Venture Capitalism And The Minsky Moment

I wanted to rant a bit about the crazy investments and valuations of apps that provide a value, but not a monetary return and what I think is going on within the venture capital space. Venture capitalism always goes through periods of conservative and high lending, the latter which we are now seeing. Apps that have no plan to make money or really can’t make money without pushing away large amounts of their userbase are getting million dollar seed rounds. To make it worse, ridiculous valuations for apps that have already been launched are only helping to fuel this frenzy. Apps like snapchat which have little to no plans for revenue are being valued at 15-30 BILLION dollars based solely on the amount of users. Snapchat specifically like those before it are going to IPO and people are going to gobble up a company that has little place to evolve.Yes they provide value to the consumer, but venture capitalists are business people and they are making the same mistakes that lead to the dot com bubble and sequential burst.

In the 90s venture capitalist firms famously threw money at almost every idea that would come into their offices that was based around a website. Famous billion dollar IPOs just like today fueled the ongoing surge of capital money, until everyone realized one thing. THE WEBSITES WERENT MAKING ANY MONEY, in fact they were burning it at extraordinary rates. The companies they funded would go out and buy $400 office chairs for all of their employees, rent prime retail space and burn through the capital without actually delivering a good or usable product. That was if the product they claimed they wanted to create even had the possibility of being profitable. In a matter of a year, venture capitalist companies saw internet stock prices plunge, multitudes of internet companies go out of business and eventually shut their wallets to any new prospective companies, but like a cycle, they eventually become okay with spending the money again and suddenly they will start lending, until it goes out of control and bursts again.

I think we are at the point now, right before the burst of these crazy app valuations. There are a few different factors such as a tighter control on company burn rates and usually a smaller group of developers working on the products, but still the foundation they are built upon is cracked. Smaller burn rates and less employees only lengthens the inevitable, but it will come. Just like before people will realize that these companies with a single app, making little to no money have no future growth and they will divest. It could happen in 6 months or in 4 years, Im not sure , but it is going to happen and then just like before venture capitalists will close their wallets once again and move on to the next thing.

There was a famous economist named Hyman Minsky who had a proposed idea called the Minsky moment which related to risk practices mostly with banks and how they cycled over time. The idea was that banks would feel more and more comfortable with lending to bad and extremely risky borrowers until the market itself made the correction and the people would default. People called this the Minsky moment and many believed that 2008 was the culmination of one. Minsky said that these things happened in cycles so although after Minsky moment, lending turn almost completely conservative, over time it is human nature to become more comfortable and take on more risk. These things would happen over and over again in cycles.

I believe what we are seeing right now in the venture capitalist industry is that we are at the near end of a Minksy cycle, getting closer to another Minsky moment when something has to give. In my opinion the investors are going to realize that they are being peddled shit by applications doing IPOs for ridiculous amounts of money and are going to stop buying into them or divesting from them directly. Because this is the only way for the Venture capitalists to actually make money, by selling their shares off to other prospective buyers, the lending will begin to slowly cease. We might not see a burst like the dot com bubble, but there will definitely be a change of attitude in the minds of the venture capitalists. It will inevitably happen again with some other projects in the future, but for now I would personally stay far away from the app industry on the stock market.

-Calaber24p