“An enthusiastic philosopher, of whose name we are not informed, had constructed a very satisfactory theory on some subject or other, and was not a little proud of it. "But the facts, my dear fellow," said his friend, "the facts do not agree with your theory."—"Don't they?" replied the philosopher, shrugging his shoulders, "then, tant pis pour les faits;"—so much the worse for the facts!” Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds
Every morning I listen to Bloomberg Radio while I run. Usually, it’s just news catch up and background chatter while I think about my plans for the day. The past few weeks, however, I’ve been paying much closer attention.
Between the twisted tango of Greece and her creditors, Puerto Rico’s impending default, and the implosion of the Chinese public markets, the news has been grim.
Add the sustained clang of the ‘tech bubble’ alarmists, and one would think I’d be better off firing up Apple Music and listening to some tunes. Working within the equity funding space, I’m especially keen on the measure of bubble talk coming out of the media. We’re operating in uncharted territory, so when both startups and investors reach out, we must be able to lay out a variety of scenarios and possibilities, and we also have to be aware of the facts.
As conversations surrounding the bubble reach a fever pitch, the venture capital industry has begun attempts at triage, whether its through tweets, blog posts, slide decks or opening up letters to their own limited partners.
Andreessen Horowitz partner Chris Dixon recently went on a tear, unearthing 3 articles about the impending tech bubble signified by Facebook’s $1B acquisition of Instagram back in 2012 (1, 2, 3). I’m sure at the time these sophisticated financial professionals and journalists were good intentioned, but even within context, their articles seem reactionary at best, and steeped in jealousy at worst.
Though plucked from isolation, the surrounding context of each of the three posts trumpet a similar refrain – absolute, unequivocal fear.
And remember, this was 3 years ago.
Since then, we’ve seen the rise of unicorns, and a new epoch within the evolution of capital formation. Wet bubble talk, dry bubble talk, fear not only surrounding venture capital, but also percolating within it.
In a great piece on Medium, Tim O’reilly contributes to the fairly compelling case that the very fabric of society – employment, wages, ownership - is in the process of a major shift.
We’re lucky enough to live in a transformative era. We’re able to witness, in real-time, societal delta at a level previously unforeseen. We’re also, collectively, more informed, more involved and more intelligent about investments at an individual level.
What hasn’t killed us has not only made us stronger, but smarter.
The measured growth of equity crowdfunding embodies this premise. The fact that its growth is gradual undermines the bubble theory. The pressure required to pop most bubbles relies on irrational exuberance at scale. The conditions to both pump and pop require a significant portion of the investment community to experience FOMO, over allocate, and become bag holders. Equity crowdfunding is nascent, but in theory provides the perfect portal to enable bubble pumping, should madness begin to envelop the crowd.
The interesting question is why this hasn’t happened? Is the process, from a conceptual standpoint, too abstract? Is there an age/technological proficiency gap wherein the capital holders are disconnected from opportunity as a result of a less digitally-enabled lifestyle? These are all sound possibilities, but I don’t think they represent the reality of the situation.
The reality is that ‘the crowd’, as it were, has learned from past mistakes. The 2000 tech bubble. The housing crisis. The Great Recession. Retail investors have been traumatized time and time again over the course of the recent past and with that trauma a keener investment sense has developed.
In fact, when surveying the rewards-based crowdfunding landscape, we’ve seen the ‘unsophisticated’ capital from the crowd pouring into products and companies that were eventually embraced by the establishment/institutional community in a big way (Oculus, Pebble) – and this is (unfortunately) without upside participation.
I, for one, am glad that equity-based crowdfunding is taking a longer time to mature. We’ve seen incredible growth in the lending, rewards, and real estate verticals. The pace of equity crowdfunding’s growth is indicative of a more cautious, sophisticated investor-base and points towards its long-term success.
Interestingly enough, of the recent financial calamities, most have been born out of institutional mismanagement. From Greece to Puerto Rico to China, the powers that be have been the instruments of havoc, with their respective constituents suffering the majority of the day-to-day consequences. It was the crowd that was wrought through the actions of the few.
But, the crowd is smarter than you think.