Tech Bubble? Here's Why I Don't Care
If you're worried that a tech bubble is imminent, I can tell you with authority that it is not. But before you relax, I can also report with the very same authority that the bubble is coming. There you have it.
The fact is that our capitalist economy is cyclic. We are always experiencing either the run-up to a cyclic high or careening toward a low. There is no stable status quo. I have experienced five such cycles in my professional life. A few were real whoppers, like the stock market crash of ‘87, the dot-com bust, and the most recent brush with depression in ‘08. Yet during these same four decades, we have experienced the most amazing explosion in innovation in human history.
So, though our economy is constantly gyrating, the pace of innovation never abates. That innovation has been the backbone of the U.S. economy's strength and world leadership. So, why should you care about the bubble chanters? I certainly don't.
Entrepreneur or speculator?
The real question is this: Are you a speculator or a value builder? A speculator makes money betting on upward and downward changes in the market. A value creator builds things that are meant to thrive despite the changes in the market. This might seem a clear distinction, but many entrepreneurs are really speculators in disguise, trying to catch a wave.
This was at the heart of the famous dot-com bubble. A buoyant market was hungry for Web-based businesses that would form the basis of an all-new economy that magically defied the fundamental physics of P&L. So-called entrepreneurs worked fast to develop ideas that were intended only to ride that giant wave. A sustainable business model was not in the calculus. When that tsunami receded, they found their fragile businesses smashed to smithereens. Yet out of this era emerged many giant household names, such as Google and Amazon--epic companies that created real value and never looked back, even through the great recession of 2008.
That's why it's vital, if you're a value creator, to tune out all the bubble talk.
The business press thrives on our economic spasms. As in the movie Rocky, everyone loves the underdog's struggle to the top, inevitable fall, and final comeback. It's hard to avoid getting caught up in the frenzied debate while chewing your nails off worrying. But, as a leader, it's your job to keep it all in perspective.
Begin by tuning out the white noise. The press will tee up expert after expert prognosticating about where we are in the boom/bust cycle. No matter how smart these people sound, no one really knows--even the guy who miraculously predicted the last crash (bring me the person who predicted the past five downturns, and maybe I'll pay attention). #IGNORE.
Instead, you should be visualizing our current cycle. Every economic cycle can be charted like a sine wave. Your job is to determine the general location on the sine wave that you believe we currently occupy. We really can be in only one of four places: at the bottom, ascending to the top, at the top, or descending to the bottom. If you are a speculator, all you care about is cashing out at the top or bottom (depending on whether you are long or short). If you are a value builder, you must have real operational plans for each of these zones. They can't just be ideas in the back of your head. They must be real, written plans.
Riding the waves
Here are a few tips that will keep you on solid footing no matter what the economy is doing.
- Cash is king. If you are expanding a business, you are likely consuming cash. The No. 1 cause of cyclic death is running out of cash around the bottom of the cycle, when capital is hard to find. Heed the old adage, "The best time to raise money is when you don't need it." No truer words were ever spoken. Always have a war chest, and manage it well.
- Have the right investors. Many investors are speculators themselves; their job is to find the wave, ride it, and cash out as close to the top as possible. These types are momentum players who are willing to pay high valuations to get into what they perceive is a hot company. Have a healthy respect for these investors, but look for investors who are value creators with a long-term investment horizon. They may not be willing to pay irrational valuations but will be your best allies in difficult times.
- Run lean and mean. This is so easy to say but very hard to actually execute. It's human nature to relax when times are good and start upgrading the furniture at the office, taking the team on lavish retreats, expanding the expense account goodies, etc. Just say no. Make sure your CFO is an absolute hard-ass about keeping the company lean. This includes being diligent about terminating marginal employees and not overhiring in anticipation of growth.
If you really are a value builder, you'll have a plan to survive the next down cycle, which I guarantee will come at some point. And if you are really excellent at creating something special, you will live to see the economic-bubble movie over and over.
So, are we in a bubble? I say, bubble, shmubble--just go back to work.
BARRY SCHULER | Columnist
Barry Schuler is managing director for DFJ Growth and the former chairman and CEO of America Online. He is credited with being one of the pioneers of the modern Internet.