Unicorns and Decacorns – Signaling a Tech Bubble?
Is this why Mark Cuban and other private tech investors are saying there is a tech bubble?
According to a Bloomberg article, Fuzzy, Insane Math that’s Creating So Many Billion Dollar Tech Companies, some 50 startups are being valued at more than $10 billion, which is where the new term, decacorns comes from (hint: 10x a unicorn or $1 billion valuation). What if making up new words to justify insane valuations is a key signal of a tech bubble, not to mention startup valuation calculations exceeding well established decades mature companies?
A case can be made for disruption and fast growth deserving higher valuations, but at what value does it become extreme and what’s the cost to whom and when? Economic history shows that the losses of extreme over valuation gets paid by late stage employees and investors. So, hold this question. Can you see a financial bubble in the making before it bursts? And will this keep you from being a late stage employee or investor?
Just to be clear, this is a positive article on the state of entrepreneurship and technology businesses today, but it does call into question the practices and backroom agreements of VCs making up valuations to get deals done. So, what does a tech bubble truly look like in the midst of it happening?
I had a fast growth company in the late 80s and remember a company had to have assets and be profitable to go public. I did a reverse merger to go public, which became one of the rare ones to go on to be successfully sustainable. In the late 90s, I was advising companies when business plan software was a new tool and all the rage because individuals were telling me they could crank out a business plan and raise a million dollars. Many were successful at raising money, but few were in business three years later.
Not because they didn’t have a good idea, but because they didn’t know how to grow a sustainable business. A key ingredient of their failure was most were unwilling to listen and learn from seasoned entrepreneurs and mentors. One CEO came to me asking if I could help him learn how to generate revenue from sales instead of always raising more money. He was unwilling to do what had to be done and he lost his investors’ money.
The late 90s was a time of true frenzy and insane valuations that involved many companies, not just a subset of an industry. I was at a university commencement address by a young startup entrepreneur who spent much of their speech justifying the startup’s valuation, which made them a billionaire (on paper). This was one of those spectacular internet tech company crashes in 2001.
Yet, there are some significant differences today.
First, the tech industry permeates every aspect of the economy, business, community and homes. There is a broad foundation of established, mature tech companies with strong balance sheets with growing revenues and profits that go into the measurement of the Nasdaq. Valuations of these companies are not insane as in the 90s when most new internet companies had only promises of revenue and profit growth. The chart below shows insane valuations. A few of the best managed companies prevailed. Most did not and numerous stories of the outrageous expenditures and excesses of inexperienced management teams are legendary.
Second, we may only be in the third or fourth inning because the next wave of innovation is just beginning. Much like when the railroad industry began to transform into the transportation industry. Millions of people are employed by hundreds of thousands of tech and tech related companies. Daily, I see new innovations and inventions of products and services that disrupt and improve the way we think and produce in business and personal life.
Third, I don’t hear everyone, including cab/Uber drivers, hair stylists and canine exercise coaches (dog walkers) talking about the latest hot IPO. Even in meetings with business owners the hot IPO de jour may be mentioned in passing, but owners stay focused on what matters. Discussions are on the practices and processes absolutely essential for building the right infrastructure, operating and financial systems to support successful sales and marketing initiatives. Of course dreaming of financial success remains, but it’s easy to tell the genuine motivations of owners who are about creating value for their clients, employees and investors.
Fourth, business owners know the true value of listening and learning from experts who have proven, deep experience and credibility in growing companies. There is an abundance of programs, organizations and tools to support aspiring and mature entrepreneurs to accelerate the growth of their businesses.
These are truly amazing times.
In spite of what you hear from media, the world is and has been rapidly moving toward what I term a mature attitude of entrepreneurship. These are truly amazing times. Worldwide growth is happening. It is estimated one billion new people will enter the middle class in the next ten years. That’s 2x today’s current numbers of people in the middle class. It’s going to take a lot of entrepreneurs building successful companies to employ one billion people.
Change and uncertainty are the norm, but be assured the future is moving toward solid, sustainable local economies. Sure there will always be pockets of excess, over valuations and greed, but there has never been the vast numbers of credible, successful experts available who know what works. At the same time there are vast numbers of willing passionate entrepreneurs spanning the globe, from all cultures, ages and backgrounds who desire to feed their families, make a difference and build legacy businesses that employ others, serve and support customers and local communities.
At the age of thirty-four in 1987, do you think I knew how to traverse the complexities of doing a reverse merger? In reality, few people really did know. In fact, few people had experienced growing a billion dollar company in ten years. The business I co-founded accomplished this goal in twelve years. I had dreams and disruptive ideas, but I sought out key mentors, investors and experts who guided me through the numerous course corrections necessary for building a sustainable business.
So, what difference does it make if a subset of the tech industry is a tech bubble in the making? Very little to one wanting to build a successful, profitable business. Find yourself a mentor, advisor, expert and investor who have credible experience at growing businesses. Turn your passion into a deep desire for rapid learning of what it takes to build your business. Even if you do have the next Uber idea, be assured you will experience many course corrections. Seek out and secure the advice of experts, read voraciously and be willing to try new things. These are vital ingredients for success.
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