Andrew Farah

me: I think you’re off about bubble

Shay: How so?

me: Well, a bubble means there is a perceived value in something that actually has very little or no value.

Shay: Which is my view of kids-only social sites

me: So I don’t think the last example of a company being bought by Disney is an example of a company without value

in fact, I’d argue it’s market validation for loopt

or uloop, whatever

Shay: That’s fair. I’m very interested to see what Disney does with the acquisition.

Market validation is an interesting concept.

I think one of the challenges of these aquisitions is making good use of themselves after they get acquired.

me: It doesn’t matter after the aquisition

Shay: very hard – I think Mint did it well, Flickr, but few others. You hear lots about the acquisition “graveyard”

me: nothing matters after that

Shay: See, I think that’s a fundamental component.

if you care about the problem, then it does matter

if you’re building acquirable companies for the sake of the acquisitions, then it doesn’t

which is fine – but…

that’s what creates this “frothy” market

me: As long as companies keep buying stupid kid social networks, then kid social network startups have value.  once they stop buying, those startups either exist and have bubble valuations or they don’t exist because the market has flattened.

Shay: If you think the only source of “value” is derived from what other corporate entities are willing to pay for yours. What about users? Subscribers? Customers?

me: For a venture backed company

…

Shay: Like Facebook?

me: customers, subs, users are just a metric for increasing value to a0 purchasing companies

Facebook is the exception not the rule.

Shay: fair

me: Let’s take Facebook.

Shay: so – I guess there’s really two types of companies

those looking to be acquired (or IPO, same boat, in my mind) and those looking to be self-sustaining.

right?

me: Right

Shay: And they derive value from very different sources, and make different decisions.

So – I guess right now the money is in building acquirable companies and moving quikcly

*quickly

me: No

Shay: While the market is “frothy”

no?

me: No, I don’t think so.

Shay: That seems to be where the deal flow is focused.

me: The “money” is in the hands of companies who are capable of aquiring.

Or

Shay: well – I’m talking about where the money is for you and me

me: The money is in building a profitable company.

Shay: the end of the equation that we’re in

So, I’m confused.

me: How so?

Shay: It seems to me that the recent rash of funding and acquisitions would indicate that the money is in building companies that look pretty/shiny/attractive to those companies doing the acquiring.

Those are not profitable companies, nor are they really designed to be such.

me: Right

Shay: They’re designed to fit into a larger corporate ecosystem

so then why “no money” in that?

me: There is money in that.

But.

Shay: Seems like there’s lots of “easy” money in that right now.

is all I’m sayin

me: It’s easy to raise capital

But that is only sustainable if companies keep buying kid social networks

and there is a runway, when companies stop buying

and that’s when the bubble forms

Shay: Exactly. So I think of bubble as relating in many ways to “unsustainable

“

me: when buyers back away.

But from what you told me, Disney is coming to the plate and hitting a double

That resets the clock

Shay: Disney didn’t hit the double, the founders of KidTown (or whatever) hit a double.

me: okay

Shay: And meanwhile, uloop gets funded same week

sound sustainable?

neither have revenue

me: So what?

Shay: neither have users with credit cards

that’s why I say bubble

these aren’t companies designed for sustainment

me: Bubble has nothing to do with acquisitions.

Shay: they’re acquisition-minded, which is fine, but is that creating real “value”?

me: Let’s say everyone started buying companies

left and right

Shay: Okay.

Unless they can sustain that pace, then it’s a bubble – even if it’s only labeled so after the fact.

me: hold on

Shay: okay – my wicked fast typing skills are getting ahead of me.

me:

So everyone is getting purchased.  9/10 companies. That means that you and I should run out, raise some funds and sell our company fast.

That means there is no venture capital bubble.

Because there is always a purchaser

You and I go home rich.  Our VC friends go home rich

This is completely different from the 2000 bubble

In 2000, companies were trying to BECOME Disney.

They were going public left and right

They were trying to become huge profitable companies that could buy younger ones like Apple or Microsoft, whatever.

