Is There a Startup Bubble?

Angel, venture capital, and private equity funding have recently produced more startups and early stage companies than ever before. Which has led to a debate about whether we’re in a “startup bubble” that is likely to create havoc when it bursts.

We asked our partners with experience in both startups and venture capital/private equity funding for their thoughts.

Keith Boudreau

Keith is a Newport partner in New England who has been president of operating divisions in four different Fortune 500 companies, in sales/marketing roles as well as other strategic leadership responsibilities.

I'd argue that the economy has virtually unlimited capacity to support good ideas and effective business models to execute them. Some ventures will always deserve to fail, but that isn't due to any capacity constraints in the larger economy. As an example, a hot investment area recently has been financial technology. Some of the ideas and business models in this market have merit; others are clearly built on little more than hype and will eventually descend from their lofty valuations. The FinTech startup market right now fits the hallmark of a bubble: investors abandon sound due diligence practices and over-invest in areas they don't truly understand.

Helen Bulwik

Helen’s career has focused on developing and executing strategies for business development and growth for leading retail and consumer companies. She has worked with private equity for more than 25 years-- as CEO of seven PE-owned consumer and retail companies and as an operating partner to eight PE firms.

Every VC and PE group knows that their capital backing of early stage companies is high risk. For every 10 companies they invest in 7 will fail. This is just standard practice. Therefore, we will continue to see more and more new companies with more and more failures. That is not a sign of a bubble, that is innovation and risk capital at work. Viva La Risk!!

Kim Denney

Kim Denney is an experienced Houston area leader with a record of solving top-level problems as an executive with broad responsibilities in the Chemical, Petrochemical, Energy, and Manufacturing industries.

I think we are seeing a lot of capital seeking opportunities for a return on investment, since the public markets have been so flat recently. That may mean a "bubble" but that will provide an opportunity for great businesses and terrific ideas to prove their business value. I'm a bit more worried about inexperienced investors funding poor business ideas than I am about a market shake out. For the entrepreneur with a great business plan, solid advisors, and market opportunities this can be a terrific time to launch. It's not a question of the economy digesting too many new businesses; it's a matter of allowing those businesses with real potential and differentiated products, services, or approaches to find the capital and the market space to establish themselves. Finding the right advisors and investors for your business becomes that much more important in a market like this.

Ferey Faridian

Ferey is a senior strategic investment professional with 25 years of experience spanning management consulting in 12 countries, investment banking and principal investing, as well as serving as CEO/President of high-technology ventures.

I can see there is a larger number of angels and VCs with smaller funds. Inevitably they will support a larger pool of entrepreneurs. This will create more employment and give a larger number of teams a temporary seat at the table. Most of them will fizzle out as funds dry up unless they get traction. There is a great amount of dry powder, available capital, out there yet to be tagged to opportunities. So I see more of a scaling than a bubble. Of course, with a larger scale, the number of failures will also scale, but I am not sure if the percentage of failures should change unless the overall capacity of demand in the market is saturated, which depends on the nature of the ventures. I do see a bubble in the valuation of some types of ventures, as they do not tally with fundamentals of performance.

Fred Fink

Fred has been successful both as an executive and an entrepreneur. Much of his career has been spent in different sectors of the healthcare industry.

The increase in entrepreneurial activity is driven more by the decrease in corporate executive jobs and the choice of many executives to become an entrepreneur by default. What we're experiencing is a fundamental shift in corporate America away from an interest in "climbing the corporate ladder" to implementing your own ideas. The ability of information and technology to disrupt industries - all industries - has never been greater and can be expected to continue for the foreseeable future.

Bill Heermann

Bill has deep expertise in building and running industrial manufacturing and construction companies.

The market is always adjusting and rebalancing. Overpriced / underpriced items reposition themselves in the market, adjusting their price and volume in response to the interests and needs of buyers and sellers. So as to the question of a bubble -- I don’t see a cliff, but the size of the undulations will vary in direct response to the market.

Billie Otto

Billie is a Newport partner in the Pacific Northwest who has been Executive VP and CIO of TrueBlue Inc. (NYSE: TBI) the largest industrial staffing firm in the U.S.

The signs I see are similar to other patterns in economic cycles. I'm seeing some consolidation in service providers and funders to pure tech startups. However, I'm seeing an expansion in other areas that are tied to more macro cycles (healthcare tech/innovation).

Mark Rosenman

Mark is a co-founder of Newport Board Group and its Chief Knowledge Officer.

I see some signs of a bubble. There is a lot of "me too" investing going on that doesn’t seem to involve real innovation. I see a lot of piling into new models such as outsourcing HR. The fact is that technology has lowered barriers to entry. Everyone who creates or invests in a startup should ask themselves: if we do start to get traction, how long would it take a well-funded competitor to reverse engineer our innovation?

Peter Rugg

Peter has extensive experience as a senior executive and advisor, responsible for issues like corporate restructuring, debt management, cost management and all forms of public and private debt and equity securities and fund raising.

Venture funds have gotten too big and gone downstream to later stage. Angels are filling the gap.

John Sullivan

John has delivered top- and bottom-line results running a wide range of companies and dealing with challenges like acquisitions, lean manufacturing, supply chain optimization/low cost sourcing, new product development and brand and channel management.

I think the "Internet of Things" Phase One was a bit of a bubble but I believe Phase Two will realize significant success. Nevertheless, constant vigilance is required as bubbles tend to grow out of popular products and technologies. Real estate values in some cities could be viewed as potential bubbles.

Eran Tagor

Eran has diverse experience in executive management, venture capital, private equity and M&A, including turnaround, restructuring and special situation transactions.

In Silicon Valley I do see many signs of a bubble. There has been a shift in the definition of seed money (sometimes up to $8 million). VCs are investing much larger amounts in A rounds. In recent months this has scaled back: It has become much harder to raise money. The barriers for an entrepreneur to raise money have grown.

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