Startups · Fundraising

Is the Secret.ly Demise a Sign that the Start-up Bubble May Burst?

Richard Pridham Investor, President & CEO at Retina Labs

May 2nd, 2015

I have been around long enough to have lived through (and survive!) the original dot com bubble and ensuing crash. With all the craze and frenzy around social media, sharing economy and app start-ups these days, it’s starting to feel like the dot com era all over again. A rush to fund just about any start-up based on insane valuations no matter how viable the business.

 

As an investor myself, I’m the business plans I'm looking at (if you can call them business plans at all) have me scratching my head. Start-ups with little or no IP, no customers, no revenues, no obvious monetization model and years of projected losses looking for seven figure seed rounds based on $10M+ valuations. And yet it appears investors are willing to throw money at these companies in droves. Just look at Angel List…it’s crazy. I’m all for investment in innovation and realize that of the thousands of start-ups that get funding, a few may emerge as the next Google or Facebook. One of the biggest differences this time around is that VC are not the only players. Thanks to crowd funding. Every Tom, Dick and Sally can throw money at these start-ups. I just wonder how long this can keep going. Is this the next bubble to burst?

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Anonymous

May 3rd, 2015

Secret was just one of the thousands of startups in Silicon Valley. The way we do business here it to bet on the unicorns ($1billion dollar cap plus) and not the lifestyle business. Go big or go home. Secret wasn't going to be big, so they went home. They tried it but it didn't work out, as so many other startups in SV do not become the next Google. And that's ok, because the founders will have learned an move on to the next big thing.

Alan Matthews Entrepreneur

May 3rd, 2015

I like to think of it as startup foam instead of a bubble. As the foam rises, so the fastest inflating bubbles burst, but not all. With interest rates near zero and costs rising, money has declining value, so more air gets pumped into the foam. Alan Matthews 267-312-4500 (Mobile)

Mark Travis Product Management Advisor | Speaker | Strategist

May 4th, 2015

I think the problem with Secret was not properly managing the customer base. It seemed like a fun app to get some gossip from big names and behind the scenes players. However, when I downloaded the app and started looking around, I realized that it had become a filthy sludge pot of anonymous sexual fantasy. It wasn't worth reading through the garbage to find anything interesting. 

So, they lost the customer base they were targeting (broad) because a narrow section of the population ruined it for the broad population. Perhaps they didn't have the technology to keep the riffraff out? 

I think there is plenty of opportunity with social, but it's tricky and finicky. It's like the fashion industry business. It's long-tailed, and there are substantial misses for the one or two hits. 

Michael Brill Technology startup exec focused on AI-driven products

May 2nd, 2015

@RichardS, Although in a few weeks, Reg A+ will allow non-accredited Tom, Dick & Harry to invest up to 10% of their income or assets in these deals. Will be interesting to see what happens.

@RichardP, I don't think I understand your point about how a company that responsibly gives back the bulk of its investors' money presages a bursting bubble. The discussion on valuations and amount of cash that goes into startups is pretty well-worn by now. Some will turn out brilliantly; some will be embarrassing. 

What will be the most interesting imho is how non-professional angel investors will react when the big pullback comes. Will they serve a buffering function or will they hightail it out of there when they realize there's no Series A money behind them? A couple years ago I would have said the latter for sure. A couple years from now with greater momentum in mainstream early-stage investing, I'm not so sure. 

(BTW, $1m in assets excluding your house or HHI of $300K puts you in the 1%. Intuitively it seems that the top 1% should be considered sophisticated enough to take those risks. )

Jesal Gadhia

May 4th, 2015

Interesting discussion, I'd just like to point to this analysis here: http://techcrunch.com/2015/03/24/tech-bubble-maybe-maybe-not/

Bill Maris points out some key indicators supporting both arguments for and against a bubble.

George Lambert Interim CTO - CTO's for Hire

May 2nd, 2015

I think the problem of Nozebleed valuations is that people lose perspective that nobody makes money until something gets sold. The problem with the companies you are talking about is that They Are the things to be sold. When your stock price is related to market perception - whatever you can do to increase potential long term value is a hugh advantage.  CMGI did it incredibly well for a while in a set of stock paper transfers that should have been more illegal than ENRON. CMGI companies exchanged stock - and as the value of other CMGI stock in their treasuries went up - so did their value. Raising the perceived value of both companies on paper. 

The predictions of "the end is near" are easy, it is calling the downfall that is hard. 


Firstly take a look at the history of the 2000 dot-com bubble   http://en.wikipedia.org/wiki/Dot-com_bubble 

and then check out this article called Betting on the Market. 

http://www.pbs.org/wgbh/pages/frontline/shows/betting/etal/script.html


Richard PhD Global FinTech - Crowdfunding - Research & Policy | Strategic Advisory | Board Member | Author | Consultant

May 2nd, 2015

Richard While you can argue that valuations are too high - your comments need one point of correction. Crowdfunding is currently only legal in the United States for Accredited Investors - every Tom, Dick and Harry are still excluded from the market by law. Data on the use of Title II (Accredited) Crowdfunding suggests that existing firms with revenues are the preponderance of firms using the currently legal crowdfunding provisions - startups are not flocking to crowdfunding. Your point is well made, and the flow of VC money is increasing substantially - but let's not confuse a potential VC funding bubble with a yet-to-be-legal new asset class. Richard Swart

Karl Schulmeisters CTO ClearRoadmap

May 5th, 2015

One thing to recognize on "valuations"  is that they are based on the traditional 10x payout in 3 years and the percent of the company a certain sized investment buys you.   This isn't exactly an accurate valuation given how dilutions and the right to force a sale etc actually convey.

Another way to look at high valuations, is that there perhaps is a dearth of quality investments so investors are being forced to buy in at more expensive (to them - cheaper to the startups)  price points

IOW just because $3 million buys you 30% of the company doesn't mean that the company valuation is actually at $10 million.    What it really says is that the investors think that in three years they can sell the company for at least $30 million.     Remember that the investors get paid first - up to that 10x mark.  

now from $3 million to $30 million in 3 years is a CAGR of 216% for those 3 years.  IE just over doubling every year.   That's not undoable for a decent startup.

Richard Pridham Investor, President & CEO at Retina Labs

May 2nd, 2015

Richard Swart: Thanks for clarifying. But isn't the bar to become an "accredited investor" relatively low? This is what they state on the site:

"An individual in the U.S. is said to be accredited if she has $200k or more in income for the past 2 years (or $300k with a spouse), with the expectation of similar earnings this year; or $1m in net assets (assets minus debts)." 

Eugene Gekhter CEO, Memorable. Founder, SharePay.

May 3rd, 2015

I'm of the opinion that for the majority of startups trying to get funded and justify their valuations, it's a popularity contest. VCs prefer 100,000,000 free users on a platform than 1,000,000 paid users on a $10/month service. I've been told in pitches that monetization strategies, targeted marketing campaigns and the viability of the business is not as important as trying to get every person possible on the platform.

Based on my experience working with and pitching to VC's, I agree with the OP's intuition that we might be headed towards another bubble.