Jim Moore’s blog: Innovation, Strategy, Public Policy

The fact is, despite all the nonsense we heard
during the Bubble about the “new economy,” there was a
core of truth. You need
that to get a really big bubble: you need to have something
solid at the center, so that even smart people are sucked in.
(Isaac Newton and Jonathan Swift both lost money
in the South Sea Bubble of 1720.)

Now the pendulum has swung the other way. Now anything that
became fashionable during the Bubble is ipso facto unfashionable.
But that’s a mistake– an even bigger mistake than believing
what everyone was saying in 1999. Over the long term,
what the Bubble got right will be more important than what
it got wrong.

1. Retail VC

After the excesses of the Bubble, it’s now
considered dubious to take companies public before they have earnings.
But there is nothing intrinsically wrong with
that idea. Taking a company public at an early stage is simply
retail VC: instead of going to venture capital firms for the last round of
funding, you go to the public markets.

By the end of the Bubble, companies going public with no
earnings were being derided as “concept stocks,” as if it
were inherently stupid to invest in them.
But investing in concepts isn’t stupid; it’s what VCs do,
and the best of them are far from stupid.

The stock of a company that doesn’t yet have earnings is
worth something.
It may take a while for the market to learn
how to value such companies, just as it had to learn to
value common stocks in the early 20th century. But markets
are good at solving that kind of problem. I wouldn’t be
surprised if the market ultimately did a better
job than VCs do now.

Going public early will not be the right plan
for every company.
And it can of course be
disruptive– by distracting the management, or by making the early
employees suddenly rich. But just as the market will learn
how to value startups, startups will learn how to minimize
the damage of going public.

2. The Internet

The Internet genuinely is a big deal. That was one reason
even smart people were fooled by the Bubble. Obviously
it was going to have a huge effect. Enough of an effect to
triple the value of Nasdaq companies in two years? No, as it
turned out. But it was hard to say for certain at the time. [1]

The same thing happened during the Mississippi and South Sea Bubbles.
What drove them was the invention of organized public finance
(the South Sea Company, despite its name, was really a competitor
of the Bank of England). And that did turn out to be
a big deal, in the long run.

Recognizing an important trend turns out to be easier than
figuring out how to profit from it. The mistake
investors always seem to make is to take the trend too literally.
Since the Internet was the big new thing, investors supposed
that the more Internettish the company, the better. Hence
such parodies as Pets.Com.

In fact most of the money to be made from big trends is made
indirectly. It was not the railroads themselves that
made the most money during the railroad boom, but the companies
on either side, like Carnegie’s steelworks, which made the rails,
and Standard Oil, which used railroads to get oil to the East Coast,
where it could be shipped to Europe.