Bubbles Always Burst

The problem with bubbles is that they burst. There have been many notable bubbles throughout economic history, but let's only go back as far as the Internet bubble. If you recall at the time, Greenspan called it "irrational exerberance." I remember attending a venture capital conference at the Waldorf Astoria Hotel in New York City in October of 1999. That was probably the apex of the frenzy. I sat through numerous presentations by would-be entrepreneurs talking about some of the most insane ideas I'd ever heard. Not insane as in "wow, that's really a paradigm shifting break-through" - insane as in "there's no way this will ever generate a nickel of income much less profit."

In every market, there are people who push the envelope and help push us forward. But those were the minority during that time. The majority really were those who were playing in the realms of the imaginary. There was no intrinsic value being added in most of these bubbly ideas, which is part of why the bubble burst. Still, out of that time, we got a lot of new technology and a lot of innovative new uses for the Internet - so it wasn't all smoke and mirrors. But the businesses that added no real value and were all about moving money from the VC wallets to the entrepreneur's wallets - those all crashed and burned.

Fast forward to the real estate bubble of the past few years. What was happening? Look at television back then to see the surge in shows related to "flipping" real estate. People buying a house, putting a bit of cosmetics on it and re-selling it far above its value. Once again, not adding real value but looking to move money from buyers wallets to "flippers" wallets - many of whom crashed and burned when the market went south.

The third and final example for today, the sub-prime mess. So here we had a bunch of mortgage brokers getting squeezed out of the conventional lending market by the unmanaged growth of Freddie Mac and Fannie Mae, so they get creative. Hey, that was all legal in the wildly deregulated environment that had been created for them to play in. So they came up with all kinds of crazy financial vehicles - for home borrowers and for financial institutions. The problem? If you've been paying attention, you'll know the answer once again is that there was no intrinsic value in this mix and that it was all imaginary money once again moving from one wallet to another. While some call it a 'market correction', it's almost like a 'value correction' in that we need to look at where real value lies and what builds lasting value rather than effervescent bubbles.

The shake out always hurts - like the con man on the subway with the shell game - you walk away without that $5 bill you placed as your bet, shaking your head because you KNEW in advance you were being conned and yet you just couldn't resist. The economic shake out from this shell game will take time to unravel and to right itself.

What's the lesson for an entrepreneur? We can become so enamored of the potential payoff that we lose sight of building real, lasting value along the way. If it sounds too good to be true, it probably is. If it feels like a con, it probably is. If you can't point to the value proposition, step back and rethink it.

Work to create real value and to create a real exchange in order to build a lasting business. Anything else will be just a bubble that will invitably burst.