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How to deal with the "bubbles"

Translation of the article by Jason Calacanis (jasonnation.com) “How to deal with bubbles”.

During my career I missed more than 9 thousand times. Lost almost 300 games. 26 times they trusted me to make a decisive throw, but I missed. In my life, I have failed again and again. That's why I succeeded.
Michael Jordan jc.is/bI33SE

“Will the internet bubble burst soon?” When?"
"I better sell the company now, or wait, and sell more expensive next year?"
“Do I need to raise money now, before the boom ends?”
I am constantly being asked these questions. Previously, they would not let me sleep. Now they are so bumped into my brain that they have become an instinct.
Young poker players are thinking about how to play the king-nine and eight-five before the flop. Likewise, newly-minted entrepreneurs are thinking about how to play the market.
The answer is that you shouldn't play any of the hands. Also on the market.

In this letter I will cover the following topics:

1. How I learned in a difficult way (aka my mixed experience)
2. The truth about bubbles
3. The truth about outstanding companies
4. What to do if the bubble grows
5. What to do if the bubble bursts
6. Final thoughts: How I learned all this (aka from whom I stole it all)

1. My achievements
I want to tell about my achievements that they are far from perfect, but, most likely, a little above average.

As there is no perfect poker player, so there is no perfect entrepreneur.

The goal of your life is not to become perfect, but always to be above average.

Poker players who are only 2-5% better than the rest, get incredible profits. Why? It's simple: since there is an endless stream of players who are just learning to play, new people are constantly appearing who can be defeated (confirmation: jc.is/bB3J1 )

Marc Andersen, Steve Jobs, Marc Pincus, Marc Cuban and Evan Williams are “forever winners” not because they don’t tolerate bad luck, but because they win more often than average players.

In other words, behind every winner there are a few forgotten defeats. Jobs had Next, Cube and Newton. Pincus has Tribe, Ev and Odeo.

Great players can miss often, however, we remember how they hit the target.

Over the past 15 years, I have collected money for four companies six times. Once - when the market was sluggish, twice - when the market was active, and three times - when the market was hyperactive.

But this is no luck at all. This is a workout plus environmental awareness. If you continue to practice, you will know for sure when to throw the ball in the basket and give a pass.

When I collected money, I used a very specific strategy, built on what I had, calculating the time for action and a good selling skill. For your information, timing, and knowing that you have the ability to sell - are key to success in poker. That is why entrepreneurs are so attracted by the game.

I sold two companies: at a time when the market was active (but not hyperactive), and when the market did not move.

When it comes to selling companies, my average achievement rate is 50%.

It may seem like a pretty bad indicator. But, as Mark Kuban told me, “you only need to be right once”. Mark is one of those people whom you can easily ignore, because he was “just lucky.” Yes, about six times in a row.

[<RETREAT>: do not those underdogs in the comments on <insert-here-any-popular-blog> who blame any successful person for being just lucky please you? I recommend looking at the achievements of these commentators and the subjects of their comments. You will definitely see, on the one hand, a person who hates his own life (and lives with his parents), and on the other hand, a person who batted a bat many times and hit the ball quite often. ]

Two of the four companies for which I collected money ( Mahalo.com and ThisWeekIn.com ) are still in the game. Truth be told, they might have already been sold. If that were the case, one could say that I am my average - 75%. Why did I not sell them? I will give explanations in the fourth and fifth parts.

Of the six examples, I shot an immaculate film twice, a decent film four times, and once a bad one. Now, people remember me in two of my big paintings: the sale of Weblogs Inc and the collection of a huge amount of money for Mahalo. Over the next five years they will forget these two, and will recall the next two. That's the thing, isn't it?

My philosophy is this: constantly train, throw the ball well, and one day you will wake up and realize that you know how to play. After that, the decisive roll will be just a matter of time.

2. The truth about soap bubbles
There are three important things you need to know about soap bubbles. First of all, there is not one, but many soap bubbles. Construction, stock market, venture capital, private companies, real estate, employment - all this has affected the state of the market over the last hundred years.

Today I feel that the bubble of angelic investment is swelling up, and some people say that it is a golden bubble. I do not feel that today such movements in the venture capital market, in the stock market or in M ​​& A (Merges & Aquisitions, mergers and acquisitions).

In fact, the prices for which startups are being bought, I would say, are already on the border of the norm. Over the next three years, we will see how the M & A bubble will grow, and how big companies will give mountains of money for startups that combine profit, brand, and customers.

Total: there are many bubbles, and they can move in different directions at the same time.

The second. Bubbles most of the time are in the stage of growth or reduction. For them, they normally expand and contract before they burst. As an example, before the dot-com bubble burst in 2000, the market went up and down.

There were also a few significant ups during the current Web 2.0 bubble, which I will discuss in more detail in the fourth part “what to do when the bubble grows”.

And the last. The third thing to remember. No one - and I really mean it - absolutely no one, can reliably predict when the bubble will really burst. However, smart people can recognize patterns that allow them to understand when something is over or under valued, and thus they can better choose the time for the next turn (which allows them to hit the target more often than others).

3. The truth about outstanding companies
Outstanding companies are growing, regardless of growth or narrowing of the bubble. During the recent financial crisis (or rather, 2007-2008), strong companies such as Facebook, Twitter and Zynga have grown significantly. In fact, during this period the “Big Three” doubled its size several times!

In addition, the "big three" raised a lot of money at the time, as the whole country was plunged into panic.

After the dotcom bubble burst, companies like Google were squeezed into the market. It is also important to note that Google’s growth began immediately after the crisis in our industry (as opposed to the recent crisis, the foundation of which was real estate).

