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Is the Secret.ly Demise a Sign that the Start-up Bubble May Burst?

I have been around long enough to have lived through (and survive!) the original dot com bubble and ensuing crash. With all the craze and frenzy around social media, sharing economy and app start-ups these days, it's starting to feel like the dot com era all over again. A rush to fund just about any start-up based on insane valuations no matter how viable the business.

As an investor myself, I'm the business plans I'm looking at (if you can call them business plans at all) have me scratching my head. Start-ups with little or no IP, no customers, no revenues, no obvious monetization model and years of projected losses looking for seven figure seed rounds based on $10M+ valuations.And yet it appears investors are willing to throw money at these companies in droves. Just look at Angel List...it's crazy. I'm all for investment in innovation and realize that of the thousands of start-ups that get funding, a few may emerge as the next Google or Facebook. One of the biggest differences this time around is that VC are not the only players. Thanks to crowd funding. Every Tom, Dick and Sally can throw money at these start-ups. I just wonder how long this can keep going. Is this the next bubble to burst?

11 Replies

George Lambert
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George Lambert Advisor
Interim CTO - CTO's for Hire
I think the problem of Nozebleed valuations is that people lose perspective that nobody makes money until something gets sold. The problem with the companies you are talking about is that They Are the things to be sold. When your stock price is related to market perception - whatever you can do to increase potential long term value is a hugh advantage. CMGI did it incredibly well for a while in a set of stock paper transfers that should have been more illegal than ENRON. CMGI companies exchanged stock - and as the value of other CMGI stock in their treasuries went up - so did their value. Raising the perceived value of both companies on paper.

The predictions of "the end is near" are easy, it is calling the downfall that is hard.


Firstly take a look at the history of the 2000 dot-com bubble http://en.wikipedia.org/wiki/Dot-com_bubble

and then check out this article called Betting on the Market.

http://www.pbs.org/wgbh/pages/frontline/shows/betting/etal/script.html


Richard Swart, PhD
1
1
Global FinTech - Crowdfunding - Research & Policy | Strategic Advisory | Board Member | Author | Consultant
Richard While you can argue that valuations are too high - your comments need one point of correction. Crowdfunding is currently only legal in the United States for Accredited Investors - every Tom, Dick and Harry are still excluded from the market by law. Data on the use of Title II (Accredited) Crowdfunding suggests that existing firms with revenues are the preponderance of firms using the currently legal crowdfunding provisions - startups are not flocking to crowdfunding. Your point is well made, and the flow of VC money is increasing substantially - but let's not confuse a potential VC funding bubble with a yet-to-be-legal new asset class. Richard Swart
Richard Pridham
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Richard Pridham Entrepreneur • Advisor
Investor, President & CEO at Retina Labs
Richard Swart: Thanks for clarifying. But isn't the bar to become an "accredited investor" relatively low? This is what they state on the site:

"An individual in the U.S.is said to be accredited if she has$200k or more in income for the past 2 years (or $300k with a spouse), with the expectation of similar earnings this year;or $1m in net assets (assets minus debts)."
Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
@RichardS, Although in a few weeks, Reg A+ will allow non-accredited Tom, Dick & Harry to invest up to 10% of their income or assets in these deals. Will be interesting to see what happens.

@RichardP, I don't think I understand your point about how a company that responsibly gives back the bulk of its investors' money presages a bursting bubble. The discussion on valuations and amount of cash that goes into startups is pretty well-worn by now. Some will turn out brilliantly; some will be embarrassing.

What will be the most interesting imho is how non-professional angel investors will react when the big pullback comes. Will they serve a buffering function or will they hightail it out of there when they realize there's no Series A money behind them? A couple years ago I would have said the latter for sure. A couple years from now with greater momentum in mainstream early-stage investing, I'm not so sure.

(BTW, $1m in assets excluding your house or HHI of $300K puts you in the 1%. Intuitively it seems that the top 1% should be considered sophisticated enough to take those risks. )

Eliahu Gal-or
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1
Eliahu Gal-or Entrepreneur
presso Lightwave International Wellness Research & Enterprises
I begin with admitting that, despite inherently valid but hard to validate without having first the resources to pursue financially credible validation I have sailed the SS Catch-22 almost all my life with no land in sight and only enough manna and rain to survive without ever making a real living, yet intellect and soul kept on thriving like an elephant's fetus who unimpressed by the faster pregnancy of mice still knows that there is an of appointed time to see the light.

