The Word Bubble

In all the posts over the past year or so outlining my thoughts on the financing and valuation environment in the internet sector, I've avoided using the word Bubble. It is intentional. For me Bubble will always be inexorably linked to what went down in 1999 and 2000 in the internet sector. And I agree with Mike Arrington that what is going on now is different. I do not think we are in a Bubble per se. That is why I don't use the word.

But I am equally sure that we are in the glass is half full part of the cycle. Investors are focusing on the upside and ignoring the downside. That part of the investment cycle lasts for a while and then things change and investors focus on the downside and ignore the upside. Markets are defined by greed and fear. We are in the greed mode right now.

I don't view this as whining. There is nothing to whine about. Investors are making money hand over fist. Why would I whine about that? But I do think it is important to point out the inevitability of the market cycles. There will come a time when the environment we are in will be in the rear view mirror. And entrepreneurs should be crystal clear about that. This is a time to raise money and sock it away for a rainy day. Because it will rain.

And investors should recognize that the current valuation environment will not exist at some point in the future. The companies we invest in will need to grow into these valuations or we will face writedowns and writeoffs. We should not let the greed emotions cloud our judgement. Yes, that hot deal sure looks damn good right now. But deals are actually companies and most venture investments are held for five to seven years. I've likened them to marriages over the years. Don't let the lust for the deal lead to a bad marriage that you have to be in for the next decade.

I've made all of these mistakes. I know what happens. I am prepared for it. That doesn't mean we aren't investing in this cycle. We are as active as we've ever been. But we are investing at this stage of the cycle with our eyes wide open. And I'm writing about it in the hopes that others do the same.

#VC & Technology

Comments (Archived):

  1. jerrycolonna

    Happy Easter. I agree with you. So what should entrepreneurs do to prepare for the inevitable resetting of valuations?

    1. fredwilson

      happy easter jerry.i think they should raise capital now and take advantage of the environment. raise enough to fund the company for at least two years and hopefully to the point they will not need any more investment.and then they should execute that plan so that they are not dependent on markets in the future

      1. jerrycolonna

        Makes sense. Probably be as conservative as possible with cash, too. Right?I mean, raise what you can at current valuations and hunker down and focus on getting to profitability. As we both know, even when valuations get reset and there are write-downs and re-capitalizations occuring left and right, companies that are profitable–or at least close to profitable–end up with the healthy kind o leverage.

        1. fredwilson

          Exactly. Financial markets don’t impact profitable companies that much

      2. Krdennis

        Fred, Funding for “at least two years’? Seems like a very long runway. Is that driven primarily by the need to insure against a reset? Would you suggest that in a less frothy environment?

      3. Ryanmatthewb

        Is the “rainy day” fund a bit utopian? Do you know of examples where such a fund was kept and used for a rainy day? I would think raising more capital will correlate to quicker cash burn in almost all cases.

        1. fredwilson

          yes, i know quite a few companies that did that succcessfully

  2. Bill Bishop

    folks might appreciate this podcast from last week on the china internet stocks:Sinica Podcast: Does China Have A Second Internet Bubble? | DigiCha

  3. Harry DeMott

    There’s still plenty of fear:Fear that you will miss the next hot dealFear that your $600M fund won’t show the proper returns and the gravy train will end – so get the money out there!Fear that you won’t be in one of the big winners from this stage (Facebook, LinkedIn, Zynga, Twitter, etc…)Fear that you might sell you shares on second market a bit to early and miss out on another double.Fear that you haven’t sold your shares on second market and the music will stop with you still holding on.The most important point from above is this:”The companies we invest in will need to grow into these valuations or we will face writedowns and writeoffs”It’s just my opinion, but I think there are more and more companies starting up that won’t grow into their valuations, or won’t scale because they are thin on the management side, or because they are building products with little defensible technology and really only a hoped for network effect to differentiate them. And why not. If it is raining money, why be employee #3 with a great team, when you can be founder. There’s no risk – other than time – and when you are 22 – this just doesn’t factor into your thinking. But of these companies don’t turn into sustainable – cash flow generating – defensible businesses, inevitably valuations will creep down.Think about some of the big guys today. Twitter is valued at what, $5B in private exchanges? Assuming it reaches some level of maturity you would need something on the order of $500M in FCF to sustain that valuation. Which means that at a 50% Free Cash Flow margin you would need $1B in recurring revenue for that business. According to press reports, revenues there (albeit early) are in the $100M – $140M range (I’ve read a pretty wide range reported).So the question is – from a risk reward standpoint, is it more likely that Twitter manages to grow revenues between 7-10X from here with and have the worlds greatest business model (the 50% FCF margins) or not.If you are afraid that it will and you are going to miss it – you go out and spend $ in the private market to buy stock. However, if you are running the company, and know just how hard it is to scale the business side of things by that magnitude – you sell stock – and sock the money away for the rainy day.

    1. Brad

      I just read the article about Twitter in Fortune magazine and I wonder if the valuation set and the expectations for revenue are too high for the companies management team to accomplish? I know that in any business that I have been in, when the expectations are out of whack with what is possible, discontent and frustration sets in. How many other companies out there that are trying to find their way in the world are in the same predicament?You bring up some great points for Twitter and with the millions of users you would hope there would be a way to capture revenues, but maybe there are millions of users because it is free……

      1. Harry DeMott

        BTW: I don’t want to imply that the valuation for Twitter is crazy. I don’t know the internal metrics in the least – nor do I fully understand the business dynamics there.That said – as an investor I always want to weight the risk and the reward – to understand what I am paying for today – and how much performance I need tomorrow. If my numbers are even close – then with Twitter where it is – they need to perform miraculously for many years to come just to justify today’s valuation – let alone the growth you would expect for this asset class going forward.You can’t defy the laws of physics – some companies can grow only so fast and pushing them to grow any faster is a disservice to the company.

        1. Brad

          Harry I also do not want to imply that I know anything about what the valuation of Twitter should be or should not be. I am only saying that I read the article and it seemed to imply that there were quite a few issues. I only meant to say an unjustified valuation may give management teams an unrealistic goal or self perception.I can not comment on how much revenue, EBITDA or ROI Twitter is providing. But based on your numbers, I would have to agree, they need some tremendous growth to hit their current valuation numbers to appease what everyone is hoping to get out of the deal.

    2. fredwilson

      we think alike harry. i guess that is how investors think

    3. PC

      From an entrepreneur’s standpoint, its mind boggling how many startups there are out there. Along those lines, it’s amazing how many receive seed funding at such early stages.Yes, many will fail. The law of failed startups has not changed. In fact, I can feasibly see a higher percentage of startups failing due to reasons stated above (defensibility, differentiation, ability to generate revenue/profit).However, I think that consequences for technology will be amazing. The lowered access for cash early on has allowed the industry to explore a wide range of ideas and concepts. Many of them initially fall into similar spaces (eg instagram, pic plz, color) but can experiment ith larger ideas that will differentiate them (eg elastic networks, mobile social networking, Entertainment platforms, etc). Competitors are forced to innovate in order to stay ahead which will lead to better products.

      1. PhilipSugar

        I agree completely.The only downside you haven’t mentioned is when you get a ton of crazy funded companies some behavior can be detrimental to the entire market and thus hurt the entire industry.Quick example. Giving away something for free in a BtoB market and trying to make money later. My favorite example is South Park’s Underpants Gnomes episode.That doesn’t help.

        1. ShanaC

          a classic episode in bubblenomics. how many companies do you think are in that situation

      2. Harry DeMott

        Yes I agree.As a society we are better served – because the timelines are far more compressed than ever before. So we will see many more iterations that would have taken years now take months. We will fail faster and succeed sooner.The implications for founders are profound. As long as there is essentially free money – you take your shot and go at it quickly. If you succeed you are a hero – if you fail, you have gained valuable experience and will likely get funded again.The implications for investors are less good – which I think is Fred’s point. You have to fund many more failures – which is just not good at all from an investment standpoint – no matter how many great people you meet along the way.Ultimately – if you gain enough experience funding failures with well meaning and genius founders you will run out of money and LP’s won’t play again.This market right now depends on the confluence of large funds raised in a different era colliding with radical transparency of funding and a large number of successful founders putting money back into the ecosystem. If any of the legs of this stool give way – it will get ugly again.

        1. PC

          I’m not an investor so I only speak from observation and hypothetically.I think on an absolute scale there will be more failures. But there are also seemingly many more wealthy individuals who are playing the role as angel investors. If there’s any truth to VCs having skill, I would think that their success rate would be hire than inexperienced investors who are trying to get into angel investing.Actually I wonder if the private stock markets have had the greatest effect (of the factors mentioned) on the frothy market we’re seeing on the high end. Without them, would we be seeing valuations pushed this high?Which leads me to this question: if we saw a massive de-valuation/correction of today’s sexy companies on the private markets (twitter, Facebook), would that scare off all the angel money that’s entered the Valley most recently? If not, then it seems the “ugliness” would contained to a few companies.

          1. Harry DeMott

            If we see a massive devaluation – the angels will disappear – or I shouldsay that the dilettante angels will disappear. On the margin they drive uppricing – so you will see less froth in the market. Given fund sizeshowever, I’m not sure you see the large cap late stage stuff get a whole lotless frothy.

        2. fredwilson

          i’m not comfortable with a model where more than 1/3 of ourinvestments are failures

          1. iamjohnstokes

            Fred, it would depend on your fund’s definition of a “failure”, but for me it’s less about the number of companies that fail and more about the amount of capital that goes into the “successful” companies versus that which goes into the “failures”. It’s for that reason I don’t mind seeding 50 companies and having 30 of them fail – those 30 failures however should only use 15-20% of the funds capital.

          2. fredwilson

            i agree about capital invested vs number of dealsbut we put a lot of energy into all of our investments so there isthat cost as well

          3. Harry DeMott

            I agree but fear we are in the minority.

          4. konterkariert

            The Union Square Ventures portfolio is very good. I can only spot “Hashable” as a potential investment that could fail.Hashable looks like an early adopter only startup that won’t make the transition to the mainstream, because of the current product focus.quote: “Hashable makes it easy to track and share all the people you meet with and introduce. You can ‘tag’ any meaningful interaction…”That is the classic description of failure startups. You “can” do anything with the their product, but who “needs” to?

          5. fredwilson

            we have quite a few investments that can failbut i appreciate your confidence in our portfolio!

    4. Dave W Baldwin

      It comes down to designing while looking forward. No matter what, Angels will be investing in a) they like the dev, b) not do due diligence, c) leading to thinking too local and not realizing the same thing is being produced everywhere else, d) and so on.The categories of today are expanded enough where a lot of small finite designs can make it to funding and deliver less than expected. Look at how many ways you can define a subcategory in social alone.It would be wiser to look at something that is able to cross channel the different categories placing you in position to offer something to bigger market. That way your options are opened up from the strategic pov and pool of buyers. IOW, be two years ahead where disruptive turns in the market place will not put you in as many emergency situations.

