History Doesn’t Repeat Itself, But It Does Rhyme

My favorite Mark Twain post, which I share with my close friend Phil Weiser (the Dean of CU Boulder) is “History doesn’t repeat itself, but it does rhyme.”

There is a lot of rhyming going on. If you want a quick taste, go read today’s Fred Wilson’s blog post Coming Up With A Better Name For NYC’s Tech Community.

If you know me, you know that it think that it is tragic to label things Silicon Blah. New York isn’t Silicon Alley. It’s New York. And Fred has been ranting about this since at least 2008 when he made a public plea to bury the name Silicon Alley.

Surprise. In 2015 there’s apparently a new effort in New York to rekindle with force the name Silicon Alley.

Here are some rhymes I hear on an almost almost basis.

  • “There is no bubble.”
  • “Raise as much money as you can.”
  • “Things are structurally different this time.”
  • “The only place to build a tech company is in Silicon Valley.”

Whatever.

I was at HBS the other day talking to a bunch of second year students about anything they wanted to talk about (we just did 90 minutes of Q&A). I just let them take the conversation where they wanted. The questions were great, but some of what they were hearing about venture capital was scary as shit. A handful of them had jobs in venture capital firms and we talked about how to be effective as a freshly minted associated. They had heard insane suggestions like “The market is hot – do as many deals as you can before it all crashes.”

Um. Yeah. What? Are you fucking kidding me? It’s not about doing the deals. If you do a bunch of shitty momentum deals as fast as you can, you are simply emulating what most VC firms (including the one I was part of) did in 1999 when we committed an entire $600 million fund in nine months. At one point that fund was up over 2x on paper (TVPI for those of you that like names for the different VC metrics.) 15 years later the financial performance (DPI) of that fund is a disaster. We didn’t get lucky and have one company that bailed us out. Too bad for us.

I told them it’s not about getting into the deals. It’s about building real value and then over time monetizing your investments. Having a strategy, being deliberate, and executing that strategy over a long period of time.

But suddenly so much of the focus is about getting into the deals. Venture Investing Just Had Its Biggest Q1 in 15 Years, Says PwC Report. $13.4 billion in Q1 in 1020 deals. Some other statements, all obvious stuff based on what everyone is seeing on a daily basis. But the headlines, and the focus, is all about input. Now, I haven’t read the PWC Report so they might have a deep analysis on the exit math, and then input / output dynamics that justify $13.4 billion in Q1 as a reasonable number. Or a segmentation analysis that shows that $7 billion of it is actually a substitution effect for what would have otherwise been public money going into IPOs, so really it’s only $6.4 billion going into venture capital.

History doesn’t repeat itself, but it does rhyme.

Now, don’t misinterpret what I’m suggesting. The easy sound bite “Feld thinks there is a bubble.” But that’s not even close to what I am saying. I have absolutely no idea whether there is a bubble. I have no idea where we are in the current part of the cycle. I have no idea what the dynamics of the cycle are.

But it’s easy to see the rhymes. And they are super helpful in understanding, and reinforcing, the best way to execute an effective strategy. But only if you are looking for them, thinking critically, and acting accordingly.

Don’t be the scorpion in the famous scorpion / frog parable. And always remember that history doesn’t repeat itself, but it does rhyme.

  • What do you think of this, from the Slack financing. Some parts rhymed with your post. Is Slack doing the right thing just because “they can”, as implied by this interview? Or is it a legit war chest?
    “We signed a lease on our San Francisco office at $62 a square feet, and we sublet it at $75, nine months later. And down in Palo Alto, people are paying $120 per square foot, and not even fancy offices. And it’s not a great thing, necessarily, for our local economy.”

    http://mobile.nytimes.com/blogs/bits/2015/04/16/is-slack-really-worth-2-8-billion-a-conversation-with-stewart-butterfield

    • No terms discussed. The money quote, even if valuations went down, we would catch back up to our current valuation.

      Here is a rhyme I’ve heard: Housing prices don’t go down, now is the best time in the world to be borrowing money to buy houses.

    • I have no clue on the Slack financing.

      However, I do have a clue on $62 a square foot real estate that is going to $75 / sq ft going to $120 / sq ft. That is super shitty for the startup economy wherever it is. Rents at the levels are just throwing money out the window.

      Real estate plays a continuous boom / bust game. Supply / demand always swings massively. Bringing on more supply lags demand and then there is an oversupply at exactly the wrong time.

