If there is one thing that we have learned from history…well, it’s absolutely nothing. Bubbles last so long as the smartest guys in the room can keep passing the baton to the next greater fool. Hence, the greater fool theory.
We witnessed it in the late 1990s. The Internet was a wild west. Dotcoms raised a lot of money and then lost it all until there was nothing left to give out. At the height of the euphoria, some companies simply just added .com to their name in the hopes of attracting a higher valuation. Everyone wanted a piece of the gold rush. Then, in March of 2000, the musical chairs came to a halt. The great dot-com bust had begun.
The smartest guys in the room did it again nine years later. It wasn’t a dot-com boom this time. It was all about gambling with financial instruments. Reverse mortgages? CDOs? It’s hard to believe that was only 11 years ago. And you have to believe that some must have realized what they were doing was completely wrong, but hey – what did it matter? As long as you could repackage these products and sell them to…wait for it…the next greater fool.
It is now 2020. It’s happening again in the world of technology. But first and foremost. I support entrepreneurship. I support business. I’m all for making money. And I am far from being a “hater.” But, these days, you do have to roll your eyes and call bullshit when you see it.
Every day, you hear about another “unicorn” raising tens of millions of dollars in their most recent round. The concept of being a unicorn – “creating a billion-dollar value” – appears to have been replaced by “raising a billion-dollar value.” On paper, everyone wins as long as the smartest guys in the room can persuade someone else to invest at a higher valuation (at least). For a while, that works. Until you run out of fools or the market conditions deteriorate to the point where the fools realize they must become wiser.
Too many unicorns, not enough horses.
Companies must deliver. They must generate value. They must provide value. Most importantly, they must MAKE MONEY. However, simply creating an app to deliver a product or service does not qualify you as a tech company. It makes you an app-maker. A massive amount of money has been invested in unprofitable and unsustainable business models, since they have some amazing buzz words attached to them.
Some operate in industries with already thin gross margins, making the path to profitability even more difficult. If it costs you $10 to find someone to whom you can only sell $5 in goods, you will always be losing money. Some argue that user base is everything, and that you can eventually sell more things to the person who just spent $5. That only works if you already make money from that user. Nike, for example, sold shoes and made money before deciding to sell you clothes. It didn’t just sell you a shoe and then lose money on it in the hopes that you’d come back to buy their clothes? That model simply does not work, and it only appears during these peak buzz cycles.
I predict it’s going to become harder to pass the baton…as eventually you run out of fools. Especially, as we’ve seen in the public markets.
My advice to entrepreneurs is simple. Build something of value, of substance. It’s fine, if it’s boring and not “sexy”, as long if it will make money. Don’t get swayed by the headlines. The headlines don’t pay your bills. Don’t sell bullshit. Don’t try to be a unicorn. Be a horse. Horses win races.