The Unicorn Ledge – Don’t Jump

That’s it. I am calling the top of the Bubble. I have been talking about the downturn for a while, but I have always been carefully vague about its timing. But I am now ready to say that we have passed the peak of expansion and contraction is on its way for the Tech economy. There was no new data that gave rise to this conclusion. No real news either. It was a single blog post – “The Unicorn Hedge” by Dave McClure.  After I read that (and it really only took the first few paragraphs), I realized that we had reached peak hype.

I do not know as much about early stage investing as Dave McClure, but I do know a lot about people talking their own book. If I did invest in early stage start-ups, I would want to believe that the things in this piece are true. I would want to believe that its really big, public companies who are going to get disrupted. I would want to believe that its public companies that suffer from a valuation bubble and not start-ups. I would want to believe in the new economy and paradigm shifts. I would want to believe a lot of things, but I know that the laws of physics, and supply and demand, are true. No amount of cheerleading can change that.

There are so many things wrong with “The Unicorn Hedge” that I do not know where to start. First, there is the obsession with “public companies” being the enemy. How “public companies” business models’ are being disrupted. I think what he means is that many large, traditional companies face threats from new business models. But that divide is not between public and private companies. Its case by case and industry by industry.

A second concern is that he offers anecdotes not real data to back up this theories. Yes, there have been several large public for private acquisitions this year, but the number of those is dwarfed by the number of private companies who are about to undergo down rounds, or sub-optimal acquisitions. He does link to a very detailed survey of venture returns in comparison to broad market returns. And while venture returns are now better than those for stocks, that should not be cause for celebration. Venture funds are riskier and need to outperform less risky asset classes, that is Investing 101. The most revealing part of that data is just how badly venture funds did for so long as compared to the public markets.

But what really calls out to me from this post is the unabashed euphoria. He uses the word ‘Disruption’ eleven times in the post. It reads like a broker report from late 1999. Waving the flag, charge full ahead, nothing of concern here. It seems to me that when we start to see this kind of enthusiasm, especially around murky valuations like Tech start-ups, that is the time we really need to pause a moment and reflect.

I am ready to concede that there are many companies who will be threatened by new technology. And that many large, established players will need to make some big acquisitions. But whenever we talk about the entire economy be completely thrown out of whack, those are the times when we have reached the peak. The economy is big, and many of the ambitious disruptions that private companies are now talking about will take many years just to prove themselves. Remember Webvan? The last time I read pieces like McClure’s, Webvan was making big promises. Their vision eventually became the reality of Amazon, but it took a decade and billions of lost venture dollars.  I am not a Luddite, I like my technology and apps and gadgets as much as anyone else in Northern California. I just think we need to be sober about forecasting ‘Big Changes’ to everything.

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