How to deal with "bubbles"

Original author: Jason Calacanis
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Translation of Jason Kalakanis ( article “How to deal with bubbles”.

During my career I have missed more than 9 thousand times. Lost almost 300 games. 26 times they trusted me to make a decisive throw, but I missed. In my life, I have failed again and again. Therefore, I succeeded.
Michael Jordan

Will the Internet bubble pop up soon?” When?"
“Is it better for me to sell the company now, or wait, and sell more expensive next year?”
“Do I need to raise money now before the boom ends?”

I am constantly asked these questions. They used to keep me awake. Now they hit my brain so much that they turned into instinct.
Young poker players think about how to play the king of nine and the figure of eight to five before the flop. Newly-made entrepreneurs also think about how to play in the market.
The answer is that you should not play any of the hands. Also in the market.

In this letter I will cover the following topics:

1. How I learned in a complicated way (aka my mixed experience)
2. The truth about bubbles
3. The truth about outstanding companies
4. What to do if the soap bubble grows
5. What to do if the soap bubble
6. Final thoughts burst : How I learned all this (aka from whom I stole it all)

1. My achievements
I want to tell about my achievements that they are far from perfect, but most likely a little above average.

Just as there is no perfect poker player, just as there is no perfect entrepreneur.

The goal of your life is not to become perfect, but to constantly be above average.

Poker players who are only 2-5% better than the rest get incredible profits. Why? It's simple: since there is an endless stream of players who are just learning to play, there are constantly new people who can be defeated (confirmation: )

Mark Andersen, Steve Jobs, Mark Pincus, Mark Kuban and Evan Williams are “winners forever ”, not because they do not tolerate bad luck, but because they win more often than average players.

In other words, behind each winner there are several forgotten defeats. Jobs had Next, Cube and Newton. Pincus has Tribe, Ev, and Odeo.

Great players can miss often, however, we remember how they hit the target.

Over the past 15 years, I have raised money six times for four companies. Once - when the market was sluggish, twice - when the market was active, and three times - when the market was hyperactive.

But this is not luck at all. This is training plus awareness of the environment. If you continue to practice, you will know for sure when to throw the ball into the basket and give a pass.

When I was collecting money, I used a very specific strategy based on what I had, calculating the time for action and good selling skills. For your information, timing, and knowing that you have the ability to sell, are key aspects to success in poker. That is why entrepreneurs are so attracted by the game.

I sold two companies: at a time when the market was active (but not hyperactive), and when the market was not moving.

When it comes to selling companies, my average level of achievement is 50%.

This may seem like a pretty bad indicator. But, as Mark Kuban told me, “you just have to be right once.” Mark is one of those people whom you can easily ignore, as he is "just lucky." Yes, about six times in a row.

[<DEPENDANCE>: aren’t you touched by those losers in the comments to <insert-here-any-popular-blog> who accuse any successful person of being just lucky? I recommend looking at the achievements of these commentators and the subjects of their comments. You will definitely see, on the one hand, a person who hates their own lives (and lives with their parents), and on the other hand, a person who waved a bat many times and hit the ball quite often. ]

Two of the four companies for which I raised money ( and ) are still in the game. In truth, they could have already been sold. If that happened, it could be said that I am my average figure - 75%. Why didn’t I sell them? I will give explanations in the fourth and fifth parts.

Of the six examples, I shot a perfect film twice, decent - four times, and once - bad. Now people remember me from my two big pictures: selling Weblogs Inc and collecting a huge amount of money for Mahalo. Over the next five years, they will forget these two, and will remember the next two. That's the whole point, isn't it?

My philosophy is this: constantly train, throw the ball well, and one day you will wake up and realize that you know how to play. After that, the decisive throw will be just a matter of time.

2. The truth about soap bubbles
There are three important things you need to know about soap bubbles. First of all, there are not one, but many soap bubbles. Construction, the stock market, venture capital, private companies, real estate, employment - all this has affected the state of the market over the past hundred years.

Today, I feel that the angel investment bubble is swelling, and some people say it is a golden bubble. I don’t feel that today such movements in the venture capital market, in the stock market or in M&A (Merges & Aquisitions, mergers and acquisitions).

In fact, the prices for which startups are now being bought, I would say, are already at the border of the norm. Over the next three years, we will see how the M&A bubble grows, and how large companies give mountains of money for startups that combine profit, brand, and customers.

Total: there are many bubbles, and they can move in different directions at the same time.

The second one. Bubbles most of the time are in the process of growth or decrease. For them, they normally expand and contract before they burst. As an example, before the dot-com bubble burst in 2000, the market went up and down.

There were also several significant ups during the current Web 2.0 bubble, which I will discuss in more detail in the fourth part of “what to do when the bubble grows”.

And the last one. The third thing to keep in mind. No one - and I really mean it - absolutely no one can reliably predict when the bubble will really burst. However, smart people can recognize patterns that allow them to understand when something is over or underrated, and thus they can better choose the time for the next move (which allows them to hit the target more often than others).

3. The Truth About Outstanding Companies
Outstanding companies grow regardless of the growth or narrowing of the bubble. During the recent financial crisis (more precisely, 2007-2008), strong companies such as Facebook, Twitter and Zynga have grown significantly. In fact, during this period the Big Three doubled their size several times!

In addition, the Big Three raised a ton of money while the whole country was in a panic.

After the dotcom bubble burst, companies such as Google squeezed into the market. It is also important to note that Google’s growth began immediately after the crisis in our industry (in contrast to the recent crisis, which was based on real estate).

