The Startup Bubble — Is this the spark that could ignite the next recession?

Julien Meyer
Sep 6, 2018 · 4 min read

I don’t have the patience or the talent to properly write an expose on the topic I’m going to discuss in this post.

The Startup Bubble.

It’s coming.

In fact the bubble has already been leaking…

I’ve been talking about this for the last year on my podcast Startup Financial News. (www.sfnshow.com)

It’s not incredibly difficult to see.

If you understand basic financial analysis, market metrics and startups you can piece it together pretty simply. Checkout the graph below to become familiar with what a bubble looks like visually.

via Forbes — We are currently (at the writing of this piece) in the “Delusion” phase for startups. Valuations are ridiculous and unexplainable and we are in total public mania with regards to interest in startups.

In this piece we’re going to look at how this startup bubble is going to burst and why it is so scary. (In fact at this very moment I am suffering from insomnia and shivering with cold sweats)

Here’s how it’s going to happen:

  1. Startups and entrepreneurship become cool / pop culture. (Happened — by the way this is the media attention phase of the graph above)
  2. Gold rush, everyone wants to get a piece of the pie. (Happened)
  3. Faketrepreneurs, Wanttrepreneurs and Inexperienced money comes into the space. (Happened)
  4. Financial engineering and overall hype leads to the creation of Unicorn companies. (Happened circa 2013 when the term was coined)
  5. Unicorn’s built mostly on hot air and hype need to IPO or get acquired. (Happened)
  6. Innovation decreases yet money continues to flow freely. (Happened…seriously what’s innovative about a company like Blue Apron…they put food into boxes for crying out loud yet are valued like a startup).
  7. Unicorn’s lose significant value. (Already happening) — Snap Inc. and Blue Apron were two poster child SV Unicorn companies that IPO’d. Both companies stocks have TANKED since their IPO and what this means is that investors including the VC’s and PE firms involved have lost tremendous value in their portfolio. Considering how crucial the unicorn play is to modern day VC’s, expect this to have more of an impact than they are letting on.
  8. With this decline in VC’s portfolios they are going to have to save their other big unicorn plays. (Already happening) — Think about what happened with SoundCloud. A firm that should have failed along was bailed out in the eleventh hour by firms who were too invested to see it die. These are your “Too Big Too Fail” type startups that are perceived as the future Unicorn’s and require bailouts from the VC’s.
  9. The bailouts get costly. VC firms have to raise massive new rounds just to support these bailouts. They fly under the radar by showing on paper performance and claiming they’re still investing in early stage startups but are not. (Happening 2016 — present)
  10. Small to medium size startups who got so used to the crutch of constantly raising massive amounts of investment money and never having to perform financially are screwed when the money shuts off. (Happening 2017-present) These leads to your first round of layoffs.
  11. The firms in the point above have to shut down as the investor money dries up. They were not innovative, scalable or profitable in the first place, simply a mirage of the gold rush. (Happening currently).
  12. Modern workforce finds themselves without jobs as they are being taken over by AI, computers and robots and also unprepared as they really didn’t have to perform at the highest of levels at a firm who was not at all concerned with actually turning a profit since they relied on virtually unlimited access to VC funds and bailouts.
  13. The lack of jobs leads to increased competitions for those that are available. The tertiary, service type firms that will emerge such as the new investment banks, consulting firms, law firms, advertising firms will require a disproportionate amount of work from employees who are no longer in a job which they got incredibly comfortable in.
  14. With the labor market drying up and the millenial workforce struggling with the above…disposable income shrinks, spending comes to a halt, and the majority of this part of the modern workforce has spent their money on experiences rather than assets.
  15. Moving back in with older parents, lack of income, inability to find a job and dwindling savings coupled with the fact that no income opportunities are present leads to unrest and social unrest and overall anger.
  16. The startup bubble may not be big enough to create an economic recession in it of itself…but it sure could be the spark that kicks one off.

History repeats itself folks. The above is nothing more than basic observations of financial and current events and cross referencing them with historical market data and metrics.

Tulip mania, 1980’s junk bonds, the Dot-com bubble and the housing market can all be outlined almost identically as in the framework above.

It may sound crazy and impossible now…

But isn’t that what we said in 2006 when a small group of traders on Wall Street predicted the inevitable about the sub-prime mortgage crisis?

For the first time in this modern economy I can honestly say that I am scared.

Julien L. Meyer, MBA

MGI Capital

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