on Nov 10, 2016
The year is 1998, and the world has gone mad.
I’m caught in the middle of it all, but at this point in my life I’m not really equipped to detect the crazy. I’m 27 years old. I got married last year, and our first child – our daughter Rachel – was born this year. I’m young, I’m working hard, and I have no idea what I’m doing. I’m so wrapped up in the changes in my own life that I don’t really notice how mad the world is.
It’s a communal kind of madness. Individually, people are as sane as they’ve ever beenWhich probably isn’t saying much.. But we’re in a period of rapid technological and cultural change. Everyone wants to stay ahead of the game and nobody knows what’s going to happen next. It’s only been five years since the Mosaic browser hit the net and kicked off the web as we know it today. Since then the internet has exploded in popularity.
If you put the various consumer technologies of the 20th century on a graph, you can see the growth curve of the internet is steeper than the growth of household computers. That is, it’s going to take the internet even less time to go from “nobody has heard of it” to “everyone has two” levels of saturation. And the growth curve of computers was already steeper than the growth of automobiles and electricity, and both of those grew faster than the telephone. Not only is the world changing, the rate at which it’s changing is increasing.
If you’re an investor, then this is panic-inducing. If you’d dropped just $2,100 into Microsoft when it went public in 1986, then today in 1998 that stock would be worth over one million dollars.
Twelve years. A growth of 47,619%. The mind boggles.
We’re Going to be Rich!
Remember the #1 secret to success: Be in the right place at the right time. Afterward, you can write a book about how you got rich by being in the right place at the right time.
Over the last century, we’d seen the growth of radio, television, electricity, microwaves, VCR’s, and countless other technologies. Again and again, the story repeats: The people who got in on the ground floor of a new technology became wealthy, powerful, and respected. They became famous. They created jobs. They got their faces on magazines. They had buildings named after themselves. That kind of lifelong payoff makes a winning lottery ticket look like a Crackerjack prize.
Not every new technology leads to fame and riches, of course. The Walkman came out in 1979. But that was made by Sony, and they were already a huge company at the time. It was too late to “get in on the ground floor” of Sony. So if you’re looking to be the next mogul then you’re not just looking for a new gadget, but a new gadget from a new company in a new industry.
This is the kind of thing that keeps investors up at night. They’re afraid of missing out. Afraid of being the doofus that throws the next Bill Gates out of his office and passes on a chance to be part of history. Afraid of their entire career being reduced to a cautionary tale.
The year is 1998, and this is the moment where it became obvious that this whole internet thing isn’t a fad. All you have to do is put the numbers into your spreadsheet and you can see the Matterhorn-shaped growth curve for yourself. This is it. This is the Next Big Thing. History is about to mint the next Henry Ford. Assuming it’s not you, then you need to find him and hitch your wagon to his star. If you’re an investor, this means you need to bankroll him.
The problem with this line of thinking isn’t that it’s wrong. The problem is that it’s obvious. Everyone is coming to this same conclusion at the same time. Making things worse is that everyone knows that everyone knows. So if you want to get in on this thing, then you need to do it as soon as possible. It’s a gold rush. You don’t have the luxury of scouting around for the best opportunity, because while you’re window shopping, everyone else is staking their claim. If you wait around for just the right deal, then the whole thing will pass you by. This sense of urgency is leading investors to put their money into unwise ventures.
How it’s supposed to work
This is from a recent re-make / reboot of The Odd Couple. I hadn`t heard about it, so I`m going to assume it was terrible.
A business venture will usually start with a couple of people. Maybe they invent something, or they see a service that nobody else is providing. But while they see an opportunity, they can’t make it happen on their own because they don’t personally have the cash to acquire the people and equipment they need.
While startups come in all shapes and sizes, the stereotype is that you end up with two 20-something guys. One of them is The Engineer. He’s dumpy, unkempt, socially awkward, and brilliant at some little corner of the technological world. The other guy is The Suit. He’s fit, well-dressed, and skilled in the social arts of small talk, persuasion, and bullshit. He always gives off the impression he knows what he’s doing. These two guys are probably friends from high school or college roommates.
Like I said, this is a stereotype. But over the years I’ve found it to be kind of strange at how often it turned out to be the case.