  4. Dan Ramsden

    Yes, absolutely. And regardless of industry profile or individual business risks, there are two critical financial risks this time around:1) Frothiness is uneven from one round to the next, so getting from seed to A to B etc. is not sequentially “half-full” as you put it.2) I think there is a correlation between high-risk startup investing and the risk-on trade in public markets. If/when QE2 (or 3) stops, that could have impact on private investing.

  5. Scott Yates

    It’s Easter Morning, and Arrington (and now Wilson) have brought forth a message that investment is not dead, but has risen again, and those who have faith that Color is the exception proving the rule shall have investment everlasting, or at least for a 2-year runway.(OK, stopping now before my grandmother turns over in her grave because of my sacrilege.)

  6. Doug

    Great post Fred. As you point out, valuations can be measured by the market or on fundamentals, and the pendulum swings over time. Historically, market metrics tend to dominate valuations of venture/growth companies. While I agree the valuations of these companies are further out on the market-side of the spectrum today, I wonder if this cycle (or its reach) may be extended in this ‘new normal’ environment that seems to be clamoring for innovation and growth.

  7. Colin Beveridge

    has the technology investment market ever been in anything but “greed mode?”

    1. fredwilson

      yes many times. 2002 is just one example

      1. Alan

        you could think of the all the cram downs in 02 – 03 as greed … they didnt turn out so well but greedy nonetheless

        1. johnmccarthy

          It was greed with limited expectations.

  8. andyswan

    Let’s not forget that a million dollars just ain’t worth what it used to be.

    1. Dave W Baldwin

      Depends on how you look at it Andy. You can get a lot more for $1m today than 2-5 yrs. ago. If you’re not, then you need to look elsewhere.Per Fred’s point above, it is a matter of eyes wide open and the better investment is in one with better OH position that allows pricing points achieving profit in both good/bad times.Do that and you achieve valuations that are realistic and will mean more.

  9. Buy Steroids


  10. John Stack

    Great Post Fred!To me, there are still constants that go beyond the term Bubble or any opposite word you can throw at it. They are solid future value beyond any particular market circumstances, willing investors (there are always willing investors – either investing in dislocations or solid positive opportunities), and hope. I put as much credence in hope as I do terms the press keep throwing around!

  11. awaldstein

    “But deals are actually companies and most venture investments are held for five to seven years.”A core truth not often verbalized. I think it is both the answer and the problem.Most invest in and most of us start with an idea. At an early stage, there can’t really be a model or a plan. Maybe you qualify this with an experienced entrepreneur or a prototype that oozes promise. Not much more.But at the end of the day, you are a quarterback with a strong line maybe and no playbook. The odds are tough, many will get eliminated but a few stars will emerge.

  12. ShanaC

    Happy easter (or passover)Do you think the money will start to blind people/affect the general economy eventually?

  13. Alexander Muse

    The biggest downside to the HIGH valuations is not necessarily for the investors – the hits will still be the hits and the failures will still be the failures. I think the downside is for the entrepreneurs. Unless the entrepreneur can figure out how to get you to give him his exit on the front (i.e. selling 25% of his stock in the financing) there will very few chances for singles or doubles. Lots of us have a few singles or doubles under our belts and it is those deals that allow us to keep playing the game. I am working on my own homerun, but I know there is a single or double there if we don’t hit it out of the park.

  14. Syed Karim

    I know it’s not possible to time a non-bubble/half-full-glass/the market, but based on what happened in the startup technology space in 1999/2000, how far out are we from a reset? I don’t mean how many months, just where in percentage-terms are we on the timeline?I ask for purely selfish reasons, as I’m interested in raising funds. My preference, however, is to wait until after we’ve built our minimum viable product and are in beta-testing, which is a couple months out.To the general community here: If you were an entrepreneur building a prototype right now, would you start pitching immediately to take advantage of the market sentiment or would you hold off until there was something more concrete to talk about and point to?

    1. fredwilson

      you don’t know. it could blow up tomorrow or it could last for the next five years. i plan for it to blow up tomorrow and hope it doesn’t

      1. Guillaume

        My plans are to move from China to the Valley, dropping a well-paying job, bringing my wife and our child. I wish I could find a job in there as tech lead. Should I reconsider?

        1. Chris Homer

          Guillaume, thredUP is looking for a senior/lead developer with big-time chops in ruby. Fire me a message on twitter if this is you.

          1. Donna Brewington White

            This is great recruiting, Chris. Way to be there!

  15. moon

    Bubble is a metaphor for irrational exuberance, this bubble has a face

  16. William Mougayar

    If the end-result is that more companies get funded, and the best ones make it,- then that’s the way it is.I still don’t understand Color or FlipBoard’s last funding. And I vaguely understand Kik’s or What’s App.We can’t totally blame entrepreneurs. Most will get drunk the minute you hand them lots of money. Those giving the money away should be the ones being careful. I sense your message is mostly aimed at the VC’s, and I sense that you’re being dragged into this somewhat.It’s the Wild West again. And I’ve said it before: it’s the speed that kills. We’re all going to get there, but the crashes will happen when someone makes you go faster than the safety limits.

