“The strangest and least economically rational technology bubble I’ve ever seen.”
Those are Paul Kedrosky’s words, discussing what now nearly everyone agrees is, well, some kind of bubble in the Web 2.0 space. I’m hearing it everywhere, and even more to the point, I feel it as well, in some odd and uncomfortable way.
Hold on, Battelle! Aren’t you the guy who wrote an Op Ed in the New York Times claiming we’re NOT in a bubble? Yeah, that’d be me, and I still hold to my arguments in that piece. We don’t have a bubble in IPO markets, and despite a few questionable deals, the major companies aren’t on a nutty buying spree either, so there’s no bubble in M&A exits infecting large company stock prices. The only folks who might lose thanks to the current Web 2 funding rush are the VCs – and, well, they can afford it.
And yet….as I think about this a bit more, I realize that perhaps we are losing in a way – all of us in this Internet/Web 2.0-related market. We may be losing the lessons a healthy market teaches us when companies fail quickly. Allow me to explain.
First, I am noticing an uptick in the kind of behavior that got us into trouble last time – specifically, spending untethered to value by companies with unproven models. Also, I’m noticing companies out there that have the veneer of success, but to my mind are riding a wave of short-term infatuation buoyed by easy money and near-term enthusiasm, rather than long-term value creation bolstered by valuable customer relationships. As Paul noted, we have a bubble in company creation – there are far too many companies with very similar models and market niches. Now, at first blush should not be a problem. After all, I’ve argued that one of the really cool things about Web 2 is that you can keep making new companies, see if they work, then disassemble them and try again.
Only, that won’t happen if the companies are kept falsely alive by a preponderance of venture capital and VC-related spending. And it doubly won’t work if those companies have an average burn rate of a million or less a year. A million bucks is nothing to most VCs. A VC pal recently told me that there were more than 200 funded companies in the video search space, for example.
In short, we don’t have a company creation crisis. But we might have a company destruction crisis. Something is off in our ecosystem – there’s simply not enough failure out there right now. For an ecosystem to be truly healthy, bad ideas (or good ideas poorly executed) need to fail, so we can all learn from the failure, incorporate the lessons, and move on.
This failure to fail can’t last forever. VCs, even the ones that funded video startup #200 and 201, won’t keep funding non-performing companies over and over again (wait, well, maybe they will). But at some point, reason will creep back into the ecosystem. Right?