There has been lots of discussions of late on whether or not we’re in the midst of a bubble that could result in another DotCom burst.
Much of the discussion has been front-footed by those with vested interests – Venture Capitalists who want the market to remain buoyant for example. So it’s nice to read a piece that is thoughtful and open minded.
Sam Altman posted about valuations recently and his piece is well worth a read. While the entire article is great, one section really spoke to me. Altman advises startups saying:
Definitely don’t start a company just because capital is available. Remember that cheap capital doesn’t make starting a company much easier. It only does stuff like drive up rent. Success will still take a very long time. And it’s definitely still bad to chase above-market valuations—you’ll price out people that will actually help. Just take market terms and get back to work.
Resist the urge to raise and spend too much money. The track record of companies that raise $30MM or more in their first round is bad. You may be one of the exceptions, but for a bunch of reasons, I think it’s better to have a small amount of money until everything is working, and only then really hit the gas pedal.
Also, if capital feels cheap, it’s psychologically easier to spend. It’s really important to stay frugal. In addition to the often-discussed correlation of low CEO pay with success, I’ve noticed that frugal companies have a culture that ends up being much more focused on real results. Frugal companies also tend to have a long-term focus. And on a practical level, it’s always possible that the capital you’ve raised now will be the last you’ve ever raised. You should treat it that way.
It’s totally the approach that I recommend to the companies I’m an investor and/or director of. And I’m impressed how they take a circumspect approach towards what they do – not spending money just because they have it.
No one knows if or when the bubble will burst, but if you focus on spending your money wisely, and aim towards building a profitable and sustainable business sooner rather than later, you’re better protected whatever happens.
Food for thought….