Users will receive a great product at all times.

In fact, some products are better distributed when the market is low (such as discount airlines), while others are better (private aviation), but technology adoption is largely independent of these trends.


It's simple: technology seeks to improve the lives of people and companies, saving them time and money, increasing their ability to communicate or learn, or at least entertain them.

4. What to do when the bubble grows
When the bubble grows, rational entrepreneurs should focus on three actions: a) collect a lot of money with the highest ratings b) get a lot of users (who are willing to spend money) and c) actively sell.

Recently, there have been two expansion in our industry. The first one happened when guys like T. Rowe Price, Fidelity and Legg Mason decided to invest tens of millions of dollars in budding startups like Slide and Ning.

These investment companies usually owned publicly-traded companies, and did well until the financial crisis (mainly thanks to shares in Google and Apple). They said: “to hell with it, let's invest in companies that * can * become the next Google or Apple!”

Ning and Slide were young businesses, and at that time they raised tens of millions of dollars (about $ 50 million) from these investment companies with estimates of half a billion.

In fact, when I found out about this in 2007 and 2008, I was just finishing the second round of fundraising for Mahalo, and I was tempted to do the same. Nevertheless, if you collect money at an estimate of $ 500 million, it means that you will have to sell within 3-10 billion.

If you set goals this way, your chances of success are greatly reduced. If you are in a situation of selling without a cover (short sale) of a startup (a sale with a lower rating than in the previous round of raising funds), you will first pay for the funds collected for the previous round, and then divide the money in a percentage if did not increase the investment received earlier.

If Ning and Slide raised $ 50 million at a valuation of $ 500 million and sold the business for 300 million, they would still have made a lot of money. However, this would not have looked like a win. That is, returning 50 million, and then giving investors in the later stages 10% of 250 million in any case, you leave 225 million for you and early investors.

That is why wealthy investors such as DST and T. Rose Price pay less attention to enterprise valuation: if you sell a startup for any amount that exceeds the size of their investment in your company, they, in principle, cannot lose. Of course, there are certain costs, however, there are no significant losses. Those. except for a situation of complete collapse (although, if this were expected, they would not have invested at all), they will make money.

Now, let's look at the sales of companies. During the dot-com boom, I worked at Silicon Alley Reporter, and the company felt great! We had profits of 11.6 million in the best year, and more than 70 employees. After the bubble burst, I had to curtail the business to a dozen people and our profits were less than a million. When I saw the opportunity (read: I was tired, exhausted and extremely angry with myself for not accepting the offer to sell the company for 20 million the previous year), I sold the company and started moving on. I still had this crazy idea that you can make money on blogs :-)

It was an urgent sale, and I received a salary for several years. I sold the company too late, and there was no opportunity to start a business again. After this happened, I thought "oh, next time, if someone offers me several tens of millions of dollars for my business, I will definitely take it." This is exactly what happened 18 months after the creation of Weblogs, Inc.

Did I sell the company too early? If we talk about the cost of sales, there was no opportunity to lose. AOL were willing to pay good money for the company, and we were poor. In fact, I got to my last stock (aka 10 cents aka $ 10,000), and only made an offer to my wife.

The market was quite active, but not hyperactive. But it didn’t matter, as I learned from my mistake, and wanted to get the money right away. I had enough risks in the era of dotcoms. In addition, I knew that I would have five more great ideas in the next few years. That is exactly what happened.

No one can predict the behavior of the market, however, if you feel an upturn, MAKE MONEY, or SELL. Today, a company’s sale can be complete, in the form of an IPO or by selling shares to a larger player, such as DST (aka Russians).

5. What to do if the bubble bursts
When the bubble bursts, smart entrepreneurs seek to increase the value of the enterprise. This can be done in different ways: using investments acquired during an active market, luring people from companies that are cutting employees, taking market share and developing your brand.

Facebook, Twitter, LinkedIn and Zynga raised money during the hot market, and they use it in the “rational market” we are currently in. Those. they can buy traffic, billboards and talented people for reasonable prices. In general, about talents (at least in the Valley) - most likely not true. The prices for talented people in the Valley are overstated 90% of the time. As, in fact, as it should be.

The condition of the angels from venture capitalists in a low market is mainly panic. One of the best times to be a venture was the time immediately after the dotcom bubble burst. Those who invested invested in the first and second rounds, often with several liquidation options.

Mostly angels invest when they feel rich. For example, when the stock market and the real estate market are booming. Angels basically stop investing when the stock market and real estate market collapse, because (for a minute) they feel poor.

Thus, raising funds at a time when the market is collapsed is a win-win option for entrepreneurs. I would not recommend starting fundraising during a sagging market. If you have to do this, collect as much as you need to stay afloat.

6. Summary
a) The growth of your important metrics, such as income and demand, have very little to do with the soap bubble.
b) Do not pay attention to the market. Put your users in the spotlight.
c) Do not start collecting money during a sagging market
d) Raise as much money as possible at high grades when you can. Even if you do not need money at this moment.
e) If you are poor, belong to the middle class, or are not rich in any other way, sell the business when the market is active. Sell ​​immediately if the market becomes hyperactive.
f) If you are already rich, you have earned the right to bargain a little. You can calmly take a chance and wait out the time of an active market, wait for the moment of hyperactivity.
g) Increase the value of the enterprise during a sluggish market. Do not go on vacation to Thailand to wait for the market to rise, as you are likely to be late.

My respect to the Samurai, and condolences to those who collect rice


Translated for with permission.

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