Whether there’s a tech bubble or not is an interesting discussion going on in the blogosphere. (Reading guide is below.)
I fall into the “boom before bubble” pack. Having lived through the 90s’ bubble, there’s no way we’re there yet. That doesn’t mean there won’t be one, but my feeling is we’re skating a razor’s edge off one side of which looms another wave of housing foreclosures and a doom & gloom Sequoia presentation. Investors herding like sheep around darling Silicon Valley startup memes is not in itself bubblicious, it’s SOP. Sheep investing affects supply and demand conditions that result in higher valuations. Good or bad, that doesn’t in itself represent a bubble.
The Internet bubble was about more that overvalued startups. Horowitz and Graham argue other dynamics way better than I can (see links below), but I think it’s important to point out that bubbles dramatically affect the entire economic climate. The bubble was “our” version of 70s inflation. The bubble caused a huge migration of people to the SF Bay Area. Salaries went through the roof (not just for engineering talent.) So did cost of living. In the 90s, the housing bubble was inseparable from the Internet bubble. The buying of lots of different goods became irrational.
And there’s the final point. Frankly, as long as the voices saying we are in a bubble remain as strong as those who say we aren’t, it’s hard to say we are. There’s was very little dissent in the 90s or perhaps more accurately, that dissent was easily drown out by the ignorance of the mainstream media. But that isn’t the case today, either.
The Best Way To Avoid a Bubble
Think globally, act locally. Successful startup ecosystems in Boston, New York, Boulder and a few other cities eases pressure on Silicon Valley prices for EVERYTHING, including startup valuations. Yes there are advantages to investing in startups in large ecosystem like Silicon Valley, including access to partnerships, vast amount of resources and M&A opportunities, but there are pitfalls, too. Strong entrepreneurship exists outside Silicon Valley, as many of the past “big wins” show. Local non-SV ecosystems frequently have strong, yet underemployed resources, lower engineering costs, employees less likely to jump ship, and local environments arguably more attractive that Silicon Valley.
But where’s the money? San Diego’s Avalon Ventures is the only VC with an active fund. Tech Coast Angels, who laughingly claim “lean startup” as a tag, is infamous among entrepreneurs for their six month plan for not investing, rather for any risk-taking activity. Local support organizations like CONNECT server clean tech and life sciences well, but their vanity metrics fail to reveal their inability to attract and help Internet and software entrepreneurs. There are about a dozen San Diego angels on Angel List, most of whom have no San Diego investments.
I have heard similar stories from other startup cities, even the bigger cities that seem to be thriving. There are several problems:
- Many local investors are “old school,” believing they sit in the catbird’s seat and can wait for for entrepreneurs to knock on their doors. (Not going to happen.)
- Many local investors follow the lead of Silicon Valley investors, rather than striking out on their own. (Angel List helps solve this, plus lower $ amounts should increase risk tolerance.)
- Investors don’t know how to connect to local entrepreneurs. (Entrepreneur groups are thriving and investors need not fear being swarmed.)
- Many entrepreneurs don’t know how to connect to local investors. (Entrepreneur groups help with this, too.)
- Some entrepreneurs either ask for money based on ideas or are not building “real” startups. (Why do you think I evangelize the Lean Startup framework?)
The crazy result is local startups going up to Silicon Valley to find funding and then experiencing a tremendous amount of trouble to move there AND local investors investing in Silicon Valley companies. This circumstance not only represents a failure to support San Diego’s economy, but also serves to increase the pressure on the Silicon Valley bubble, er boom.
Please let me know your thoughts on the bubble and local investments in comments.
Here’s a short guide on bubble opinions:
Yes, there’s a bubble
Steve Blank (post)
Paul Kedrosky (post)
Mike Maples (TechCrunch)
No, there’s no bubble. (Yet.)
Henry Blodget (slides)
Paul Graham (article)
Ben Horowitz (post)
Howard Lindzon (post)