The incredible valuation of the LinkedIn IPO can only be interpreted as one signal: the Bubble Clock has started ticking. So long as it continues to run, we will live in a reality distortion where valuations are insanely high, capital is cheap, and smart businesses can leverage that to hyper growth. When it stops, we’re back to “RIP: Good Times“.
What should responsible Founders do with their companies during this period before the sand in the hourglass runs out?
In The Art of Riding the Bubble, we considered the dynamic interplay between VC’s and Entrepreneurs when there is a Bubble. For this essay, let’s focus on Founders who want to build their companies.
Just as we got a presentation from Sequoia discussing what to do in the wake of the crash, there should be a presentation about what to do when the starter shot for the Bubble is fired. Bubbles have a very limited shelf life. This one is no different, though one of the crucial signs we have a Bubble is that people will admit it exists and then work hard to convince you it’s different. It’s not. Bubbles only differ slightly in terms of whether they emphasize tulip bulbs, sock puppets selling pet food, or multi-billion dollar business card substitutes. They differ slightly in terms of their timing, what starts them up, and what shuts them down. All of that is minutiae to be analyzed after the rush has ended.
What we’re talking about here is a Valuation Bubble, where the sense of how to value a business has become highly skewed. It doesn’t necessarily mean there isn’t a real business there, just that the business is fantastically more valuable than it will be before and after the Bubble. It will seem as though the business has transcended the laws of physics. You will hear that the business is based on fundamentally new forces and that the only way you can profit without being left behind is to jump into the fray.
Founders, forget all that psychology about the Bubble. You only care about two things:
1. The Cost of Capital gets as close to zero as you are likely to see with this business.
2. The world is willing to go way beyond giving your business the benefit of a doubt if they become convinced it has the virtues driving the Bubble.
Your job, therefore, is clear:
First, you should accumulate as much capital as you possibly can–put more cash in the bank than you think you could ever use. Put so much cash there that if you had to reinvent and restart the business three times over you could do so. Easily. Assume you are never going to see capital available so cheaply again.
Second, you need to leverage #2, where the world will believe in your business more than it ever could outside the business. Leverage it by positioning your business so it has the virtues that drive the Bubble. This Bubble is a Web 2.0 Bubble. The last one was a Web 1.0 Bubble. If you’re not a Web company, you’d better figure out how to become one. Fast. Otherwise, you’re sitting this Bubble out.
Third, having positioned your business and raised lots of cash, figure out how to convert that cash to scale as quickly and efficiently as possible. Businesses that both have cheap capital and can spend it efficiently have a huge advantage over those that are clumsy with their capital.
The way you keep score is by either achieving a liquidity event for your business at a ridiculous valuation that benefits your shareholders, or by making your business so strong relative to the competition that it can keep growing and stay strong after the Bubble bursts. The last Bubble killed a lot of companies, but out of those ashes we got companies like Google. There are no other outcomes of consequence for you to seek.
Lastly, this is not a time for “business as usual”. Business as usual will be easy. It will be tempting to avoid risk, take the orders, and keep your head down. If you take that course, you’re not leveraging the Bubble, you’re hiding from it. You’re marginalizing your company’s shot at greatness. There will not be another Bubble in time to help your company. Don’t miss this opportunity.
Those are the high level nuts and bolts. A word about some tactics:
The three elements work together. The more your business is positioned with the virtues driving the Bubble, the more Capital you can get. The more efficiently you can convert Capital to Scale, the more Capital you can get. The more Capital you have, the easier it becomes to Scale and get unfair attention for the virtues of your Business. We easily have time for a couple of cycles of this, meaning you need not raise all of your Bubble Capital in one shot.
Based on the reality of when the Bubble will likely end, Founders should draw their plans accordingly. One way to do that is to plan an 18 month cycle that runs to 2012 with a follow-up 18 month cycle after that if the Bubble holds. A cycle consists of fund-raising followed by execution leading to results that are good enough to raise more capital. Stack your long-lead items for the first cycle up front along with the fund-raising. If you’re planning a major technology initiative, for example, get the team going on that ASAP to maximize the benefit as early in the cycle as possible. If you’re planning to upgrade your Executive Team, do it sooner than later. Bubbles will accrete talent to the likely winners, and they will be hard to pry loose until there is an outcome. Get your scarce talent aboard ASAP.
How long will the Bubble last?
I figure we have until somewhere in the 2012 to 2014 range. There’s no way the Bubble pops before we know who our next President will be. The incumbent wants a frothy economy anywhere he can get it while he is trying to get re-elected. Therefore, consider 2012 the inside limit. It’s possible some disaster can nip this in the bud sooner, but we live with risk in Bubbles–get over it. The strength of the LinkedIn IPO is telling us there is a lot of fuel on the sidelines for this Bubble. 2014 is a function of economic cycles. Some say the VC cycle is 14 years. 2014 is 14 years post the dot-com cycle. Can the Bubble last longer than 2014? Perhaps, but it’s very unlikely.
The Bubble Clock is ticking, are you sprinting for the finish yet?