I am researching start-ups for about 3 years now. I got interested in this field because probably it is the most dynamic research field you can be in at the moment. Even though many articles have been written about entrepreneurship and start-ups, from reading the academic literature you realise that knowledge is so fragmented that it is hard to comprehend this phenomenon that has taken the world by surprise.
Billions if not trillions of dollars are being poured into start-ups that are set to revolutionise the world. Every day you hear news about a start-up that managed to secure millions in funding sending their valuation through the roof. When you read about it and research more, you see that their revenues are not impressive. It is just the idea that manages to attract those investors.
The academics are not the only ones who have hopped onto the start-up hype. There are a plethora of online magazines, more or less established, that have as a job publishing news about the latest funding rounds. If you read them every day, you know the deal. Start-up X has secured 30 million in funding. Start-up Y is going public.
Few to none articles are critical about this hype. Start-ups are super interesting because they have the potential to disrupt certain markets by bringing a product or a service that have benefits for the customers. But how many start-ups that are presented in the business media actually have an amazing idea? How many of them will survive? The truth is that few will, and even fewer have ideas with the potential to disrupt.
So why bother? I am not bothering, but a bit of a critical eye would do us good. After all, reading news should not only be informative but also a digging for the truth experience.
Are we experiencing another bubble in the high-tech start-ups’ valuation? According to my recent research that looked at over 100.000 start-ups from all over the world, in the past 10 years, we have seen about 2 trillion dollars invested only in high-tech start-ups. Roughly half of those start-ups are out of the market now. This is a whopping 1 trillion in lost investments. Probably you can compare this turnover with investing in a risky stock market. For plenty of investors funding a start-up is a gamble.
If there are people who want to gamble with their money with the knowledge that they have a coin-toss chance to lose them, is that making the start-up investment market a speculative bubble? The answer is not that clear, but for sure we are not re-living the dot-com bubble. Investors do know that Internet businesses are risky. It can be a flop and lose all your money, or it can be the next Uber and you become a rich entrepreneurship guru. For the dream that they would become the latter, people would gamble.
What differentiates the dot-com bubble from the current situation is that back then Internet business was a new concept, unexplored, with little financial history to reference back to. In 2016, we know way more about start-ups. Not necessarily enough knowledge about what makes them successful, but at least we know that most of them go out of business by the time they reach their fifth anniversary. So some information is out there for people to read. This wasn’t necessarily the case in 2000.
We are not there yet! It still might be a bubble. While information is out there, is it easily accessible and transparent? No! Not really! Information asymmetry is strong in the start-up scene with investment cliques monopolising the investment in successful companies. Even though your newsfeed is full of news about the latest funding rounds, they are pretty much empty of content. The underlying networks of investors are far from being fully transparent.
What lessons can we learn from what is going on right now? If you don’t have money to invest, then don’t worry. The bubble burst (which is imminent according to the economic theory of cycles) will not affect you that much unless you have some stock in a company that recently went IPO. Even if start-ups are overvalued (and, boy, they are!) they have all the ingredients to make a comeback because technology is advancing at an amazing pace and people would always be interested in investing in them.
If you want to learn one of the few critical articles out there, read this piece in the Telegraph!