Users will take a great product at all times.

In fact, some products are better distributed when the market is low (for example, airline discounters), while others - at high (private aviation), but the adoption of technology is largely independent of these trends.


It's simple: technology tends to improve the lives of people and companies, saving them time and money, increasing their ability to communicate or learn, or at least entertain them.

4. What to do when the bubble grows
When the bubble grows, sensible entrepreneurs should focus on three actions: a) raise a lot of money with the highest estimates b) get a lot of users (who are willing to spend money) and c) actively sell.

Recently there were two expansions in our industry. The first of these happened when guys like T.Rowe Price, Fidelity and Legg Mason decided to invest tens of millions of dollars in budding startups such as Slide and Ning.

These investment companies usually owned publicly traded companies, and felt pretty good before the financial crisis (mainly due to Google and Apple shares). They said: “To hell with it, let's invest in companies that * can * be the next Google or Apple!”

Ning and Slide were young businesses, and at that time they collected tens of millions of dollars (about $ 50 million) from these investment companies, with estimates within half a billion.

In fact, when I found out about this in 2007 and 2008, I was just finishing the second round of investment collection for Mahalo, and I was tempted to do the same. Nevertheless, if you collect money at a valuation of $ 500 million, it means that you will have to sell between 3 and 10 billion.

If you set goals in this way, your chances of success are significantly reduced. If you are in a sale situation without coverage (short sale) of a startup (sale with a lower estimate than in the previous round of raising funds), you first of all pay for the funds collected for the previous round, and then divide the money as a percentage if you did not increase the investment received earlier.

If Ning and Slide raised 50 million in a valuation of 500 million and sold the business for 300 million, they would still make a lot of money. However, it would not look like a win. That is, returning 50 million, and then giving investors in the late stages 10% of 250 million, in any case, you leave 225 million for you and the early investors.

That is why wealthy investors such as DST and T. Rose Price pay less attention to the company's valuation: if you sell a startup for any amount that exceeds the size of their investments in your company, they, in principle, cannot lose. Of course, there are certain costs, however, there are no significant losses. Those. except for a situation of complete collapse (although, if it were expected, they would not invest at all), they will earn money.

Now, let's look at the sales of companies. During the dotcom boom, I worked at the Silicon Alley Reporter, and the company felt great! We had a profit of 11.6 million in the best year, and more than 70 employees. After the bubble burst, I had to wind down a business to a dozen people and our profits were less than a million. When I saw the opportunity (read: I was tired, exhausted and extremely angry with myself for not accepting the offer to sell the company for 20 million the previous year), I sold the company and began to move on. I still had this crazy idea that you could make money on blogs :-)

It was an urgent sale, and I received a salary for several years. I sold the company too late and there was no opportunity to re-create a business. After this happened, I thought “oh, next time, if someone offers me a few tens of millions of dollars for my business, I will definitely take it.” This is exactly what happened 18 months after the creation of Weblogs, Inc.

Did I sell the company too soon? If we talk about the cost of sale, the possibility of losing was not. AOL was willing to pay good money for the company, and we were poor. In fact, I got to my last stocks (aka 10 cents aka $ 10,000), and only made an offer to my wife.

The market was rather active, but not hyperactive. But it did not matter, because I learned from my mistake, and wanted to get the money right away. I had enough risks in the dotcom era. In addition, I knew that I would have five more great ideas in the next few years. That is exactly what happened.

No one can predict the behavior of the market, however, if you feel the rise, RISE MONEY, or SELL. Nowadays, the sale of a company can be complete, in the form of an IPO or by selling shares to a larger player, such as DST (aka The Russians).

5. What to do if the bubble bursts
When the bubble bursts, smart entrepreneurs seek to increase the value of the enterprise. This can be done in different ways: using investments acquired during an active market, luring people from companies that reduce employees, taking market share and developing their brand.

Facebook, Twitter, LinkedIn and Zynga raised money during the hot market, and they use it in the “rational market” conditions we are in now. Those. they can buy traffic, billboards and talented people for reasonable prices. In general, about talents (at least in the Valley) - most likely not true. Prices for talented people in the Valley are overvalued 90% of the time. How, in fact, should be.

The condition of angels from venture capitalists in a low market, mainly panic. One of the best times to be a venture was the time right after the dotcom bubble burst. Those who invested money invested them in the first and second rounds, often with several liquidation options.

Mostly angels invest when they feel rich. For example, when the stock market and real estate market are on the rise. Angels basically stop investing when the stock market and real estate market collapses, because (for a minute) they feel poor.

Thus, fundraising at a time when the market is collapsing is a losing option for entrepreneurs. I would not recommend starting a fundraiser during a sagging market. If you have to do it - collect as much as you need to stay afloat.

6. Summary
a) The growth of your important metrics, such as income and demand, has very little to do with a bubble.
b) Do not pay attention to the market. Put your users in the spotlight.
c) Do not start collecting money during the sagging market
d) Raise as much money as possible at high marks when you can. Even if you do not need money at this moment.
e) If you are poor, belong to the middle class, or are not rich in any other way, sell the business when the market is active. Sell ​​immediately if the market becomes hyperactive.
e) If you are already rich, you deserve the right to bargain a little. You can safely take a chance and wait out the time of an active market, wait for the moment of hyperactivity.
g) Increase enterprise value during a sluggish market. Do not go on holiday to Thailand to wait for the market to rise, as you will be late for sure.

My respects to the Samurai, and condolences to those who collect rice jc.is/cm1DHW


Translated for blog dennydov.blogspot.com with permission of the author.

Source: https://habr.com/ru/post/101103/

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