R.I.P. Good Times: The Startup Bubble May Be Coming to an End in 2012

Is it just me, or is money being thrown at a lot of crap these days? As long as it has a cutesy name and is based in the Valley, it gets bukkaked with millions of dollars by eager investors.

All this cash floating around also seems to lead to startups sucking up all the best talent. Do coding geniuses really need to be working on photo-sharing apps, as opposed to, say, rocket programming?

I did an interview with Danish madman and super-entrepreneur Morten Lund once. One of the things he told me is that a recession is the best time to start a business: the table is cleared and the posers don't want to work hard to make it. More room for the truly dedicated.

First, let me say, there will eventually be a decrease in funding levels primarily because the VC asset class is raising less money and since they can only invest what's in their bank accounts, it has to come down. When will that happen? Not sure.

Here's some thoughts based on data we collect.

- 2011 is shaping up to be banner year for VCs ($30B+ invested) - Seed investments whether by VCs, VCs & angels or just angels are growing like mad

If you think of investing as a funnel, i.e., more seed stage companies get funded than Series A than Series B, etc, it def looks like the funnel has gotten a bit fat up top, i.e. a lot more seed deals than Series A, B, etc money down the pipeline.

So if anything, the Seed thing has been overdone. At the same time, many of those Seed companies can become real businesses on just the Seed round, i.e., SaaS companies (just look at UserVoice's second small round raise as a case study). Or these companies get acquired for $20-$50 million. Which is not a great return for a mega-VC who only care about billion dollar opportunities, but can be quite good for a micro-VC. I'd imagine Dave McClure and others like 500Startups would be happy hitting those all day long.

That said, there is an overabundance of seed backed companies and many of these will be orphaned and die. That's not a bad thing. It's the market working.

At the same time, there are a lot more investors at the Seed stage and a lot more can pile in so the trend might continue for a while as everyone hopes to fund the next Facebook, Pinterest, Quora, etc (pick your soup du jour). This is only natural as there are a lot more folks who can invest at the $1 million level than the $10 or $100 million level.

As to whether later rounds will decrease in # and a bubble exists, that can really only happen when the buyers (investors) decide not to pay crazy valuations. I'm not sure what the 'forcing mechanism' will be that will drive this. There is not a long list of public internet companies that will set the "real price" for these companies and cause a correction. So without the forcing mechanism, it comes down to investors agreeing that valuations in private markets are too high. Not sure there is anything out there that would cause an across-the-board shift like that. Of course, some investors might get more conservative but there looks to be no dearth of cowboys investing right now.

Finally, this could all change if the stock market and general economy go into a tailspin. If I could predict that with any precision (or if anyone could), we're in the wrong business.

Some links for those interested in some data -

Startup Cash Crunch? Hardly - http://www.cbinsights.com/blog/venture-capital/startup-cash-...

VC on track for $30B in 2011 - http://www.cbinsights.com/blog/venture-capital/quarterly-ven...

An engineer -- here's the egotism coming -- is a money machine. She may be more effective working together with other force multipliers (marketeers, venture capitalists, a good CEO), but fundamentally a good engineer creates value all by herself. If the VC isn't along for the ride, less value may be created less quickly, but the engineer is still going to get hers and the VC not.

I can think of one example of an engineer who just didn't seek funding and created a whole bunch of value (notch); does anyone know of a good example of a startup which was forced to bootstrap without significant funding (on account of a burst VC bubble) and survived to stick it to 'em?

Can someone explain to me how this could possibly ever not be the case? Even if 99% of seed-funded companies go on to raise a series A, that's still "seed-stage fundings outpacing series A fundings".

Maybe I'm not understanding what Schonfeld wrote here?

  RIP Good Times! DOOOOM! GLOOOM! The Skies Are Falling!

  I Need an Excuse to Knock Down Your Valuations and Terms!

In the comments, you have the same sentiment of "It's too frothy, there has to be a pullback", or "There won't be a pullback, this time it's different than 2008."

After surviving the dotcom crash and the 2008 financial crash, it definitely seems like we are headed towards a global recession in 2012. No matter what path we take, whether Europe can save itself or not, the best case scenario is going to be a sharp pullback in European economic output. Worst case is that the euro falls apart and the entire global financial system is rocked. My guess is that Germany won't allow this to happen because they will suffer disproportionately, so they will allow the issuing of Eurobonds.

So that being said, economic growth will slowdown worldwide. I think the US is the best place to be, given its sluggish-but-not-catastrophic growth.

BUT it's not the US's GDP that matters, it's the investments of American rich people that matters in terms of funding VCs. If rich people take a hit because a majority of their investments get whacked, then they will stop investing in venture funding. There's a pretty strong correlation between VC funding and the stock market. Already the markets are down pretty hard since they topped in June. If you remember the dotcom boom, it was during a massive bull market in the stock market. As well, after the crash of 2008, the nadir of the markets being March 2009, there's been almost a doubling of the stock market since then, so by 2011 lots of rich people got very, very rich and are willing to spread out their investments.

However, since June, the US markets are down 15%. The German market is down almost 30%, Chinese markets down 23%, Indian markets down 22%, Brazil down 25%. There are a lot of rich people around the world that don't feel as rich as they used to. If this trend continues and spills over to 2012, these rich people will definitely pullback on discretionary investments, the top of them being venture funding. So if you want a gauge on how VCs will behaving, I'm personally going to be looking at the stock market to see how it's going to behave.

That is always the case, just as it is always the case that series A fundings outpace IPOs.

I think the wise people in the Vally see the capital influx coming and are trying to cool the sector to ducks some of that capital. We have already killed the goose that laid the golden egg once before, I think we are just trying to ensure that we are not to attractive to the stupid money.

There are fewer and fewer places for it to run to and tech is one of the last bastions, but it cannot sustain the kind of fiat capital that has been created, we are too weak in our recovery from the last exuberance. That being said, this is not a bubble, it can and has gotten a lot crazier than this. This is what healthy was before the bubble.

Unless of course when the prediction itself changes. And that's when things start to move again -- not in the future, but at present.

Bubble pundits have to accept the fact that they will not be able to predict the bursting of a bubble. Assuming there is one.

Even the title says "I think"

(Addendum: I'm starting to think that having a startup is the "I'm gonna be a film star/hip hop singer/rock guitarist" equivalent for the geek youth).