    1. Dara Albright

      I would also add that irrational optimism, contagion, hyper-speculation, over-leveraging, burgeoning IPO market and increased participation of small retail investors inflate bubbles. It was blatant in the 1920’s and 1990’s. I just don’t see it today! Check out:

  17. StephenPickering

    Well, the whole economy is in a type of “bubble” because of excess liquidity. The Fed makes the mistake that growth causes inflation instead of realizing that excess liquidity is the cause, and so what they will do is turn off the spicket as soon as the economy is finally headed in the right direction which will cause a wild swing going the other way. Economic cycles are natural, but the kinds that we have had in recent decades are wildly exacerbated in terms of frequency and amount by an unstable unit of account.

    1. Dara Albright

      I would also add that irrational optimism, contagion, hyper-speculation, over-leveraging, burgeoning IPO market and increased participation of small retail investors inflate bubbles. It was blatant in the 1920’s and 1990’s. I just don’t see it today! Check out:

  18. moon

    If Facebook’s valuation is correct, they should easily be able to bail-out California

  19. Mo Koyfman

    well said…couldn’t agree a young vc, great to have such transparent perspective from those who have been through it before.

  20. Craigelimeliah

    I recently wrote a post where I try to dispel the notion that we are in a bubble:( debate dujour is the overvaluation of companies that create and innovate these channels.Networks that are focused more on ubiquity and usability than the ability to generate actual revenue, and to the dismay and confusion of many, receive record breaking valuations.Most see this as a bubble waiting to burst. I disagree.There is a new wave of visionaries who are pouring billions of dollars into companies like Twitter, Facebook, FourSquare, Groupon, Instagram, Tumblr and other channels that are able to garner its users the ability to grow social capital.These people have a vision and a belief that social capital will eventually be or is already as good as gold.These vast digital plains are being mined for innovative ways to allow billions of users the ability to grow their social wealth.To help stoke the desire to possess the power to control these social resources by building digital extensions of personalities, knowledge, insight and experience through apps, websites, games, services and devices.We are essentially mining the human mind and soul and the precious ore that emanates is a new commodity that has a tremendous value.

    1. Jengrog

      “These people have a vision and a belief that social capital will eventually be or is already as good as gold.”Yes, but, the real question everyone wants the answer to is how/where/when does ‘social capital’ become as good as gold? How can we be sure it will? Will it come in the form of savings (coupon feature du jour) or revenue-generation (pay me money to connect you to my network)? And does something get lost in the currency conversion? Is there a tax? Will there be retail outlets where you convert social currency into dollars?

      1. M. Edward (Ed) Borasky

        Interesting phrase – “social capital will eventually be or is already as good as gold” – especially when you consider that gold is at an all-time high price in dollars per ounce while mere pennies will buy you spam and click fraud on Mechanical Turk and a few dollars will buy you an hour of a PhD statistician’s time on eLance.Don’t everyone try to get through that exit door at once.

      2. Craigelimeliah

        Social Capital is not going to replace money it is a new form of value that can be cashed in on. If you own a platform where millions of channels (people) are producing content you now have a goldmine of highly niche content to advertise against.

  21. Semil Shah

    The use of the word “lust” perfectly captures the environment.

    1. fredwilson

      sure does

  22. YoniAssia

    The word bubble should be replaced with the word waves, the bigger the wave the harder the crash. Just like when the earth moves and creates waves when technology paradigms shifts investment waves start.(low interest rates and devaluation of the dollar also increase the velocity of money = higher velocity more waves) Investors should decide if they are riding this wave, the more people go in, the more fun it seems, and more people come in, I suggest reading… .Entrepreneurs just like surfing…

    1. fredwilson

      i like that

  23. William Mougayar

    Your last paragraph is key because you’ve been there and are vowing not to make the same mistakes again. Without naming names, are you seeing people that have been there before and repeating the same mistakes, or is the irrational exuberance coming from ones that haven’t been “really” there in 99-01.

    1. fredwilson

      or seeing people who weren’t there making the same mistakes we made

      1. William Mougayar

        Yup. That’s what I suspected. But it’s really stupid. There’s enough of us that have been there before. Some people don’t learn til they make the mistakes themselves. The smart ones learn from others’ mistakes.

  24. Andrew Greene

    There is a lot of liquidity in the system, and many people are taking big risks, perhaps without knowing it. Now is the most important time to take calculated risks.I think the big difference is that the people taking risks are mostly qualified investors. There haven’t been enough IPOs to include the masses. Qualified investors should be able to withstand the inevitable blowups/volatility. The minimum for the Facebook/GS investment was about $2 million. The minimum for the JPMorgan/Twitter PE fund I believe was around 500,000. I wouldn’t expect that a qualified investor would put more than 10% of their asset allocation in these funds, so even if those funds get marked to zero, they should still have plenty of investible assets. The question then becomes whether these investors will come back to the VC/PE asset class. If not, that’s when liquidity will dry up, and entrepreneurs will have to worry.Could this happen in two years? I think there’s a slight chance. Quick googling tells me that about $18 billion was raised in VC funds for 2010. I could see that falling sharply if there aren’t exits in the next few years. Or things could get hotter and valuations rise even more and the early investors get some return. Catching a falling knife is frightening.

  25. BradDorchinecz

    I agree we aren’t in a bubble. Bubbles are like 1999 where people who had no business being at a starup or a vc firm were there simply to make boatloads of money. Bubbles are when people don’t have to document income to get a loan to finance 100% of the purchase price of a home.What’s interesting to me is it seems people are much more alert to the formation of bubbles or “hot” markets today, but that most don’t alter their behavior. I’ve made this mistake myself and hope I don’t make it again.

