Financial Bubbles Blow
I've lived through two and we're all in the middle of a third.
My first website was promising and, in hindsight, if I hadn’t sold it I’d be an extraordinarily wealthy person today. However, at the time I had a mortgage, baby, wife, student loans, and was tucked away in St. Paul, Minnesota, where venture funding for the new idea of an internet company was pretty much unheard of.
The day I arrived for a job interview with a genuine Silicon Valley startup was with a small company that aimed to create an FAQ website. When I arrived, the San Jose Mercury News had a story about my website featuring a photo of my son sitting on my shoulders. I saw it on a newsstand walking into my interview and was offered a job on the spot. I didn’t realize, at the time, that was probably a ticket to pretty much a job at any business in the valley in 1997, especially combined with my self-created degree in “Communicative Information Systems,” a guess that computers and communications would soon fuse.
Today, businesses in San Francisco or even Oakland are described as Silicon Valley but, back then, being in the valley meant it literally. For those who’ve never been there, Silicon Valley is an actual valley that stopped well south of San Francisco. Outside the valley was rural farmland: it was inadvisable to drive up into the hills without a four-wheel drive.
The Valley has always gone through boom and busts and, at the time, was coming out of a bust. There were plenty of houses to rent or buy and not much in the way of traffic. You could walk in the middle of most streets. We opted to rent a three-bedroom house in Milpitas that cost something like $1,000 a month. Buying houses in the nicer parts of the valley cost, on average, $100K per bedroom. Two-bedrooms cost about $200,000, a three-bedroom about $300,000, etc… Houses cost more in places like Palo Alto and Mountain View but there were plenty to rent or buy.
The founder of the company I originally came took the name faqs.com but dropped it, telling me she realized the name “sounded like something else.” I nodded, having no idea what she was talking about. It wasn’t until I’d been hired and listened to a never-ending barrage of homophobia that I realized what she meant.
That company, in classic Silicon Valley style, was clueless. The world was still on Java v 1.0 but the VP of technology, an ego-maniac in a three-person company, insisted we build the site with both client and server-side Java. He’d never actually built a website before but had sold a CD-ROM-based consumer software business. I didn’t know it at the time but charlatans with CD-based software businesses would be the bane of my existence for years to come. The next hire after me was an H1B Java “expert” who didn’t know what a CLASSPATH was or why it mattered.
I didn’t last long and neither did the company which is a shame: an early FAQ site, with that URL, would’ve likely done really well.
I bounced around doing some consulting work and we quickly tired of the Valley, moving North first to Sausalito then settling into Mill Valley. I took a job at a local consulting company for a while but, for the most part, found plenty of interesting work with the countless startups that popped up. We bought a hot tub and I’d enjoy talking to clients while sitting in it; the clients thought that was funny. I’d offer to drive down to the Valley but a surprising number of people thought it’d be more fun to drive over the Golden Gate Bridge to spend the day with me in my Mill Valley bungalow. More than a few top-tier VCs spent time with senior management in my living room.
Over time, the Valley exploded with businesses and people. There were countless internet “experts” who no experience whatsoever. I’m not sure I’d ever met an MBA before then but suddenly they were everywhere claiming to know more than people who’d been doing this forever.
Consulting projects became increasingly weird. One business wanted to hire me either as a consultant or an employee. They’d been stumped on how to build and display a pricing grid, doing one query for every cell. I sat down and quickly rewrote it so one query returned the results to populate their grid, increasing by the speed by almost two orders of magnitude. Then politely turned down their job offer but accepted a free lunch.
My now ex-wife had a job at a company with stock options. She exercised them when the company she worked for, eToys, went public but couldn’t sell due to lockouts when the dot-com bust started. eToys was especially hurt when they failed to deliver the toys on time for Christmas. We were visiting my parents for the holidays and, one day, the value of her options lost $85,000. The founder of eToys, Toby Lenk, went from billionaire to bust. As if that weren’t enough, we eventually had to pay tax on that and a lot of other losses. Good thing for the consulting work.
Things became dire. A friend who worked at a popular pregnancy and parenting website lost her job. They sent a courier with severance paperwork while she was in the hospital with a newborn; her health insurance was cut off immediately. Another friend had a 1000000:1 reverse stock split; every million shares he owned were converted to one in a new business. Traffic was vastly reduced when Porcshe’s were repossessed by disguised tow trucks. You could drive around and headlights would shine through empty floors of shiny new office buildings.
I sold one of my projects, print from the web technology, to a Fortune 500 who gave me a job. I didn’t get very much for it because a charlatan with a CD-ROM-based business sold them similar technology for far more money pawning off their single-threaded Windows 95 program that illegally used Adobe’s Acrobat on a server as web-ready. They quietly swapped in my tech when the thing had to go into production. My contract included the ability to telecommute, a far less common perk back then, but by then the whole Bay area was so depressing we moved to Southern California.
Fast forward … eventually, an even bigger company cross-licensed some tech I’d developed and I joined them moving to Boca Raton, Florida, about 2005. My mom found us a nice house we bought sight unseen because housing was red hot. I remember our mortgage broker telling us we didn’t need to put down any money at all but I think we brought 20 percent to the table with the idea that sounded like something you should do when buying a house.
Prices went up and up and up until they went down and down and down. Soon, countless houses had foreclosure signs on them. Without exception, everybody who wasn’t in foreclosure knew somebody who was.
Two bubbles. Two messes. It’d be impossible to exaggerate the financial and emotional carnage of that time. I became well-known, by accident, thanks to another startup I built focused on housing data that I started just before the crash.
The foreclosures were only the symptom: the core cause was reckless financial bubbles. At least with the dot-com bubble, the burnt investors voluntarily traded in dot-com stocks. In the housing bubble, people either purchased a house or overpriced condo or rented thinking they’d be “priced out” and never able to afford their own place.
Today, there is a stock market and housing bubble, the former purposefully inflated by the Federal Reserve as COVID relief and the latter inadvertently created with low-interest rates and foreclosure moratoria. Neither bubble is sustainable; both are likely to cause widespread misery when they pop. People are already sensing that they may be paying too much for houses (yup) and no matter how much I want a Tesla the company is not worth a multiple of the aggregate value of VW, Toyota, and GM.
Bubbles give the illusion of prosperity in the short-term promise of pain over the long run. They’re built on a laissez-faire attitude that’s more akin to enabling fraud than fostering a free market. Nobody honestly believes these valuations while, at the same time, countless experts pump up a buying frenzy not all that different than the promoter of a boiler room pump-and-dump scheme.
Blue ocean strategy is about building genuinely sustainable businesses. Granted, some businesses have a naturally longer lifespan than others. For example, the Nintendo Wii was a category killer for eternity in videogame console years but just a few years in people years. Still, blue ocean businesses are built to last, cribbing the name of another popular book. Bubbles, on the other hand, are built to pop and these recent ones are long overdue for a painful correction.
When the inevitable happens, the experts will say nobody could’ve known. That’s what they always say as they line up for bailouts while defending their participation in Wall Street when it functions more like a casino than a rational market. They’ll say Wall Street is supposed to be a long-term investment in index funds (yes) while ignoring that they’re active traders and prognosticators. They’ll claim Wall Street isn’t a casino and people shouldn’t actively trade while simultaneously doing exactly that for a living. They’ll publish articles about how to trade, knowledge not needed when putting money in long-term index funds.
Please subscribe to this newsletter:
If you share this post, please share it: