The Controlled Deflation of the Bubble is Almost Complete

For the past three years, everyone has been kvetching about this fakakta bubble and, frankly, it’s annoying.

Today, I announced on CNBC that the two major bubbles we’ve all been so worried about -- the early- and late-stage private company bubbles -- have been successfully deflated in a very controlled fashion.

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EARLY STAGE COMES BACK TO EARTH

In the early-stage space, I’ve seen the uncapped notes and “12-15m cap” notes for YCombinator companies with 10 weeks of growth go away completely -- and that’s a good thing!

In fact, I was laughing out loud with a founder about the uncapped note in 2015 at the Golden Globes on Sunday night. (Event drop is the new Name Drop!) The only thing funnier than the fact that serious investors gave him a mountain of cash without knowing how much they paid for their shares was Ricky Gervais taking apart Mel Gibson.

In the past couple of months, I’ve seen the early-stage pull back in a major way. Here are some common events I’ve witnessed (with specific startup names/details anonymized):

1. Startups that are doing well having to meet with over 50 investors to close a flat round.

1. Startups doing bridge rounds with a 2-3x liquidation preferences (this means those recent investors get a guaranteed return of 2-3x their money before any other shareholders get paid).

1. Early-stage investors telling me they are “taking a pause” on investing in new companies for the next six months. In fact, two non-traditional, authors-turned-angels, Tim Ferris and Tucker Max, have both announced they’re hanging it up.

1. Startups coming out of elite incubators that can’t hit their target valuations or raise amounts coming back to me six months after graduation with “rebooted” valuations.

LATE-STAGE TIDE GOING OUT

In the later stage, we’ve seen mega-rounds replaced with press coverage of “dying unicorns,” and elder statesmen Bill Gurley and Marc Benioff chastising folks who have chosen to stay private.

As the easy money tide has receded, we’ve seen which businesses are sustainable and thriving and which are, well, ready to fold.

1. Instacart (and dozens of others) have laid off some staff. Instacart also raised their prices, a savvy move considering folks are addicted to the product and their margin on groceries is ... ummm, what’s the word? Low? Horrible? Bad? Either way, savvy move to “get there on what you got,” and prove to the investment community that you’ve got positive unit economics.

1. The ecommerce category has continued to unwind, with Fab.com collapsing, Gilt Group having a short sale and One Kings Lane reportedly going up for sale soon.

1. We’re hearing a lot of speculation about how Dropbox and Evernote should react to massive competition and significant private market valuations. It’s possible both of those companies will be snapped up by savvy, cash-rich players like Microsoft, Google, Apple, or Facebook.

1. The extraordinary pressure on Theranos to prove they have the goods certainly being driven in part by their huge, $9b valuation. (If they weren’t a unicorn, folks wouldn’t care so much.)

PUBLIC MARKETS & GLOBAL RISK

In the additional “good news” bucket, the public markets are taking a pause, bouncing off the all-time highs. The seven-year run up, from 2008-2015 has everyone on high-alert -- there has to be a crash right? This couldn’t possibly be a bull market for 10 or 15 or even 20 years, right?

The truth is, no one really knows.

What I do know is, if there is a huge, macro event that sends the world spiraling into a financial crisis again -- and, sure, there will be one eventually -- it will not be the tech industry’s fault. This time, for two reasons:

1. Startups today are generating real revenues off of a massive customer base (thanks to mobile and broadband saturation).

1. Startups with money in the bank or even -- gasp! -- profits, don’t go out of business! Founders are aware of this and are watching the deflation I mention above and, largely, taking measures to control their burn.   

The next financial collapse will probably be caused by Putin (rebuild the empire!), China (who's in charge?), Pakistan (nukes for sale! favorite vacation spot of Osama!) or some black swan we haven’t seen (pandemic, terrorists get nuclear secrets from Pakistan, asteroid hits earth, etc.).

Bottom line: the private and public markets are being super cautious, and the “free money and uncapped notes party” is over-- and that’s a good thing.

Slow and steady wins the race.   

best @jason

PS - Thanks for feedback: Geoffrey Clapp, Lon Harris, Joshua Sortino, Nick Baily and Jon Shumate.

PPS - China is the wild card in all of this. No one knows what an economic collapse, or revolution, does to the global economy. If Greece and Spain are not able to pay their bills, can you imagine what ten million people rioting in the streets of China -- and being run over by tanks (real possibility) -- will cause?

PPPS - Hosting an Angel Summit on March 1st, right before the LAUNCH Festival. Format is 20 angel investors, who are very active, talk about their portfolios, investing strategy and one other thing. Everyone gets 12 minutes on stage. Should be fun.

PPPPS - We have 8,000 (of 15,000) registered for the LAUNCH Festival. We did a quick survey of 6,491 of them and asked what services they were looking for. If you’re in the Cloud Computing, Advertising, Data Analytics, Legal, Email, Design, etc., space we’ve got thousands of folks who want to meet you. Join us as a partner by emailing me [email protected] -- we could use your support throwing the party!