    1. Dara Albright

      I totally agree, Brad. Historically, bubbles are “inflated” when small investors race to buy stock, on margin, in companies selling products that no one paid actual cash for (such as the dot com’s in the 1990’s comprised of barter revenue and crafty accounting and even in the 1920’s when most consumer goods were bought on installment). Today’s Internet company is growing real revenue at an unprecedented pace. No one is buying virtual pigs on installment!

      1. BradDorchinecz

        Interesting parallel. When I see virtual credit card companies emerge, I will sell everything!

      2. BradDorchinecz

        Interesting parallel. When I see virtual credit card companies emerge, I will sell everything!

      3. BradDorchinecz

        Interesting parallel. When I see virtual credit card companies emerge, I will sell everything!

      4. BradDorchinecz

        Interesting parallel. When I see virtual credit card companies emerge, I will sell everything!

        1. dara albright

          LOL! Actually Brad, that would be the best time to buy because you’ll be able to invest with virtual money! 🙂

  26. Kevin Brown

    Good post. But saying “I’ve made all the mistakes”. That sounds a bit cocky.

    1. fredwilson

      did i say that? it does sound cocky. i will go back and re-read. not good.

    2. fredwilson

      i said “i’ve made all of these mistakes”i didn’t say “i’ve made all the mistakes”there are plenty more that i will make. you can count on that.

      1. Kevin Brown

        My bad. Indeed, you are right!You did not say “I’ve made all the mistakes”.Please keep writing. Love your blogging.Respect,KB

      2. Donna Brewington White

        Well, you’ve probably made more than you realize. 😉

  27. Ivan Vecchiato

    You are right about not using the world bubble because using that word is becoming a fashion trend, a race towards the most claimed news article or blog post. And the risk in my opinion is that continuous and insisting warnings, if not properly explained, will lead to a deceleration of the creativity we are seeing right now among VCs and entrepreneurs.Happy Easter to you and AVC readers

    1. fredwilson

      happy easter Ivan

  28. Denim Smith

    Timely post. I agree with Arrington. It seems to me that with the housing and dotcom bubbles being fresh wounds, everyone from the media to Joe public is shouting that the sky is falling and calling a bubble – but it’s way too early. So maybe we’re at the beginning of a Roubini-bubble currently – or Blubble (I like to think of us currently in the lathering stage – tiny bubbles forming all over). A few over-valued companies today doesn’t mean overvalued tomorrow and also doesn’t mean a bubble – unless they use their currency to inflate acquisition prices of targets. There seems to be no more bulls and bears duking it out, debating, and making the market, just hyperbole from the extremes of bubble or great reset with the velocity of social media helping spread the bubble-talk – where, of course, everyone is an expert. This will ultimately help to create a self-fulfilling prophecy; however it is going to happen regardless. [And btw, it is nearly impossible to have bears in the private markets other than by shouting from the rooftops (ie no short-selling or sell recommendations and the like in the private markets – you just pass on investing as an accredited investor or a pro with supposedly more knowledge than Joe public (limited market btw)).]People tend to forget that a bubble is simply unsustainable *market* valuation of an asset class to an actual buyer, or better yet an inflated and decoupled purchase price from the underlying value of said assets. Overshooting and chasing and paying for future growth or potential that isn’t actualized – which you won’t know until its too late. Wait for the IPOs. Demand for employees, supply of new startups and/or capital, heightened competition, new products, press, demand from more and more people online, mobile computing, optimistic blogs, a handful of high private market valuations relative to history, etc. etc. etc. does not make a bubble. Price to invest does, so if you’re not a buyer then you don’t have to worry. Keep on truckin’ entrepreneurs, there’s nothing to fear….yet. Focus on your companies.This time IS different. Just like every other time was and will always be. This isn’t tulip mania or a gold rush, we’re at the beginning of building the foundation of the future with brand new technologies. There will be always be unknowns, and therefore winners and losers.

  29. gregorylent

    “Markets are defined by greed and fear” …. exactly why the market system is fatally busted, and will not survive the paradigm shift that is underway.enjoy the transition.

  30. Dara Albright

    Thank you for your insight from a VC perspective. Check out:… I believe it makes a strong case against today’s activity being “bubbly”

  31. Peter Cranstone

    That’s why you have liquidation preferences and participating preferred. Valuations can go sky high, but as long as the liquidation preference is in place then the only risk is that you can’t exit which is always there.As valuations creep up watch for the LP/PP to go up as well.

  32. alanp

    Fred, I thnk we are in the early “S curve” growth of another Bubble/Blubble/Flubble/Whatever as i outlined (semi-tongue-in-cheek) here:…But I think the enmergence of thse secondary markets, new boy funders/incubators and me-too startups is classic Bubble behaviour.

    1. fredwilson

      i left a comment on your blog alan

  33. kidmercury

    Whatever. Its a bubble, all the signs are there, there will be a crash of some kind. Most likely it will involve the dollar so the real test is if shares appreciate relative to the cost of energy or living, or to gold.You guys just can’t have an honest discussion about it because you’re afraid of the implications. Be careful though. Keep being a wall street junkie and i think you’ll end up in a place you’d rather not be.

  34. Noam Grunes

    “This is a time to raise money and sock it away for a rainy day. Because it will rain.”This seems to be a modification of your “When They Are Throwing Money At You” post (Jan 12, 2011), under which I commented. There you appeared to suggest owners not raise money they don’t imminently need. I disagreed because investor sentiment is cyclical and the time required to raise capital can be as expensive as extra dilution in fearful years, and surplus cash when cash is scarce can be a competitive advantage. Have portfolio events, frothier valuations or heightened anticipation of expectations deflation led you to reconsider the merit of accepting not imminently needed money for rainy days? I enjoy your blog btw.

