Tuesday, June 5, 2012

My thoughts on Paul Graham's email

Paul Graham, co-founder of Y Combinator;
Facebook bubble is popping a bit and
start-ups should watch out for the side effect.
Yesterday I saw Paul Graham's email alerting Y Combinator teams that start-ups may have rocky road ahead in raising money due to over-hyped Facebook's IPO.  Then there are lot of pundits piling on the news.  Some compared it with now famous Sequoia Capital's R.I.P. Good Times deck.  Some had more balanced response putting Facebook's IPO in perspective.

I have two observations:

1. Yes, there was (and still is) a bubble for Facebook.

$100 billion valuation with 25 multiples of revenue is unheard of before Facebook.  Google gets valued at 17.29 multiples of earning (not revenue) today.  Even after Facebook figures out a fantastic new way to monetize 900 million users' traffic, it will take time catch up with all the hype that is built in to current Facebook price.  That is still true with closing price of 25.87 as of today which still shows 82.80 multiples of earning for Facebook.

But let's remember this.  Facebook has screwed lot of investors, but that's not what Facebook's wrong doing.  It's the wrong doing of ourselves who created the hype, and unfair loopholes in our security rules that creates uneven playing field for institutional investors just before going IPO.

2. As a start-up you should take advantage of market hype, but don't depend on it.

Hype is good when you are raising money.  The fact that Facebook went IPO with close to $100 billion valuation means investors can justify higher valuation when they come on board.  But clearly that $100 billion story is now $55 billion and shrinking.

Follow Paul Graham's advice and raise as much money as you can without diluting your stocks too much for existing investors.  Take advantage of the market hype.  But don't assume that cheap money will be around forever.  Raise money offensively and spend defensively.  There are exceptions of course.  But when you have those exceptions, your customers or staffs will tell you, and it's a lot better problem to have than worrying about which VCs to call for the next round that you have in the plan.

I actually think that technology landscape is ready for sustained rally of creating values in the next 4-5 years.  There are lot to be disrupted in today's market.  Practically anything that we have created in last decade can be improved with enormous value-add by rethinking about mobile and ubiquitous access to the internet.

There may be over-hype (aka bubbles) and market correcting pops along the way.  But that does not negate the fact that we are about to enter incredibly disruptive technology market.

As Paul Graham points out, watch out for those bubbles, and don't get sucked in to it.  Then any value-creating cash-conscious start-ups will do just fine.

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