On March 26, I accepted Sam Altman’s startup bubble bet. The bet is about the future value of three portfolios composed entirely of non-public companies.
Mr. Altman’s bet was an attempt to move the conversation about a startup bubble in a more productive direction. In Mr. Altman’s original post, he wrote that, “I understand that it’s fun to do and easy press…The gleeful anticipation of a correction by investors and pundits is not helping the world get better in any meaningful way.” I found Mr. Altman’s post admirable because there is a sense in which it hurts him: The more time his competitors spend on startup porn, the greater his competitive advantage. Since correcting the thinking of ululating pundits is unlikely to be immediately profitable for him, I view his post as being motivated by care, concern, and altruism.
One of the most life-giving characteristics of the startup community is that the best people share their thoughts openly and, by doing so, they increase everyone’s abilities. Outside of a few narrow academic disciplines, I am not aware of any other community in which the most successful people share their best thoughts so quickly and freely. This openness contributes to the increasing ability of startups to incinerate the status quo. (This is what should concern old school Fortune 500 corporations the most. It’s not that software is eating the world, it’s that the startup community values openness and transparency and, hence, it is learning how to build better companies, products, and services at a much faster rate than the Fortune 500 community.)
I view the Altman/de la Maza bet as a stepping stone to radically improving our collective understanding of how and why startup valuations change and, hence, how startups benefit the world. For many securities, there is a well-developed theory and practice of valuation that rests on multiple Nobel Prize winning discoveries and on the daily work of tens of thousands of Wall Street professionals. The Altman/de la Maza bet provides a concentrated way to explore startup valuations.
What work might the bet drive over the next five years? As a former hedge fund manager, I fondly remember how Bloomberg grew. It started off as news and data. Then it added simple analytics. Then it added advanced, real-time analytics. Then it became a trading platform.
That’s one possible future for work on startup valuation. We could start by tracking the valuation of the three portfolios that make up the bet on a daily basis. It’s then natural to track baskets of arbitrary startups. This would require both startups and investors to be more open about valuations. Once historical valuation data is available, it will help to prove or disprove theories about startup valuation. I am particularly interested in learning how to invest in a lollapalooza, power law world instead of the normally distributed world assumed by most finance theories. Once the data and the analytics are available, a two-way trading platform is an obvious next step.
Contributing to the development of the financial market around startups would be a great boon for startups, entrepreneurs, and investors. Today, fund raising and investing is, despite significant advances, still a largely ad hoc, bespoke process. This is insanely costly and inefficient for all involved. It harms startups, sometimes gravely, and it dissuades investors. Compare the startup entrepreneur who has to walk dozens of investors through his startup before getting an investment with the CEO of a public company who can discover a clearing price in a fraction of a second. In fact, this is one of the few remaining structural advantages that public companies have over startups. Because startups are great, we should work hard to make starting and running startups as easy as possible.
Graphing the value of the three portfolios daily seems trivial. But, to the best of my knowledge, no startup portfolio is publicly tracked on a daily basis. This is inconsistent with the startup community’s values of openness and transparency. I hope that the Altman/de la Maza bet will spur someone to fill this lacuna.
