10 Things to Remember for the Next Bubble
The euphoria is over, so I wanted to jot down some salient things to keep in mind for the next time this happens...
For my inaugural Bullfight post, I thought I’d start with something “fun”...
It should now be broadly obvious that the stock market, tech VC world and speculative asset classes were in an absolute bubble these last few years and things are now popping and unwinding. The full extent of the carnage is unknowable – could be benign, could be devastating – but certainly is > 0. Nonetheless, it was a wild ride over the last 2+ years kicked off by COVID with everything from memestonks, to robinhood options, to SPACs, to crypto, to companies trading > 100x revenue and beyond.
This was my first official bubble burst where I had a front row seat so I decided to describe some of the non-traditional, qualitative signals that felt like excessive froth so I can remind myself of them for the next go-around. This is by no means a scientific or exhaustive approach (Bridgewater already does this or even the Shiller PE ratio is a good starting point). This list contains more meta-indicators or some of the “greatest hits” of this recent tech-fueled cycle through the lens of someone who spends their time in private / public tech land.
I hope this captures some of the fervor and behaviors that won’t make it into the purely academic version of history, which will probably focus more on interest rates, liquidity, capital flows and market multiples. I’ll also add that none of these are inherently bad. Most people are acting rationally (or doing what seems rational), but too much of any good thing can eventually turn into a bad thing.
Anyway, here it goes:
1. Everyone became an “investor” and investing became “fun”
Angelist, day trading, fintwit, syndicates, r/wallstreetbets, Tiktok, Robinhood, SPVs, etc. The perception of investing became one of a series of risk-free, fun side hustles where prices could seemingly only go up and significant wealth was just one good trade away (so yeah, speculation). Most people didn’t bother to ask why things felt this way. A few folks even quit their jobs to manage their crypto, VC, angel portfolio full time.
2. Definitions of value / valuation became recursive
Valuations were justified based on other absolute valuations… “If Snowflake is worth $100B, then data company X should be worth at least 10% of that” What if Snowflake isn’t worth $100B? What if there are hundreds of other data companies out there?
Multiples became an input to valuation, not an output… looking at multiples in a vacuum can only get you so far. Private deals were priced, not valued. Turns out there’s a lot more nuance to valuing a business than multiplying the ARR for a fast growing company by the “market rate” multiple (even if that number is 100x).
3. “Who” mattered more than “what”, “how” or “why”
The level of name dropping for credibility was at an all time high. “Firm X is leading this round”, “Firm Y is anchoring the SPAC”, “Firm Z is trying to suck up shares on the private market” were all too commonly heard in lieu of any justification from business fundamentals. It was an all-too-real version of Southpark:
4. New and exotic financial assets and instruments entered the chat
SPACs, employee forward contracts, opaque SPVs, crypto schemes and secondaries for Series A founders ran rampant as ways to put a new wrapper around risk in non-conventional markets or unproven assets. Ultimately, many of these proved to be creative ways to get liquidity in different forms.
5. Billionaires mocked Buffett
You come at the king, you best not miss.
6. Zero accountability for management teams
CEOs and management teams of private companies and SPAC assets could pretty much share whatever financial forecast they wanted to entice investors. It often didn’t matter how realistic or substantiated these forecasts might be as many investors were coming inbound with term sheets anyway. This supply / demand imbalance led to some egregious secondaries (mostly unreported, except for headline-making Hopin) and are currently ending in tears for many.
This all happened before the team or company delivered liquid value to investors, employees and probably many customers in some instances. A select number of companies will still be great and perform phenomenally, but not every company can be the fastest growing software / consumer / fintech company of all time.
Before (2021):
After (2022):
7. No diligence, just YOLO
Deal timeframes for private companies compressed from months to weeks to days. Many investments were shotgun weddings. Oftentimes investors barely had time to go through a scant data room with no excels (just PDFs and maybe a light presentation) to make a decision. Everyone was exhausted. Public investors were inundated with IPOs and SPACs… they are still playing catch-up today. Some firms even outsourced their diligence.
8. Corporate finance went out the window
Terms like capital efficiency, free cash flow, gross margins, downside case, exit multiple and terminal value were barely part of the conversation. Most of the math being done was limited to revenue, growth, topline multiples and the last round valuation. Low gross margins and weak unit economics were routinely overlooked if there was strong growth and “hot deal pressure”.
9. Investment firms changing lanes
Many firms, including highly reputable ones, felt empowered to expand the scope of their practice when good times felt like they would last forever. VCs became hedge funds, hedge funds became VCs, everyone raised a 3x bigger fund or a second opportunity fund. It felt like having capital was the only barrier to investing it well and deployment was the name of the game.
10. Too many companies in a category
All too often there would be emerging categories [a good thing!] for various products (sales + marketing software, social tools, grocery delivery, data infrastructure) in niche areas where there would be too many (10+) well-funded competitors [a bad thing!]. Do you really want to fund the 9th company in the sales automation space? Doubtful. I’m all for experimentation but this looked like death by a thousand cuts. As a result, you get marketing landscapes that look like the below and probably just confused customers, investors and employees.
What did I miss? Feel free to comment, tweet or email at bullfightcap@gmail.com