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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

Use secondary markets sparingly

Who: Robert Ackerman, Founder, Allegis Capital:

Bubble Cred: Ackerman was the CEO of UniSoft Systems, a UNIX systems house operating, and a founder and Chairman of Internet appliance company InfoGear Technology Corporation, which was acquired by CISCO in 2000. Mr. Ackerman appeared on the 2007 Forbes MIDAS list.

Interviewed by Cortney Fielding

Lessons Learned:

  • Enthusiasm isn’t enough to build a company. As an investor (or a founder), you must avoid getting swept up in it all. Stay focused on startups where an ROI can be measured. It is a much more sober approach to building companies. In the social media sphere, more than 500 startups have been funded, but probably only a dozen are of merit.
  • Where’s the business model? Today, the common refrain is, get the data and the revenue model will follow. This is a mistake and eerily reminiscent of the first dot.com bubble.
  • Don’t get caught believing the laws of gravity don’t apply. We are not in a special or unique age, so don’t use that excuse to justify crazy bets. People tend to underestimate the magnitude of the change and underestimate the time it will take. The whole world doesn’t just flip over night.
  • If it seems to be good to be true, it probably is. This goes for VC’s and founders as well. Truth be told what we do is hard and it should be hard. It’s when things get too easy that all the excesses kick in. It should not be easy to get rich.
  • Valuations don’t mean anything. You feel good in the moment, but until it’s money in your bank account it’s not real. Don’t get sucked in. And even in an IPO situation, if you are a founder or investor you are looking at a couple years to get out. By that time, you could have nothing.
  • Use secondary markets sparingly. As a founder, selling stock on the secondary market signals that all is not well and you don’t have confidence in your company in the long term. And it’s happening a lot lately. That signals the social media sphere is not stable. At the same time, as a founder, it’s not so terrible to sell up to 10 percent of your company on the secondary market in order to float money to yourself, pay a mortgage or pay salaries.
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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.

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  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.

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  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.

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  4. 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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