The “is there or isn’t there a bubble in venture” discussion has mostly focused on whether the momentum behind venture financing is showing signs of weakness, whether valuations are (way?) over extended and when, how and why this might unravel. Some say yes, some say no. But most bubbles are only evident after the fact so time will tell on this one. (If it is one …)
Much of the the debate been couched in terms of the fate of the 150 or so $1bn+ unicorns. (Unicorpses to come?) As I noted recently, whatever the size of business, if you are a startup founder this is the time to make sure you are wearing swimwear.
Some unicorns are definitely getting sick, and not just for lack of revenues. Caroline Fairchild wrote on Linkedin that “Theranos, the Silicon Valley startup known for its blood-testing technology, is now in the spotlight in the wake of a deeply damning report out by the Wall Street Journal …” Neatly she called it a “wounded unicorn“.
As we digest the troubling news about Theranos here is something else to worry about: extended periods of loose money and exuberant investment are typically associated with some high profile incidents not just of mis-valuation but misrepresentation, or worse. (I am not commenting specifically on Theranos in that regard, but the allegations there have set alarm bells ringing.)
10 years ago I was the second witness for the US Government in the trail of Worldcom CEO Bernie Ebbers. Worldcom was a darling company that rode the 90s/early 2000s “TMT” bubble to huge success but ultimately to ignominy. Mr Ebbers was convicted and sentenced to 25 years in goal for an accounting fraud in which costs were understated and thus profits overstated … and which led to the bankruptcy of the company. Worldcom went bust in July 2002 with $107bn of assets making it the biggest in history up to that point. (It ranks #3 now, behind Lehman and Washington Mutual, taken down by the 2007/08 financial crisis after an epic housing bubble burst.)
So, for anyone concerned about the more extreme things that become visible when the loose money tide goes out, what did I learn from the last tech/telecom bubble? What are the warning signs that, with the benefit of hindsight, folks should have payed more attention to ahead of the biggest failures of the last tech bubble?
While nothing more than my own anecdotal observations, here are some red flags today’s tech investors might care to look out for:
1. A very controlling CEO (and likely CFO too in a public company context) who has close oversight of all operations to the extent that only a very few people at the heart of the company have a full picture of what is going on. (That was the story at Worldcom.)
2. A CEO with massive ego (and paranoia) – although of course this goes with the territory in many cases so not very distinguishing. But taking aversion to criticism to extremes points to someone who can go to extremes in other ways – in their own self defined reality.
3. Sycophantic media coverage – which dulls sensitivity to any adverse issues and results in self censorship. That is … until someone does the work and calls the company out … and gets heard.
4. Opaque “trust us” business models that “just work” … where mere mortals on the outside are not to be let in on the secret. (Recall the acclaim for “asset lite” Enron. It took Bethany McLean in Fortune to point out that the Emperor seemed to be lacking clothes.)
5. Vanity Board i.e. a Board of directors populated with “very important people” … but who lack and domain expertise in the area of activity of the company and hence can’t provide effective oversight, and likely don’t have the time to commit either.
