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 saw it in the late 1990s. The Internet was the wild wild west. Dotcoms raised a ton of money and lost it until there was no more to give out. And, at the height of the euphoria some companies just added .com to their name in the hopes to seek a higher valuation. Everyone wanted it in on this gold rush. And, then March 2000 happened, the musical chairs stopped. The great dot-com crash began.
Nine years later, the smartest guys in the room did it again. This time, it wasn’t about a dot-com boom. It was about gaming financial instruments. Reverse mortgages? The Sub-prime mortgage crisis? Hard to imagine that was just a mere 11 years ago. And, you have to think some must have realized what they were doing was just downright wrong, but hey – why did it matter? As long as you could re-package these products and keep selling them to you guessed it…the next greater fool.
Now 2020. We see it happening again in the tech world. But, first things first. I am pro-entrepreneur. I am pro-business. I am pro-making money. But you can’t ignore bullshit these days. Every day you hear about another “unicorn” raising double-digit millions, from just a few months ago of their last round. It seems the idea of being a unicorn – “creating a billion-dollar value” has been replaced by “raising a billion-dollar value.” So, long as the smartest guys in the room can convince someone else to invest at a higher valuation, everyone wins on paper (at least). That works for a while. But that doesn’t last.
Too many unicorns, not enough horses.
Companies have to perform. They have to create value. They have to deliver value. And, most of all they have to MAKE money. But just because you make an app to deliver a product or service, doesn’t make you a tech company. It makes you an app-maker. An enormous amount of capital has been sunked into unprofitable and unsustainable business models. Some operate in industries that already operate on thin gross margins, so the path toward profitability becomes that much harder. If it costs you $10 to find someone you can only sell $5 worth of goods, you will always just be burning money. Some have argued that user base is everything, eventually you can sell more things to the person that just spent $5. That works only where you are already making money from that user. For example, Nike sold shoes, made money and then decided to sell you clothes. It didn’t just sell you a shoe, lost money on it, in the hopes you would return to buy their clothes? That just doesn’t work.
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. It’s okay if it’s boring as long it will make money. Don’t chase headlines. Don’t sell bullshit. Don’t try to be a unicorn. Be a horse. Horses win races.