    1. Donna Brewington White

      Good question. I, too, was remembering what seemed like a different view but couldn’t quite remember the context.

    2. fredwilson

      yes, i’ve come to believe that the time has come to raise rainy day money

  35. Andrew Ullman

    There’s no doubt that things are chugging along in startup world. Good.Now, I’m not suggesting that we be cavalier during these times but does anyone else think we are being cautious because its the “right” thing to do? With the swath of destruction of the global financial collapse barely behind us we’ve been told that good times shouldn’t feel good. We’re supposed to be cautious, which is good, but nobody wants egg on their face after so many people looked so stupid during 2007/2008. That’s fair and understandable.Now, I’m not suggesting that some valuations aren’t overly-frothy but lets understand what we’re talking about here. Are we valuing companies solely on clicks and not revenues? Other than a few paradigm-shifters like FB, internet companies should be easier to understand as markets mature versus a decade ago. I don’t know–I wasn’t there–but this doesn’t feel like 1999/2000. I do know non-revenue companies were going public while bleeding cash.I think we’ve learned enough as an investment community to ask the right questions and know when to pass on a deal that’s been overvalued due to mob mentality.The only thing I DO know is that VC is a ridiculously complicated asset class. At least with hedge funds you get your report card at 4pm everyday and can right the ship the next morning if you made a mistake. Five to seven years is a long time to wait…

  36. RichardF

    Can you go to a VC and say “I’d like to raise a bunch of cash to sock away for two years” ?Also that is one of the best pieces I’ve read by Mike Arrington. I’d have liked to have commented on it but couldn’t because they still have Facebook comments switched on …..urgh (I liked Mark Cuban’s comment there, “we are in a Rubble”)

    1. Aaron Klein

      I don’t know if Flipboard said it to their VC but they did say it publicly after that 🙂

    2. fredwilson

      no. you say, “we are doing a big round which will get us to breakeven”

  37. Eric Friedman

    I spoke to a group of students last week who were asking questions about raising money from institutional firms, angels, and other providers of capital. All of them focussed on the short term relationship where capital seems abundant. None of them wanted to go into describing how the relationship will look when times are not as good.I likened the relationship to a marriage as well, and explained that they should think about how investors act in the good times and in bad. Look at the history of their actions. Were they even around in a so called “bad time” – whether macroeconomic or for a specific company or category.I do believe in seizing opportunity, but you have to also look at the longer term ramifications of that choice.I also agree with the terminology of “bubble” not being quite right. There is simply not as much public money in these Companies at the moment, which means that if there is systematic failure of every company in every category – the public will not be affected in the same way.

  38. OurielOhayon

    Most people use the word bubble out of laziness and lack of effort in finding an appropriate word or expression qualifying fairly this cycle you’re describingas usual the media does not help in finding a better expression..

  39. Bryan Wiener

    Most people think super high valuations are good for entrepreneurs, but they’re not. Sure, it’s great that the entrepreneur experiences less dilution. And everyone is happy when the exit is timed perfectly –happens most often when money is raised and company sold during the same economic boom cycle. But more often than not, high valuations equate to unrealistic growth expectations too early in the company’s lifecycle. Get big fast in terms of market share and revenue –profits be damned.Many companies start managing their company for the exit in this environment rather than to create value for their customers –a surefire way to destroy value. Then if the economic market environment changes for the worse, there becomes an overnight rush to produce cashflow. This was best reflected by Sequoia’s abrupt call to downsize in late ‘08 after relentless cheerleading months before. Nothing kills entrepreneurial spirit more than a massive restructuring.The meltdown was the best thing that ever happened to my company because we continued to invest while others panicked. And we couldn’t have done it without the backing of our investors. While we owned less equity that we would have liked, we were fortunate that our investors got in “cheap” and believed the down-market represented more opportunity than peril. The best entrepreneurs and investors never think things are as good or as bad as the crowd believes.

    1. Donna Brewington White

      “The best entrepreneurs and investors never think things are as good or as bad as the crowd believes.”That’s quotable.

  40. DavidR2000

    Blame the Media for this pre-bubble and for the inevitable bubble burst on the horizon. There are more subtle, underlying sinister reasons that are currently going on and are contributing to this pre-bubble and are the exact same things that caused the bubble of the early 2000’s in the first place. I am explicitly calling out the Media. They did it before and are doing it again. They automatically assume that the only companies worth covering are the ones that receive funding of any kind from any so called reputable VC or Angel. BS I say. There are several under the radar companies doing great work that u never hear from

  41. Ben

    Fred, I got a laugh out of something you might have said — unintentionally — on this subject last month.From…”Back during the first Internet bubble, we…” First implies more than one I figure. Seems you do too?-Ben

    1. Aaron Klein

      Declaring something was the first doesn’t have to mean the second one has already happened.

    2. fredwilson


  42. M. Edward (Ed) Borasky

    Fred, it won’t just “rain” – it will tornado / cyclone / superstorm / earthquake. Startups simply cannot create jobs as fast as the incumbents can destroy them.

  43. mleviko

    Fred do you think that there is a trend of over-valuations, in companies with no product or no clear (sustainable) revenue model? I can think of some: would one. 99% of groupon-clones woud be another kind.It seems that valuations are disconnected from any VC model be it DCF, multiples, or anything else that is half logical.

