Tech Investment Cascade
According to experts quoted by an article in Wired Magazine, tech startup investment levels have been increasing to levels equitable to those of the dotcom bubble days. Lately investors have been pouring money into startups with very optimistic outlooks. Investors are now even investing in startups when those startups don’t really need more money and those startups are accepting the extra money anyways. Venture capitalist Bill Gurley says that “With the companies that have access to this type of capital, there’s a long list of people that will just hand it to them. It’s a rather bizarre situation.” This steady flow of money, although helping startups grow, it also has enabled many of those startups to burn through large amounts of money very very quickly. With such large sums of money, there’s a lot to be lost if either growth doesn’t happen or the funding fuel stops. Gurley argues that this has formed a culture in which startups are getting pampered to a point that the money could be taken for granted and if it is cut off or decreased, the startups wont be lean and frugal enough to survive. In my mind this goes against some of the stereotypical views on startups being quasi rebellious and doing things their own way by their own means, creating growth and success purely for what their service or product actually does for people. Venture capitalist Fred wilson warns that “At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.”
This increase in startup investment can be related to our study of the cascade effect. There are a large number of investors all making similar decisions to invest lots of money in startups regardless of their private information: what they know about those startups, what will actually be done with the money, or what other investment opportunities were available that could have been done instead. Even in the world of modern economics where there are very rational investors who have teams of researchers to determine the prospects of a startup can easily fall into a cascade effect. Some investors may think that its always good to invest in a startup regardless of the amount of genuine info you they have. As stated in the article from Wired, “many companies and investors are in too deep to restrain themselves. If your competitors are spending, you must spend too.” Likewise, with the way that startups culture is progressing it seems more and more likely that a startup will thinks its always good to bring in more money, when they really should be putting more attention into their business plan. The characteristics of cascades are not necessarily a bad thing, who knows, the increased funding may enable a larger percent of the plentitude of startups to succeed and create great lasting companies. However, startups must be mindful, cascades are fragile and can be overturned by a small amount of additional genuine information. If growth starts to slip, startups must be ready to pay their bills and work with what they’ve got.
http://www.wired.com/2014/09/money-pouring-tech-like-1999and-thats-good/