In Defense Of Bubbles

There is nothing the tech media and the broader press likes to ask me about more than bubbles.

“Is Snapchat a bubble?”

“Is Uber a bubble?”

“Is Facebook a bubble?”

“Is seed investing a bubble?”

“Is growth investing a bubble?”

And on and on and on.

It’s like bubbles are a disease that we need to eradicate.

Don’t get me wrong. Bubbles are something investors need to be careful with. You can make money on the way up but lose it all on the way down. I’ve done that. It hurts.

So at USV, we are careful to invest early in cycles and get defensive later in the cycle and take profits when they are available. If anything, I think we have been too conservative in this regard.

However, as I pointed out in a conversation with my colleagues yesterday, bubbles are a necessary part of any technology cycle, large or small.

Carlota Perez talks about this in her seminal book on technology cycles, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages.

But maybe the best thing written on this topic is my friend Tom Evslin‘s blog post from January 2005, when the investment world was just waking up to the fact that the Internet bubble wasn’t the end of things, but just the beginning. I particularly love how he ends that post:

Historically, the results of bubbles have usually been more empowerment for more people.  Historically, bubbles have provided an explosion of funds which blasted away the entrenchments of an old oligarchy not only to the benefit of entrepreneurs but also to the benefit of consumers in general.  Think of the constantly falling price of transportation and communication.

If we should find a way to stop bubbles, if we were to put the genie of irrational exuberance back in the bottle, the winners will be whoever are the incumbents at the time and the losers will be all those who could benefit from another great breakthrough in infrastructure like railroads, canals and the Internet.

Bring on the next bubble.  And invest in it at your own risk. I will.