Why the Bubble Question Doesn't Matter

“Is there a bubble?” is a question that seems to be asked every day. But it’s the wrong question - in fact, it’s an unimportant question. Maybe there is a bubble. Maybe there isn’t. Instead of asking the question, let’s just presume we are in a bubble.

Then, the far more important debate surfaces: given the bubble, how should a team manage a startup differently? If I were to survey entrepreneurs and board members, I presume I would hear something like this list:

First, a startup must think long term. No matter the uncertainties and the fluctuations of the market, the business must survive. To survive, a startup must build a differentiated product that customers want to use and buy. The company must offer the best product in the market.

Second, the company must manage its cash effectively. The business must achieve profitable unit economics; only invest substantial dollars in marketing efforts with positive return on investment; curtail unnecessary expenses; collect cash from customers religiously; maintain an upside and a downside plan that ensures the business enough cash to survive in the downside case.

Third, the startup should only hire the right people, and grow the team when justified by the needs of the business and the incremental revenue possibilities.

Fourth, the startup must mitigate churn. Companies ought to build the best customer success organizations, structure pricing plans properly, plan the right product roadmap, cultivate a diversified customer base, and ensure customers achieve positive return on their investment.

Fifth, the founders must raise capital opportunistically to amass a war-chest large enough to achieve their vision; and position the business so that it can always be in a good position to raise capital or cut costs to achieve profitability quickly, should the need arise. This means running an efficient go-to-market organization.

In all likelihood, there are other ideas that would surface from such a conversation. But reading through the list you’ll notice, panic isn’t among the ideas. In fact, there’s nothing crazy at all in this list. All of these activities are things great startups do anyway, in any environment: think long term, manage cash well, build the best product, hire the right team and provide customers value.

No one knows if there’s a bubble or if/when our presumed bubble will pop. The best we can do is build startups using sound principles and disciplined decision-making, with the aim of building sustainable, defensible businesses. Whether or not we’re in a bubble shouldn’t change those core tenets. So if we’re abiding by those principles, the question of are we in a bubble doesn’t really matter.

Published 2015-04-21 in Management 


Tomasz Tunguz is partner at Redpoint. I write daily, data-driven blog posts about key questions facing startups. I co-authored the book, Winning with Data. Join more than 20,000 others receiving these blog posts by email.


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