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Summary:

A another bubble seems to be brewing and entrepreneurs and investors need to get ready, tread carefully and, most importantly, learn from the lessons of the previous bubble and bust cycle. To help with that, we sat down with five entrepreneurs and investors to hear their tips.

bubble2

Venture funding does not equal a good business

Who: Vivek Mehra, General Partner with August Capital

Bubble Cred: Co-founded server appliance maker Cobalt Networks in 1996. Cobalt went public in 1999 with the third-best IPO in the history of Nasdaq, and Cobalt was acquired by Sun a year later for $2 billion. Mehra joined August Capital, Cobalt’s largest investor, in 2003.

Interviewed by Katie Fehrenbacher

Lessons Learned:

  • Business fundamentals do not change. Every five to ten years new technologies emerge. These change how applications get created, consumed, and how business gets done, but does not change business principles. Venture and public markets are willing to pay for future growth but companies eventually have to become profitable.
  • Raising venture money does not validate your business model. Just because you are in a ‘hot’ sector and VCs are throwing money at you doesn’t make it a good business.
  • Your customers business model matters. If your customers don’t have a business model, you don’t have one either. In the last bubble a lot of startups grew selling to other venture backed startups with unproven businesses. It worked for a while until VCs stopped funding and the house of cards tumbled.
  • Avoid herd mentality. We live in an incestuous world. We go to the same events, read the same media, meet the same people. Conversations get amplified. Think critically and avoid group think.
  • Execution is key. A great vision is important but great execution often separates the winners from the losers.
  • Partner well. Startups have incredible highs and lows. Work with co-founders, partners, and investors that are aligned and have the determination to hold the right course through the shifting winds.
  • Don’t set yourself up for failure. Once again we are seeing large investments at very high valuations often into early stage startups. There are two challenges with this. One, easy money gets spent. Two, investors have high expectations of such investments and the CEO/investor dynamics sour quickly when the company does not deliver.
  • Be willing to change. If the market demands, be willing to make fast and decisive changes. People often know what to do but don’t hoping for better times. Hope is not a strategy.

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  1. A bubble requires a great deal more than excess enthusiasm for a couple of tech stocks. Especially when they’ve demonstrated some ability to turn a profit on their own.

    You don’t need buzz concepts in the headline to have an interesting discussion.

  2. The last tech bubble was burst by the Fed by ill-advisedly raising interest rates and causing a recession. The only way interest rates go up soon is if the Fed is crazy. I don’t see a localized bubble as bad. Has a tech bubble ever soft landed on its own without the milieu of rising interest rates or a recession? We’ll soon find out.

    As to raising interest rates to ill-advised levels, the entire last decade gave two examples of how not to do it. Interest rates need to be low because of productivity gains. We have entered a new age of innovation, like the industrial age, this time based on electronic technology. I don’t think the Fed has a handle of how much computers and smart devices/networks are changing the productivity equation for both consumers and businesses.

  3. LosFelizRider Wednesday, July 13, 2011

    It’s interesting how the interviewees contradict each other on some points. It’s also interesting how some of them made out well by selling during Bubble 1.0.

    And, really, the head of Ask.com talking about focusing on building a great product? Ask.com has sucked ever since IAC acquired it and change it from AskJeeves.

  4. Jason Thibeault Wednesday, July 13, 2011

    I disagree. There are profound differences between DotCom 1.0 (2002) and DotCom 2.0 (2011). Most notably the VCs approach to investing now (execution vs. R&D dollars; and it’s this capital investment which largely drives up valuation pre-IPO) and that these newer dotcoms actually generate significant revenue (i.e., Zynga and Groupon). Their ability to drive high margin and good EBITDA will force correction post IPO. Here’s a post I wrote about these core differences:

    http://gigaom.com/2011/07/13/how-to-survive-the-next-bubble/

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