It’s not a bubble, it’s a balloon.

Note: I work for Equidate, a platform for late-stage startup investments. These are my ramblings, and do not represent the company. Those who know me know that I have no shortage of my own opinions. All information cited here is from public sources.

Everyone loves a good analogy. Language is a colorful device and the human mind an eager participant. Silicon Valley is no exception (Unicorn, Hockey-stick, Runway, Bubble). And that’s why — not to dumb it down, but to bring concepts to life — this is an article of analogies.

Why is this different from the dot-com bubble? A lot of people smarter than me have opined on this; this presentation from Andreessen Horowitz is particularly illuminating. A few of the better reasons (in my opinion) from there and elsewhere:

• Today’s tech startups have real business models, generating tens or hundreds of millions of dollars in revenue, trending towards profitability.
• This is because of, and compounded by, the massive number of people who are now online, driven by diminishing hardware costs and proliferation of internet-connected mobile devices.
• Startups are now staying private for 8–12 years (or more), which shifts value creation to the pre-IPO rather than post-IPO phase. This phenomenon organically leads valuations higher in absolute dollars; but IRRs (which are annualized figures) often remain reasonable.
• The 2000–01 bust is fresh in the minds of plenty of venture capitalists, and the headlines every other day that there’s a bubble in Silicon Valley make sure they never forget.

But these opinions have not been fully heeded. I think there are two reasons. First, there are certainly reasons for pause and introspection for the startup community: a need for better unit economics, burn rates, and an obsession with the unicorn club. The second (less substantive) reason is that with any argument, it’s difficult to convince a reader or listener of a negative fact, without replacing it with something else.

So, let’s replace it. If it’s not a bubble, what is it?

I believe it’s a balloon.

Bubble companies have users. Balloon companies have customers.

When Webvan went under in 2001, consumers woke up the next day and just drove over to the nearest grocery store… just like they had for decades.

Today, Uber has created a network that is rapidly resembling a fundamental utility more than a fringe service for millennials. Airbnb saves hundreds of millions of dollars every year for millions of users. Palantir returns value to its customers that is dozens — or hundreds — of times the cost of its projects. Dropbox and Slack are used by thousands of companies every day. In aggregate, tens of millions of people use these services; their disappearance will cause serious pain and maybe utter chaos.

To intentionally misquote Greenspan’s famous turn of phrase, this makes the current exuberance much more rational.

A bubble is delicate, held together by nothing more than surface tension, and cannot withstand external shocks; a puff of air can destroy it, leaving no trace. A balloon is more resilient, since its held together by the sheath of market demand; even if pricked by a pin, it doesn’t always pop.

A bubble can’t be messed with, because any attempts to let the air out will ruin the fine balance; we saw this once the first wave of selling began in 2000. A balloon can be deflated if needed; we’ve already seen this over the last few months (Q3-Q4 2015).

A bubble, left to its own devices, moves laterally. A balloon, when buffeted by winds, may bob up and down, but its natural trajectory points upward.

There are certain to be some companies in the current crop of unicorns and near unicorns that fail. It’s obvious that there are some over-valued companies, relying only on the greater fool. But that is true of every asset class.

And even if every company is perfectly valued, markets are dynamic and every company cannot succeed. Occasional stumbles and failures will happen, there will certainly be more down rounds and liquidation events in the months to come. Such re-calibration is actually healthy for the ecosystem. These instances will unfortunately cause isolated pain to those investors and shareholders, but they are unlikely to destabilize or destroy the ecosystem.

Regardless of whether the balloon stabilizes, continues slightly deflating or starts inflating again, rank-and-file employees should strive to stay rational and well-informed of the full range of possibilities for their companies. In the meantime, there are still a lot of fairly-valued or under-valued companies. There is plenty of room for a smart, sophisticated investor to sleuth out opportunities with an appropriate margin of safety.