      • Yup.
        Let’s hope this isn’t a trend, but rather an aberration that gets back to reality.

        • SF has building and zoning restrictions that restrict supply. Is the network that good that they can’t locate someplace else with cheaper real estate, like Sacramento, or Berkley? Or Toronto? Or Chicago? Or Seattle? Or Denver?

          • And they prob have a Unicorn detector where they raise the rent further knowing it’s a hot startup 😉

      • The killer for this is that you are allocating $100k NPV per employee on a five to seven year period for rent alone.

        • Yup – good math!

        • There is a bubble right there… misallocation of capital and value

    • This makes no sense to me, you are taking venture money to buy Real Estate? when there is uber connectivity and creativity is all over the globe? In addition, having too many of the team members focused in one single location leads to homogeneous thinking. I would break up the actual office spaces to different locations and build distributed teams. Go to places where the cost is $5 a square feet and find interesting people to build new things. This is what causes bubbles. Concentrating ideas, people and money.

      • What is the range of office lease costs in Reykjavik?

        • $2/sqft to $25/sqft depending on the sophistication of the building but there is a lot of space available.

          • Didn’t know you were from there you will see a big press release come from Iceland with my name in it next week.

          • Philip – I you are doing something in Iceland you should (a) get to know Bala (he is awesome) and come to Startup Iceland (which I’ll be at) and hang out!

          • Excellent to hear about news related you and Iceland, yes, been in Iceland since 2006. Seen the up, down and up again. I am the Founder of StartupIceland.com run the event for the past 3 years.

  • Bernard Desarnauts

    your post reminded me of the proverbial “Any event, once it has occurred, can be made to appear inevitable by a competent historian.” Can’t wait to be in 2020 and hearing all about IT
    btw, think you have a missing “daily” in your “Here are some rhymes I hear on an almost basis.”

    • Thanks for the edit – fixing now.

      I’m looking forward to 2040 when the machines are treating us like we treat our pets.

  • Matt Kruza

    Good post. I think part of it is that people (especially those not well versed in something.. aka most people don’t know vc and startups.. which is totally normal, not an insult to the average person) look for simplistic heuristic like “we are in a bubble”, or “best time ever to invest”, or “3 secrets to riches.. etc.”
    The fact is (as you obviously know and have demonstrated for 15-20? years now) anyone can get lucky, which happens a lot in vc, but sustained success is a process. One quote / concept that I think is similar to the building value / sustained approach you have is from my time as an equity research analyst at an investment bank. The head sector analyst who I was under said there is “no such thing as a good stock”. There are good companies, and bad companies, and each “stock” can be good or bad for THAT company depending on price. With venture that is a little less true because a big zero is very possible (highly unlikely with S&p 1500 company). However, just because uber is a great company, or slack or whatever company, there has to be SOME price at which it no longer makes sense. As John Maynard Keynes said “the market can sometimes remain irrational longer than you can remain solvent”

    • The Keynes quote is one I carry around with me all the time.

      • Matt Kruza

        Yep. Top 5 quote for sure 🙂

        • A corollary might be, “Don’t fight the Fed”. Been there done that and it wasn’t pretty.

  • You’re so right. We tend to make it so complicated – bubble/no bubble… I’ve been there. “…thinking critically, and acting according…” as you say is so important, simple, but hard to do when you get caught up in the hype of the moment. In the long run common sense/value will prevail. That means being selective and passing when the metrics don’t add up.

    Thanks for another great post. BTW it was great seeing you in Montreal at Noman House with Sean. Last night at Accelerate Montreal you were quoted a few time… Cheers.

    • I had a good time – thanks for having me out there. And hope Accelerate Montreal is going well.

  • This is a wonderful post. Thanks Brad!

  • $600 million in nine months! Wow, I had no idea you guys did that much.

    • We “committed” that much – probably invested $200m in that time frame but had 2x reserves on our investments. I think it was about 50 deals.

  • Vaibhav_ncsr5

    This is an awesome article on what context matters in notifications and recommendations. Thanks – PAN Details

  • I am quoting Peter Thiel here:
    “We still need new technology, and we may even need some 1999-style hubris and exuberance to get it. To build the next generation of companies, we must abandon the domas created after the crash. That doesn’t mean the opposite ideas are automatically true: you can’t escape the madness of crowds by dogmatically rejecting them. Instead ask yourself: how much of what you know about business is shaped by mistaken reactions to past mistakes? The most contrarian thing of all is not to oppose the crowd but to think for yourself”.