Sent at 12:34 PM on Thursday

me: The difference today is that companies are trying to be purchased not become sustainable.  So I can only conclude that as long as companies who profit from other sustainable means… like Disney’s parks are coming to the table to purchase smaller companies looking to be purchased, there is no bubble for VC’s or entreps in that game.

However, I do not believe that there is no bubble.  I believe that there is a froth.

Shay: Okay.

me: Just not in Kids social networks. haha

Shay: ha

so, let me ask you this

say there is a buying spree for 8 months.

and we run out, get funded in 2 months, get another round in 4, and then sell at the end of the 8 month period.

then, say, the buying stops (or drops, or whatever)

now look at that on a graph, with time on they x-axis and purchases on the y-axis.

what does it look like?

me: a crach

Shay: A bubble

me: crash*

Not necessarily

Shay: was low, rose, then fell

me: What is indicative of companies stopping purchases?

Shay: What does it mean or what causes it?

me: No, how do you know companies are no longer purchasing in the next 12 months?

Shay: That’s the trick – much of this you can’t know until after the fact. But I think you and I would both agree that a high-level of acquisitions is not sustainable.

me: Time

Time is the only way you can find out if people stop purchasing

That’s why a bubble is always speculation until it’s measured in retrospect

Shay: right – but it’s also why I think we’re seeing a bubble now.

and why you can’t prove me wrong

until much later

me: That makes no sense

I think that VC thinks companies will keep buying.

Shay: Here’s my proposition: the dealflow we’re seeing is not sustainable and companies that shouldn’t get funded (or funded as much) are anyway.

me: And I think that the tech industry is growing (financially / scope / reach) geometrically each year.

Shay: artificial value

me: ULoop being one of them?

Shay: Indeed.

Would you fund it w/your own money?

Or buy stock in it if it were public?

me: But you were proven wrong when Disney purchased togetherville

Fuck yeah in togetherville

Shay: I’m sticking with my artificial value proposition.

me: Right?  The formula workred

Somebody said “Social for kids”

A VC said, sure

Shay: It’s real money for the VC/entrep but it’s not real value

me: Eye of the beholder

And Disney is notorious.  They are ruthless

They didn’t just blow $xx

Shay: so – what’s keeping you from starting an acquirable company?

me: I don’t have one yet.

and…

I think the Disney deal, like Facebook, is the exception.

I think it give the wrong impression of the market.  Not because the company isn’t valuable, but because it tells VC and entreps… keep going there will always be money to buy your dumb companies.

When in reality…

Togetherville was good enough.

But Uloop may not be.  But that’s for the buyer’s market to decide.

Shay did not receive your chat.

Shay: So…

You think the deals we’re seeing represent legitimate value propositions and moves for entreps/VCs/acquirerers

?

me: Acquisition says to me… the market sees value.  Like stocks.  Buy!

Long periods of time without acquisition says to me… the market sees no value.  Sell!

Shay: Interesting approach.

me: And as long as co’s keep buying then it’s fucking money in the pocket for VC and entreps

Shay: True

me: Once they stop… froth forms.  VC over extend their funds

and bubble

Shay: So what do you build TODAY?

me: I think you should default to building a product that customers pull our their credit cards for.

Shay: Indeed.

Which is why it wouldn’t be kids social.

12:52 PM

me: And if you think you can expand that business model by taking funding for growth… fine

That’s my opinion.

But Disney has a different model apparently for Kids Social

Maybe that increases ads for Disney World and thus ticket sales…?

12:53 PM

Disney is on a completely different strategic level.

I’m on… how can I take a product and turn it into $7K a month in the first year

12:54 PM

Shay: Yeah – and do it without funding.

me: They’re like… how can we get little dolls with NFC tech in them in the hands of every child who enters our park so that the toys will interact and speak while they tour.

(which they’ve done, btw)

(yeah, no funding… till I need it.)

12:55 PM

Shay: I didn’t mean to make this an attack, just like to chat about what we’re seeing on the startup landscape – so, hope it didn’t come off that way.

12:56 PM

me: On the contrary… You have a permanent right to get me fired up.

12:57 PM

Shay: Ha – good.

You know I’m going to be taking full advantage of that for…ever?

me: I encourage you too. This transcript is going online. Maybe we could make it a monthly series.