worth and professional career to both be 90%+ SaaS-weighted for most of this year.)
This is not good advice. Buying options is a fool's game. The vast majority of retail options buyers lose money, which isn't surprising given that upwards of 70% of call and put options expire worthless. When it comes to losing money, buying deep OTM options is by far the best strategy.
If you want to play the options game, you are statistically far more likely to not lose money, and to make it, by selling options.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#16Why are there bubbles in the first place?
Would it not be in the interest to prevent trillions of dollars in losses due to economic bubbles bursting? Or is that part of a finance game where shorting companies becomes very profitable?
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#17It's difficult for many entrepreneurs to hedge, particularly young or first-time entrepreneurs, because a supermajority of their net worth is in their company. If you own a software company and have $10k in your IRA there is no option available which causes that IRA to suddenly be worth an appreciable portion of the value of the software company given some event which severely compromises the worth of the software co…
> That said, you might do something like I did, which was e.g. pick a publicly traded company which would get shellacked if your sector got hit and buy deeply out-of-the-money puts on them. (I picked Salesforce and spent ~$500 on an options position which pays out only if they either have Enron-sized accounting issues or SaaS gets punched in the face. It expired valueless. I'd have re-upped it for another year but di…
That's the point of an insurance policy: you want to say next year "Darn, I spent a small predictable amount of money and nothing bad happened so I got nothing for that money."
The more pertinent criticism of this strategy would be "Patrick, there are all sorts of ways for the value of your company to go to zero, including in the middle of a sectoral decline, without causing the options you purchased to be worth enough to meaningfully cushion the blow."
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#18My 2 cents... In 2008 and 2009, when so many of my most talented friends were unemployed for the only time in their career, I observed, "It's a once in a lifetime opportunity to start a company. Better to be starting a firm when talent is plentiful and money is scarce than the other way around." So what to do now that it's the other way around? (Independent of calling it a bubble, money is relatively more plentiful t…
Thanks for this.
get it from investors with as long a time horizon as possible Can you elaborate on how to evaluate this? I'd imagine you could just ask them if you already have a relationship, otherwise by looking at the age of their fund?
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#19Earlier quoted context omitted.
> That said, you might do something like I did, which was e.g. pick a publicly traded company which would get shellacked if your sector got hit and buy deeply out-of-the-money puts on them. (I picked Salesforce and spent ~$500 on an options position which pays out only if they either have Enron-sized accounting issues or SaaS gets punched in the face. It expired valueless. I'd have re-upped it for another year but di…
That's the point of an insurance policy: you want to say next year "Darn, I spent a small predictable amount of money and nothing bad happened so I got nothing for that money." The more pertinent criticism of this strategy would be "Patrick, there are all sorts of ways for the value of your company to go to zero, including in the middle of a sectoral decline, without causing the options you purchased to be worth enou…
A protective put against an equity position can function like an insurance policy. For example, if you owned a large position in CRM stock and were sitting on significant unrealized gains but didn't want to sell, you could buy CRM puts to protect your equity position. Of course, there are other strategies (like a collar) that are probably going to make more sense in many scenarios.
Buying a deep OTM put in a single company as an "insurance policy" for your privately-owned SaaS business is patently silly. The correlation, if any, is far too weak to be meaningful but even if you believed there was some correlation, to follow your own criticism of your strategy, I find it hard to believe that $500 worth of puts would provide protection unless you have a tiny business. Even if the value of your puts grew by, say, 3900%, an entirely unlikely scenario, your dollar gains would still only be $19,500.
So I'll repeat: folks should not consider buying puts (and deep OTM puts at that) as you suggested.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#20Why are there bubbles in the first place? Would it not be in the interest to prevent trillions of dollars in losses due to economic bubbles bursting? Or is that part of a finance game where shorting companies becomes very profitable?
If you can figure out why bubbles happen and are able to predict them then there's a Nobel in economics waiting for you