Don’t Build for a Bubble

Posted in Startups, Thoughts

I heard we’re in a tech bubble.

People have been calling our industry a bubble ever since angels and VCs started putting in a few extra bucks when that entire housing thing turned sour. Well, if the sign of a bubble is simply when optimism trumps pessimism, then all the positive press is a sure sign the apocolypse is coming.

Not that a bubble is necessarily a bad thing; the world just runs on a different set of rules. For these past few years, it’s been engineer-entrepreneurs who have benefitted from the influx of investment and interest, even as the time it takes for companies to exit via a public offering has lengthened[1]. There have been a few notable exceptions in Groupon and Zynga, but both have been met with healthy skepticism in public trading, and most startups will never get to a point where an IPO makes sense. As a result, there has been an increasing amount of small startup buyouts and acquisitions.

In fact, one tech writer opines that angling for an acqhire is a viable strategy in this bubble. That is, all it’d take is a building a few non-viable, technically interesting toys, capturing the attention of a cash-flush company, and then negotiating a buyout worth a few million per engineer with the small caveat that they have to stay for a few years[2]. Really, a pretty good payday by any standard.

That said, I do take issue with this cynical generalization of our generation of startups. It’s silly to extrapolate a handful of acquisitions into a legitimate exit strategy; not only are some not interested in working in a corporate environment, but others simply aren’t interested in selling, either because they believe their company will grow into something much bigger (e.g., Facebook), or because they simply don’t need an early, low-value sale (e.g., Airtime).

And of course, as with any movement receiving generous amounts of attention and capital, there are bound to be bozos among the legitimate. I’d argue – from typical interview rejection rates alone – that the vast majority of small startups angling themselves for a buyout aren’t talented enough to consummate the deal. Google famously interviews the employees of its acquisition targets, and sometimes members on the team don’t make the cut, especially if the acquisition is primarily for talent.

It really comes down to building something that people will use, may change the world, and will hopefully make a profit. Not many startups can fallback to a talent buyout as the worse-case scenario, so it’s even more ridiculous to lead with this premise.

That said, I’ll totally change my tune if Color gets acquired.

Footnotes    (↑ returns to text)

  1. For more information, Keith Rabois has a few ideas why companies aren’t rushing IPOs anymore.
  2. Remaining at the parent company for a number of years is typically a part of the terms. Not much point in buying a company for talent if the talent just turns around and leaves, right?
  • Good thoughts. Thinking more about talent acquisitions: I’m curious if they’re a short-lived phenomenon or if they’re here to stay… and if the latter, what kinds of effects this will have on the tech economy in general. 

    For example, a better worst-case outcome of starting a company (perceived or actual) should lead to a higher number of early-stage startups, which makes it harder for companies that actually have traction to hire talent and creates some interesting dynamics in early-stage financing. 

    And… that’s kinda what’s happening right now. I don’t know if it’s good or bad, but I’m very curious to see what things look like in a few years.

    • I gotta think that small startups will only continue to form as long as there is still enough early-stage investment, and that’d only happen if enough of them become homeruns. 

      There’s been a shift in the rhetoric the past…6 months or so, from people calling things a bubble to people saying tech. is the hot thing lifting us out of a depression, and the concerning part is that startups are leaning back to optimizing for users instead of revenue.

      Right now anybody with a two-bit idea can go and get *some* funding, regardless of whether they can actually execute on anything. Maybe when the optimism fades, those who remain are really going to be the talented ones and be worth the cost of acquisition.