So the two guys will take their idea and shop it around to potential investors. The Suit will shake hands, swap business cards, and give the powerpoint presentation on why their idea is the Best Idea Ever. The Engineer will slump down in his chair and alternate between feeling awkward and bored. Occasionally a prospective investor might ask him a question along the lines of “Will we be able to X?” and instead of just answering the damn question like his partner told him to, he’ll attempt to explain why X doesn’t make any sense in this context and try his best to correct the investor’s misconceptions about X using a bunch of jargon that only he understands.
If the meeting goes well, they might get a promise of money in exchange for a controlling stake in their budding enterprise. Most of the time the investor will pass. Like dating, you usually have to kiss a few frogs before you find your Prince Charming.
But in this distorted world of internet speculation, this entire process is turned on its head. The power is going the other way. If you’ve got a Suit, an Engineer, and an idea, then you’ve probably got several investors beating on your door and begging you to take their money so they won’t be left behind in the new age of Doing Business On The Internet. You can haggle to get more money than you need! Engage in brazen nepotism! Demand funding for needlessly luxuriant office furnishings in your trendy overpriced office space! Limit the investor’s share so you can sell more of the company in exchange for even more money you don’t need! It’s a seller’s market!
This behavior feeds a secondary wave. Once a significant portion of the business world is doing this, everyone assumes the herd knows something they don’t. Maybe you didn’t care about the internet before, but once you see many of your colleagues pushing their chips to the middle of the poker table, you start to wonder if this internet thing isn’t a winning hand. After all, this many people can’t be wrong at the same time, right? If it turns out this whole internet thing really is free money, then you’re going to look like even more of an idiot for not cashing in when you had the chance.
Heck, even if you know this is a bubble (and many people no doubt sensed this) it still might be worth putting some money in to take advantage of the surge. This is the rhythm method of investing; it’s all about knowing when to pull out.
You Can Trust Me
Trust me, in a couple of years you won`t believe how much money you have in the bank.
This glut of loose money attracts a fresh crop of hucksters. A couple of losers will adopt the Engineer / Suit roles and sell some idiotic, half-baked concept to the latest wave of lemming investors. The fact that most of the investors don’t understand internet technology beyond a few buzzwords makes it even easier to sucker them. It typically takes a business many months to spin up and begin doing whatever it is that’s supposed to do to generate income. During that time, hucksters can set themselves up with exorbitant salaries, luxurious office space, and jobs for all their friends. When it’s all over, they have a nice little nest egg and a collection of pilfered high-end office furniture.
Not everyone is a huckster, of course. Some startups are built by copycats who are simply doing what everyone else is doing. Some startups are built around solid ideas that fail for logistical or personal reasons. Some startups are a great idea that’s too far ahead of its time and fails because the market isn’t ready yet. A small number of startups turn out to be reasonably successful in the long run.
The tragedy is that a lot of these people are right. This is the future. Eventually, people will do their banking, shopping, learning, dating, reading, activism, socializing, porn-watching, and job-hunting online. But the infrastructure isn’t there yet.
The Right Idea at the Wrong Time
No! Don`t do it!
Imagine if the year was 1880 and you realized the automobile was the future, so you spent hundreds of millions of dollars mass-producing something like the Ford Model T. But there’s no road network yet. There’s no middle class to buy them yet. There aren’t any filling stations. No mechanics. Everyone might agree that your cars are dreadfully impressive and clever, but they’re impractical and nobody is in a position to buy them.
That’s what’s going on here in 1998. Everyone is building the internet we’ll need a decade from now, with no plans for how they will make money in the meantime. Everyone is adopting a “If you build it, they will come” mindset. It’s not that people are stupid, it’s that people are too clever by half. We’ve correctly predicted the future, but we’ve gotten sidetracked by the promise of riches and abandoned good business principles.
The over-optimistic fervor attracts even more investors, which attracts even more hucksters, dummies, hopefuls, rubes, geniuses, and copycats. The fire begins to feed itself. The pull of this money is so strong that it begins to distort the rest of the technology sector.
My company isn’t an internet startup. We’ve got positive cash flow and we’ve been around since the mid 90’s. But we’ve just been hired by a startup. I don’t know it yet, but I’m about to get sucked into the strange world of starry-eyed internet tech investors.
To be continued…