Startups: Bubble or no Bubble?

Is there a StartUp Bubble on the doorstep?

Bubble is defined differently by different people who specialize in different subjects. While an economist attributes this phenomenon to an unsustainable valuation of a cluster of companies that are built on large capitals raised from the public directly or indirectly through various funding instruments not limited to just stock market listing.  For a common man this means he is going to loose jobs, his immovable asset valuation dives nose down and he foresees a lot of turbulence in financial situation of his family.  All this is in a way, true but also “not as straight as it seems”. There is more to this saga of “bubble and its effect” that what we think.



Most technocrats and so called  “magic tools that forecast the economy” predict  that the StartUp Euphoria is in the state of a bubble right now that will burst and most entrepreneurs would return back to their day jobs if at all they could find one. Here is my one cent on this “thrilling speculative subject”.

My View:

Every 15 years once, the Global economy undergoes a phenomenal churn and spins into a new zone that brings a sea change to the way in which the “future world” operates.  While period between 1990 to 1995witnessed bond market massacre in US and the rest of the world, throwing Mexico into crisis, while India had multiple stock market scams like the Harshad Mehta scam. The Soviet Union Collapse and the Gulf war only added more woes during this period to the already on-going economic crisis. This was perceivably the worst years for stock markets ever but I would call it a phase that lead to newer exploration of investment vehicles, new platforms and evaluation of more structured products for investments that put the economy back into the Upswing before the 2009 Global credit crisis and stock market meltdown happened again, surprisingly exactly after 15 years after 1994. 

While the early 90s also gave birth to the “world wide web” which eventually revolutionized the world, Clinton sang a new song for America during this period. Before all this, during 1970-75, there were times when Oil crisis rocked the world and there was stagflation and the end of post world war 2 economic boom. While Nixon ordered an invasion of Cambodia, widening the war in Vietnam, India was busy taking on Pakistan in a never before type of a war. There was also the steel crisis and stock market crashes that created havoc during this time – all exactly 15 yrs before the 1990 story that I just discussed. Between the 1970 and 75 when all this was happening, Bill Gates and Paul Allen quietly founded MicrosoftCorporation to flag the beginning of a new software era that nobody ever thought would create the next set of Unicorns and turn the tables for the world. Like how, between the 90 and 95 when the world’s panic button was ON, Nokia tested the first text message service between two mobile phones flagging the beginning of a new era that would be lead by mobile phone revolution. All this when India was opening it liberalization policies under the PV Narasimha Rao’s Government to welcome the sea change that changed the face of India forever.

It is interesting if we go a bit backwards into the 70s and rewind a little to understand how these economic patterns pan out and what resulted in typical follow through events afterwords. Upon keen observation one can identify and draw conclusive typical patterns in these events. While the 1974 resulted in solid restructuring in lending sector, engineering sector and new era of computers (IT sector) emerged, the 1990 turmoil forced the west to explore cheaper labour and skills that resulted in an unprecedented outsourcing boom in the third world countries and especially in IT and IT enabled sectors that not only paved way for companies like Infosys, TCS and Wipro to leave strong footprints in the Global economy but also lead to internet leading the revolution of digital transformation and bringing the world closer using virutal modes of communication. This positively impacted countries like India and resulted in a complete makeover of multiple sectors such as real-estate, service sectors, retail and manufacturing. Mainly the buying power of the middle class section of the society increased multi-fold and digitalization started to change people’s way of life and thinking. Internet was soon changing lives, making the world shrink and connected like that of being in one city. It took exactly another 15 years for all this to under-go a correction in 2008-10 where the economy opted to go in for a hibernation while people speculated on the meltdown and the world is all over. 

If we observe the trend, a turmoil is just a phase that makes one retrospect and results in huge transversal change in perception, brings newer markets, newer forces that change the world, technology and people. My analysis compares these 15 years to a train that has Engine, First Class, Second Class and the Rear. These 15 years can generally be sliced with the first 3 to 4 years as the period of slump during which indicators (like I explained the origin of microsoft, internet etc amidst chaos) the next 3-4 years of consolidation, discovery and innovation and another 4 years of Euphoria where people start breaking ice, identify newer sweet spots, create newer avenues that attracts large unprecedented scale of investments and lastly the phase of 3-4 years of the speculation about how the world will doom. This is the end of the mega change and for the subsequent 3-4 years there would be a substantial correction, consolidation and dormancy.

I feel currently we are witnessing early Euphoria phase post 2009 and our new “game changers” are SAAS, IOT, Artificial Intelligence, Digital, Big Data and Shared Economy (like Uber etc) – these would result in trillion dollar companies at the end of the Euphoria phase. Such massive valuations will take time for people to accept and acknowledge. When United States Steel Corportation(USSC) became the first billion dollar unicorn in 1901 their true tangible assets were probably 50% of the valuation and rest half was sheer goodwill. During that time if companies like Morgan could issue a mammoth $303 million in mortgage bonds, $510 million in preferred stock, and $508 million in common stock it surely is no joke. These investment houses showed huge levels of risk appetite then when just one dollar a day could keep lot of families afloat for the whole week in America. A 50% goodwill in 1900 can be equated safely to a 75-80% in today’s world simply because of the 100 times more visibility that we now have on everything compared to 1900. This means an Uber which is the most speculated “unicorn” which is leading the so called “bubble bursting” game, needs to be making atleast 20-25% of its valuation to equate it to the then USSC’s “fair” valuation. Uber claims to have close to 8-10 Billion USD in revenues from across 50 countries that puts the valuation at a whooping $40 billion, and surprisingly enough Uber valuations to me seems “fair” and justified taking into account the 75% logic I quoted w.r.t USSC. While I still feel Facebook valuation is crazier compared to Uber, the fact that FB is publicly traded puts Uber in a safer zone on a comparable note.

While these are some typical signs of the next trillion dollar companies in the making. the next 3-5 years can be very interesting especially in the lights of the cheap money that is flowing from US and China together with massive interest to invest in startups by the private equity funds. This only makes it the best or the right time for new start-ups in tech circuits to kick in and join the bandwagon especially in segments like mobile, AI and analytics. 

Every 15 year cycle has 4 characteristic regions and indicators – like the 1990 resulted in Internet as the driver, Public money as the creatorB2B the consumer and the Technology as the enabler. In today’s world we have the Mobile as the driverPrivate Equities as the creatorB2C as the consumer whileDigital is the enabler.

So, the bubble isn’t coming, go back and build massive companies, START-UP NOW and seek the highest valuations possible if you can get it!

 

This article has been reprinted with permission from the author. The original blog appeared here- http://www.thestartupguy.me/blog/startup-bubble-or-no-bubble

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