    1. M. Edward (Ed) Borasky

      “It seems that valuations are disconnected from any VC model be it DCF, multiples, or anything else that is half logical.” Yes, there are very clear financial ratios that define whether a business will thrive or fail. Graham & Dodd laid the groundwork, Buffett made his fortune following their studies, and Edward Altman’s Z-score made it possible to implement in a spreadsheet. See “Altman Z-score – Wikipedia, the free encyclopedia” for the details.

    2. fredwilson


  44. Gordon Bowman

    “Markets are defined by greed and fear.”Reminds me of the “Greed and Fear” post you wrote a while back:…I got the mini-print and love it. Such a great reminder of how markets really work.

  45. Nigel Scott

    Michael Arrington’s post was a smart piece of journalism on a notoriously slow news day.However suggesting that things are different this time around simply because the HR model has changed glosses over the fact the economic fundamentals of doing business online haven’t changed over the past decade .If we scratch away to the data behind Mary Meeker’s Web 2.0 from last year we discover that yes online advertising ARPU has risen from $9 to $46 over the past 15 years but the average revenue per web site from Advertising has fallen from $2750 to just $230.Take Google’s share out of the revenue pie and you can just about half that number.So yes the revenue pie has grown considerably ($54 Billion in 2010) but not as quickly as the number of mouths trying to feed off the advertising pie.This means it is significantly harder today to make money out of online advertising than what it was 10 years ago.This lack of growth in the revenue base means the new entrants have to take market share off the incumbents to survive.This is probably why Facebook’s advertising revenue growth is mirrored in the shrinking revenue base of the old dot com mega portals.Things are probably even worse in the Mobile space. For all the good things we read about Apple and Android the US’s share of worldwide sale of mobile handsets has fallen from about 20% in 1998 to what is today? 5%?So apart from one or two exceptions to the rule – Google being the most obvious example – it would be fair to say that 10 years on after the dot com crash Silicon Valley is still struggling to find a sustainable revenue model that unlocks the potential of profiting from doing business online.After all, given the amount of time American’s spend on the web today and the rapid decline in print revenues, online advertising in the USA today should be at least a $120 Billion business.The problem of course is it is still only $26 Billion and that’s why the word bubble is hanging in the air.

  46. Bob DeMarco

    One thing is always different. It is a new cast of characters that start with a conclusion and then tells us all the evidence that supports that conclusion. So that is certainly different this time around.The one thing that is consistent is that they are always making new greedy fools that think the tree that grows in Brooklyn will soon be as tall as the Empire State building.Of course in this day and age it really doesn’t pay not to play. Its other peoples money (OPM), so why not.Fred, can you bring your gold article of June, 2010 up to date? We really need to know your current thoughts so we know what to do.

    1. fredwilson

      please do not look to me for investment advicethis blog is just me thinking outloudit is not investment advice

  47. Aaron Klein

    During the last year or two as this environment was building, I resisted going back into the startup world until I had the idea and team that I thought could build an amazingly successful AND insanely profitable business – not a quick flip or small-beans kind of startup.A few people asked why – after all, “anybody can get funded right now.”And my response was “if everyone is getting funded now, imagine what we can accomplish if we have an insanely great idea that can grow into an insanely profitable business.”Those who act like there is a bubble and are built to survive in the post-bubble world will be the ones sitting atop the glass half full world, and the glass half empty world when that comes.

    1. Donna Brewington White

      “…imagine what we can accomplish if we have an insanely great idea that can grow into an insanely profitable business.”Brilliant, Aaron!

  48. Adam Besvinick

    At the end of the day, I agree that it is all semantics. However, the fact that professional investors (be them individual angels or VC funds) need to be reminded to invest prudently, regardless of whether there is a perceived bubble or not, is rather mindboggling to an outsider looking to get into the business.

    1. fredwilson

      it’s not an easy business adam

      1. Adam Besvinick

        I can understand that it’s easier said than done, but I thought that enough investors would have learned from their experiences during the bubble of 1999-2000 to not make the same mistakes again, even if the trends are slightly different. Hopefully, I’ll get the opportunity to realize just how hard it is.

  49. baba12

    For those who are VC’s like yourself and other angels, you would like to see valuations down so you can maximize your profits. Fair enough.If you are the entrepreneur and someone is willing to value you more than another, then it is great.The notion of whether it is a bubble or not is not something the entrepreneur is focussed on or should be bothered by it. Their moral conscience should dictate they do what is right by them, not what is good for the VC industry as a whole.I am sure from the VC standpoint every deal they make is always not driven by what is right but what they believe is the right valuation, which is a art not a science in the real sense.Thus to me this article of being in a bubble has two view points at the minimum and from one side it may look great and from the other side it may not.So when Mr.Wilson mentions being a greed phase, I’d say the VC’s are in a greed phase always, just the percentages are different, ae entrepreneurs in a greed phase, possibly but most people are not driven by the notion of profit maximization when they build a product. I am not sure if Jack Dorsey and company built twitter with the notion that they would have a Billion dollars in say “x” of years, they were solving a problem they had and the rest is just what followed.On the other hand I am sure USV goes about raising a fund with a promise to investors that they will return “y” % more than say the S&P average etc. For the USV’s of the world making investments and hoping they pay out for the investors is the only driving force and rightly so. Fear or Greed they have to deliver or else they wont be viable.I think for VC’s they exist in a bubble perpetually, question is how big it is and can they manage the bubble so as it does not explode with them inside it.



    1. Donna Brewington White

      Your definition also works for a “house of cards.”Same thing?