Time and again I have come up with realistic but too futuristic inventions only to see them unfunded, then reappear elsewhere bearing another signature; last time I named examples here the post disappeared too, so I won't bother with that.

What I am here to say is that even the failures will have produced alternative wealth, in the form of experience and of diffusion of the new idea which could never find its ultimate destiny, different from what its ideator(s) had in mind or at least intended to reveal, had it not been publicized in its original flying plan.

To ride a bicycle means to balance of positive and negative gravities, otherwise the force is wasted full speed in neutral; to make a bicycle fly one must put up with the inconvenient clumsiness of its pre-take off looks, bulk and weight, which are what the contraption gets judged for by superficial eyes, and to demonstrate the elegant efficiency of its flight the cash required to build must be on the table first to buy materials, maybe even a pizza and a beer on the side...
There are plenty of imaginary factors preventing the cash transfer to the flying bicycle's designer, first of all the channel to effect it, banks, gateways, looks... most of all the proper connections, the actually irrelevant credentials which keep good ideas from being funded when they originate in underfed brains walking in too worn shoes...

The worst is hearing all the doomsday prophets wailing their self-fulfilling prophecy; there have been bubbles, and they have burst, I won't deny this, there have been failures whose masters either walked away with sheltered cash and were never heard of anymore, or walked away totally broke, perhaps suicidal, after losing face, home, spouse and children, but most of the others are busy now, transforming the failure they have lived through into the strong points of their current venture, which may well redeem their face and bring on the Job-like epiphany, with a decent boat, younger and smarter wife, more kids, good wine and music...

Keep your next bicycle away from too-windy places, let the chips fall where they may, but if you feel that you are born to create, that the spirit of innovation lives in you, keep creating as if failure did not exist and remember: "There is a bottom to everything, whence the only way is up again. Nobody can ever give up totally on you unless you do that by yourself first.

I hope that these my last two cents don't disappear, and if you want to talk more, I am easy to find.

Eliahu Gal-Or AKA The Pizza Rebbe
Alan Matthews
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Alan Matthews Advisor
Entrepreneur
I like to think of it as startup foam instead of a bubble. As the foam rises, so the fastest inflating bubbles burst, but not all. With interest rates near zero and costs rising, money has declining value, so more air gets pumped into the foam. Alan Matthews [removed to protect privacy] (Mobile)
Dirk de Kok
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Dirk de Kok Advisor
Founder and CTO Mobtest
Secret was just one of the thousands of startups in Silicon Valley. The way we do business here it to bet on the unicorns ($1billion dollar cap plus) and not the lifestyle business. Go big or go home. Secret wasn't going to be big, so they went home. They tried it but it didn't work out, as so many other startups in SV do not become the next Google. And that's ok, because the founders will have learned an move on to the next big thing.
Eugene Gekhter
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Eugene Gekhter Entrepreneur
CEO, Memorable. Founder, SharePay.
I'm of the opinion that for the majority of startups trying to get funded and justify their valuations, it's a popularity contest. VCs prefer 100,000,000 free users on a platform than 1,000,000 paid users on a $10/month service. I've been told in pitches that monetization strategies, targeted marketing campaigns and the viability of the business is not as important as trying to get every person possible on the platform.

Based on my experience working with and pitching to VC's, I agree with the OP's intuition that we might be headed towards another bubble.


Mark Travis
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Mark Travis Entrepreneur
Product Management Advisor | Speaker | Strategist
I think the problem with Secret was not properly managing the customer base. It seemed like a fun app to get some gossip from big names and behind the scenes players. However, when I downloaded the app and started looking around, I realized that it had become a filthy sludge pot of anonymous sexual fantasy. It wasn't worth reading through the garbage to find anything interesting.

So, they lost the customer base they were targeting (broad) because a narrow section of the population ruined it for the broad population. Perhaps they didn't have the technology to keep the riffraff out?

I think there is plenty of opportunity with social, but it's tricky and finicky. It's like the fashion industry business. It's long-tailed, and there are substantial misses for the one or two hits.
Jesal Gadhia
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Jesal Gadhia Entrepreneur
Full-Stack Developer
Interesting discussion, I'd just like to point to this analysis here:http://techcrunch.com/2015/03/24/tech-bubble-maybe-maybe-not/

Bill Maris points out some key indicators supporting both arguments for and against a bubble.
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