If We’re in a Bubble, What Should an Entrepreneur Do?
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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?
#2My 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 than talent than any time in the past 15 years)
An entrepreneur should take the money and use it to build talent. What's this mean? Be selective about money, get it from investors with as long a time horizon as possible, and make sure that it's enough to last a while. Then hire people with great potential who may be overlooked by the market. Use the money to grow them as they grow the company, and create an environment where they might want to stay.
If you're not that patient, just take the high valuations and use it to buy 1 or 2 superstars whose equity is underwater at Google.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#3It'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 company.
The best option available if you're concerned about sector-specific or firm-specific risk is to decrease your exposure to your own company. For example, if your company has already created tangible economic value, you'd do something like a secondary sale while raising a new equity round, such that part of the round goes into your pocket rather than the company's coffers. You'd then take that money and then do anything other than putting it into a high-growth tech company.
This is becoming much more common than it used to be, to my understanding. Historically VCs preferred to have founders be "hungry for an exit" (which was, ahem, so that VCs would have a superior negotiating position), but these days social acceptability of cashouts is increasing as a) the market favors entrepreneurs and b) VCs are starting to cotton onto the fact that early acquisition offers (which murder VC returns) are radically more attractive when you have $600 in your checking account than when you can comfortably contemplate e.g. a wedding, childbirth, or a home purchase (well, OK, maybe not a home purchase in the current real estate market) without suffering crippling amounts of financial anxiety.
Given that one has a non-trivial portion of their net worth outside the company, there exist options for hedging, but given that you're probably better at selling software than on financial alchemy you should probably stick with what you're good at.
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.)
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#4There's a bunch of options.
One of the most obvious, as an investor, is to hoard cash now. When the bubble bursts, your dollar will go further; you'll get better valuations, companies will be more desperate, etc.
As an entrepreneur, time to make hay while the sun is shining; raise cash now.
Looking for hedge? Consider SF real estate. A big part of what's keeping it sky high is the proliferation of startups in SoMa, making living in the city an attractive option. If those jobs all disappear, I doubt there will be more than enough Tech shuttles to bring all those people back down to the valley - and the depressed labor market should lead to lower wages.
I do think there's tremendous opportunity in the hiring space for a good startup, but I have no idea what that is. The "Bad Hire" risk is magnified for small companies... so if anything, that's something that does better in this phase of the business cycle, when hiring is high.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#5It'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…
You'd then take that money and then do anything other than putting it into a high-growth tech company.
Yep, that's one way to hedge :)
I guess the main thing I was getting at is - is there any high-growth tech company that you could start that has more opportunity in a bubble burst?
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#6There's a bunch of options. One of the most obvious, as an investor, is to hoard cash now. When the bubble bursts, your dollar will go further; you'll get better valuations, companies will be more desperate, etc. As an entrepreneur, time to make hay while the sun is shining; raise cash now. Looking for hedge? Consider SF real estate. A big part of what's keeping it sky high is the proliferation of startups in SoMa, m…
How would SF real estate be a hedge if the regional tech labor market becomes depressed? Lower wages in SF and the surrounding area should depress real estate prices in SF, not increase real estate prices.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#7My 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…
Great insight. I'm frustrated in general by the amount of bellyaching about the difficulty of finding talent in conjunction with the apparent unwillingness to invest in developing it. If there's a time for cash-rich, talent-poor companies to invest in training, now is it.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#8There's a bunch of options. One of the most obvious, as an investor, is to hoard cash now. When the bubble bursts, your dollar will go further; you'll get better valuations, companies will be more desperate, etc. As an entrepreneur, time to make hay while the sun is shining; raise cash now. Looking for hedge? Consider SF real estate. A big part of what's keeping it sky high is the proliferation of startups in SoMa, m…
How would SF real estate be a hedge if the regional tech labor market becomes depressed? Lower wages in SF and the surrounding area should depress real estate prices in SF, not increase real estate prices.
It won't be a good hedge. You'll take a bath on that real estate if the venture capital market seizes up (eg with higher interest rates and were a bubble to pop). Rents will fall, vacancies will soar, and a lot of construction will halt.
I can't see what the parent meant, such that it makes sense as a hedge. The hedge (if one were really worried about a bubble popping) on SF real estate would be to sell right now - if you can get a high price - and rent.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#9It'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…
You'd then take that money and then do anything other than putting it into a high-growth tech company. Yep, that's one way to hedge :) I guess the main thing I was getting at is - is there any high-growth tech company that you could start that has more opportunity in a bubble burst?
All good tech start-ups benefit more from a bubble bursting, than from the roaring times during the bubble.
Others have written about this before; in fact every time this happens it gets historically summarized by someone. If you look at the numerous boom / bust periods in tech, whether the '80s, '90s, or '00s, the best tech companies roared right through the downturn and came out the other side in great shape.
It's the same reason Intel always believed in investing right through the bust periods, to gain ground against everyone else that either can't do that or is foolish enough to go into lock-down mode.
Re: If We’re in a Bubble, What Should an Entrepreneur Do?
#10Bootstrap. 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.