  51. Robert Holtz

    A couple of weeks ago I was on the phone talking to Bill Bartmann (a billionaire who knows a thing or two about economic swings). I was saying something a lot like what you were saying, Fred. I said, “We’re not in a bubble per se… everyone is smarter this time.” When I remember the rhetoric about the “new economy” and how everyone needed to throw away their rulebooks of how brick and mortar business worked, I felt very assured in saying this was going to be different. But Bill just started to laugh.He said, “Everyone is NOT smarter, Robert. People forget.” And he pointed out to me that this is a recurring cycle of human nature from bullish to bearish back to bullish… Rinse. Repeat.I wanted to shake off his assertion but he really had me beat when it came to the astonishing track record we have, especially in the USA, the statistics of just absolutely repeating our same mistakes over and over again as a nation and as a world leader. I was having trouble reconciling it because culturally I “feel” like everyone is a little more careful and a little more contained than in 1999, especially in the tech sector. But then something happened.I had the TV on tuned in the background to CNN and they were talking about a field trip of high school students that were going to visit Ground Zero in New York. They were taking them there to learn what happened on 911 and to explain about the World Trade Center and the epic loss of life that occurred on that fateful day. I don’t know about you but 911 altered so much of my life personally and professionally… it was such a profound global event that to ME, I still feel like it was YESTERDAY and I believe I shall never forget it. But here were these high school students most whom thought of 911 totally in the abstract like it almost didn’t happen or like it was footage from a blockbuster movie not real life. They were so disconnected from the emotion of that day. Some hadn’t even been born yet or they were infants unaware of the big picture. And that’s when it hit me how right Bill was. It bums me out to say it, and you know I prefer to be positive and upbeat. And I have to laugh because it is the only thing that stops me from crying… but Bill is right. We’re NOT smarter. People forget.At some point, enough years will go by. Enough of us will be old enough that no one is going to hear our stories or care about them because they’ll all be such ramblings and nonsense to them… fading into the noise. And new people will be born with new aspirations and ambitions thinking they’re reinventing the world and they’ll do it again and again and again.So here’s my positive slant on it if there is one. Make hay while the sun shines. Make the best of the upswings when they happen because people forget… knowledge stops getting passed on… and the cycle repeats whether we want it to or not. So yes, that is sage advice from Fred…”Raise money and sock it up for a rainy day. Because it will rain.”

  52. Tom Labus

    In a longer view, Robert Gordon and economist at Northwestern, talks about the Internet being the third leg of the industrial revolution but a short lived one. He sees signs that we have run through the “inventions” of the internet.How interesting to see a contrarian view.Interestingly, he is a member of the Business Cycle Dating Committee. The guys who decide when recessions begin and end.

  53. ErikSchwartz

    Semantics aside…I get the bubble feeling when I see companies that are not at their core technology companies positioning themselves as tech companies. At its core a company has a DNA. I see a lot of companies playing up the fact that they use technology, but they are no more technology companies than my insurance company. Just because your primary customer interface is a website does not make you a tech company.

  54. Donna Brewington White

    “But deals are actually companies…”I am struck by the significance of this statement.Then my mind plays it out further to “and companies are actually…” which then gets back to what you initially base the investment decision on in the first place, right?

  55. Ashish Mistry

    Perspectives from Atlanta…Truest sign of a bubble is a frenzy of unsophisticated money trying to enter deals, which I believe is at a 2.5 of 5.Agree with Fred’s point of growing into valuations – entrepreneurs need to be cautious of placing that overhang on themselves, especially in the very early stages, as that will cause real pain for marginal companies/teams that need more money. However, veterans know to raise as much as they can now as cloudier days will eventually come.But, what I like about our market (Atlanta, Southeast) is the even keel market in MOST instances. Since capital flows are not like those in the valley or NE, our entrepreneurs are less focused on valuation as a primary, and more on the valuation “fit” and what happens “if” scenarios on future rounds as the business reach milestones.

  56. Leslie Kossoff

    Fred, I particularly appreciate this post – not just for your insight as an investor, but because executives, as well as entrepreneurs, need to understand and accept that we are at that “glass half full” part of the cycle. If they do, they’ll plan and act accordingly.There’s a fascinating suspension of disbelief that recurs among executives – from SMBs to multi-nationals. It’s that, whichever direction the cycle is going, that’s the only direction it will ever go. Ever again.As a result, companies expand too far and too fast (think Starbucks) or contract too much too soon (think the majority of companies in the Western world). It’s wholly reactive – and it’s wrong.Your guidance that other investors keep their eyes wide open is apt – not just for investors but for those executives who are operating in this economy worldwide. The more that they take that objective view and make their well-informed decisions accordingly, the less the chances of future failure – whether they’re start-ups or legacies.Thanks for your blog. I always learn from you as well as from those who comment – and that’s invaluable.

    1. M. Edward (Ed) Borasky

      “There’s a fascinating suspension of disbelief that recurs among executives – from SMBs to multi-nationals. It’s that, whichever direction the cycle is going, that’s the only direction it will ever go. Ever again.”As a result, companies expand too far and too fast (think Starbucks) or contract too much too soon (think the majority of companies in the Western world). It’s wholly reactive – and it’s wrong.”I wouldn’t put too much blame on executives for not knowing where they are in a cycle. Even PhDs in economics get it wrong, as we’ve learned in the years since 1987.

  57. andyidsinga

    When i saw the title of this post i read it as: The __word__ bubble 🙂 and i was all : “crap theres a bubble in the word business now?”:) 🙂 🙂

  58. the_infonaut

    Is there a bubble in articles about the bubble?

  59. fredwilson


  60. jerrycolonna

    Jason Calacanis did that years ago on his radio show for Pseudo.