    • The only thing interesting to me in that quote is “to think for yourself.” I strongly agree with that. It’s really, really, really hard for humans to do this. It’s super easy to say, but very hard to do – consistently. And it always shows.

      Suggesting that this is on a contrarian spectrum somehow doesn’t really make sense to me.

      • I guess the takeaway as you mentioned in the post is that no-one really knows whether there is a bubble or not, we all just need to objectively think for ourselves and ask tough questions if what we observe makes sense. Sometimes I have seen is that the most sane thing to do sounds really insane in retrospect. Like when the entire financial system was going crazy in Iceland, I asked a question to my boss who was the CEO of the bank, why we were increasing the salaries to a number of the managers to some ridiculous levels i.e $50k/month. I never got the answer. Then I realized the best way to steal a bank is to own one or decide on its balance sheet! It sounds crazy now, then it made a lot of sense to a lot of people. I was not one of those who got paid. Nobody asked the question either.

      • Frank Traylor

        “Think for yourself” such a great topic. We talk a lot about mentorship. It’s of such value to have a foundation of knowledge, all the better if you can borrow someone else’s. And of course read common wisdom; such as:
        “There is no bubble”
        “Raise as much money as you can”
        “Things are structurally different this time”
        “The only place to build a tech company is in Silicon Valley (Alley)”

        But once you have that amorphous foundation
        – Think for yourself
        or the corollary,
        – Don’t hesitate to call bullshit

  • I think for those interested in this topic, this set of data driven analysis is great on the topic (although I do see some biases in the graphs – and they don’t count well for inflation etc.)

    https://medium.com/gv-notes/tech-bubble-maybe-maybe-not-b83d6a2dbc9f?section=suggested

    • Try rerunning the graphs using 1999 as the index year against 2015. Looks a little different, doesn’t it. Now, use Q12015 against Q11999. Hmmm. “Make the data tell your story” – the first thing every good economic forecaster learns.

  • CamiloALopez

    The timeless lesson on this post is anything we do should be about creating value, no matter where we are in the food chain. From developer, entrepreneur to VC. If you create value in your little universe then you will be ok in any environment. You might get bruised up but ok. “It’s about building real value”

    • A good meta statement about life!

  • I know someone who is holding off changing USD for CHF – because he “knows”-He clearly thinks he knows more about the market than the market – (or is just a sucker)

    MUPPETRY is forgiveable in the uninformed (if dangerous for their own good)

    But when VCs play follow my leader (as a strategy?) or chase the money (really ?) I wonder if the funds that back them are complete bozos.

    Then I look at global financial systems and remember – there are technical traders who “see support” – pundits who “see bubbles” – best performing traders (who are bears and bulls at the same time and make money off the brokerage).

    So like Socrates himself – I admire Brad more for what he knows he doesn’t know.

    • Thanks @kwiqly:disqus. One of the reasons I don’t live in the bay area is so that I’d don’t have to engage in endless conversations with people talking about things they don’t know as though they do and arguing with them from an unknowable perspective.

      Did you like what I did there?

      • Depends on the implicit punctuation 🙂

        Do you
        a) both talk to them on their chosen subject of ignorance “as though they do” ? and also argue
        or
        b) do they talk “about things they don’t know as though they do” and you merely argue

        I guess I cannot know unless I as yet do not recall what i once knew

        • And they both realized commas were missing .

  • Brilliant.
    I think what sets you apart from so many other investors is that you truly are introspective by nature. And you’re gently brutal, despite the apparent contradiction in terms.

  • Felix Dashevsky

    …and the scorpion said: “because it is in my nature.” brad, your article resonates with me overall, and mark twain’s quote is timeless, and just now, rapidly increasing in pertinence. but the advice “don’t be a scorpion” won’t help the scorpion. the frog will always get stung.

    • There’s nothing I can do to help the scorpion. And you are right, if you are already a scorpion you can’t be one. But you get the point…

  • Love when you discuss investing $600mm in 9 months. I would love a book about everybody who has been around for more than 20 years in the industry biggest screw-ups. I will contribute. I love Bessemer’s anti portfolio: http://www.bvp.com/portfolio/antiportfolio

    • I will probably write more posts about some of the biggest screwups, especially around the suspension of disbelief that happened in 1999 – 2001.

      • I can add plenty.

        Like the time I did a “merger” with no preferences with a company that had a bunch of preferences and let a “professional” CEO take over.

        Or in an all time absolute “dummy” move I let our lawyers convince us we should sue a big company but not serve them to get choice of venue. I knew it was a bad idea but my partner was really aggressive, dumbest idea ever. Once they found out (our lawyers said that wouldn’t happen) we had sued them it was “On like Donkey Kong” the guy who was the antagonist at the big company actually felt bad because he said even though he was a total dick it was never going to go there, but once it did they were willing to spend 3 times the amount on lawyers than the amount we were arguing over.

        • Tyrone Niland

          We’ve all been down that “this is great legal advice” road that starts with “trust us, they’ll capitulate”. The only thing that ends up capitulating is your bank account when your lawyer eventually sends you a bill.

          • The worst part I knew in my gut it was a bad idea. I said look let me take trip to Atlanta. But my business partner was really mad. I didn’t block it so it was my fault.

            The situation has happened to me twice: A big customer has to have a certain feature in NOW!! Typically they announced something that your software doesn’t do and need to deliver.

            Well your people work day and night and jam in a release. Shockingly since they were working as fast as possible with no sleep there is a serious bug.

            The customer is incensed that you have a bug. The person that is so angry wasn’t part of the business decision they are in IT and start going over unit testing, etc, etc.

            The first time it ended up in a lawsuit.

            The second, I did in fact calm the CIO down, but in one of my all time funny situations, he was yelling at me that I needed to fire the guy (he did it without telling me and he was a partner) Finally in exasperation I said what do you want me to do tattoo BAD CODER on his forehead?? The guy actually pondered that. I said seriously that is where we have gotten???

            I have not had it happen again.

  • All I hear is that some VCs are trying to spend as fast as possible so it’s a great time to raise money.

    • Yeah, uh huh, until it isn’t. Be wary.

      • I was mostly being facetious. A VC who invests a lot because they expect a crash to be coming isn’t really somebody I want to be in business with over the long run.

        • Agree – sorry I missed the sarcasm…

  • Here is the real question you must have some insight into (I have none):

    What are the terms of these deals (no particular deal, just in general)??

    1. If they are 1x preference with no onerous control and anti-dilution terms, people are right, you would be crazy not to take money.

    2. If they are deals for common stock, then the people putting money in are absolutely crazy.

    3. If there are all sorts of terms that people don’t understand, then you are crazy to take the money.

    I have no feel on the continuum.

    • It is a broad continuum. There is structure (participation, ratchets, warrant coverage) on plenty of the deals. The baseline is a simple liquidation preference. Im not aware of primary deals for common stock but there is plenty of secondary action at similar prices.
      So – some rational, some not.

  • I’d like to see you devote an entire post to “Don’t be the scorpion”. Thanks!

  • Tyrone Niland

    In my opinion, anyone that deploys capital simply for the sake of doing the deal is nothing more than a broker and in the case of your example above, should realise they’re most definitely not venture capitalists, or capitalists of any other description.

  • I’ve seen (and been part of) two obvious bubbles in my life, the dot coma and American housing. Both felt quite different than today. In both, the public and media were talking about those investments every day. It sounded like stories from 1929, where the shoe shiners were talking about the Dow.

    Perhaps “this time is different” because regulations are limiting the VC frenzy to VCs and their extremely high net worth LPs. That doesn’t mean the collapse isn’t coming, but it does mean any fallout is unlikely to make a nationally economic mess.

    Rather than argue bubble or not, what seems prudent now is a pre-mortem assuming a VC collapse later this year. What happens in 2016 if a few current unicorns fail? What happens if the S&P tops off and the IPO window completely closes again? What happens if no new unicorns emerge in 2015, ending the assumption that there is always another unicorn?

    It was no fun being an entrepreneur between 2001 and 2004, before Google’s IPO reminded VC’s that venture investing could work.

    • It was very fun being an entrepreneur between 2001 and 2004. Watching the companies that were competing with you with no real plan to make money, starve, was sweet justice. Getting ready for another round of this.

  • Feisty but great post. As a Chicagoan, I here time and time again that it isn’t happening here. But, if they looked out there window they’d see that it is.

  • Diogenes60025

    The next crash always comes in the sector where it is least expected. I nominate “Clean Tech”/

  • Kelsi Kamin

    From someone who was 5 yrs old in 1999: what was the prevailing sentiment among investors over the years post-bubble? How did the current fundraising frenzy start again?