Micro-Bubbles Are Constantly Building and Bursting

David Sacks: In between these once-a-decade macro-shocks, there are mini-shocks that affect certain kinds of companies or certain stages, where investors reevaluate their fundraising criteria. 

We had the SoftBank shock, which was a mini-shock in late-stage rounds, where all of a sudden people started re-examining late-stage valuations for certain kinds of companies.

When a space gets hot, the normal rules of investing go out the window

One of my biggest learnings since I’ve become a full-time investor is that micro-bubbles constantly develop as spaces fall in or out of favor with VCs. When a space is hot and in favor with VCs, all the normal rules of investing get thrown out the window.

For example, we had a crypto bubble over the past two years. Crypto companies with no revenue and no customers—and even some with no product—were able to raise at stratospheric valuations. Some tokens raised pre-launch in the billions of dollars. If any of the normal rules of investing would’ve applied, the valuations would have been a lot lower.

When a space gets really hot, people buy into the narrative, valuations go way up and companies are able to raise a lot of money. But once the bubble pops, all of a sudden the normal rules of investing do apply and valuations plummet to a level that’s implied by the fundamentals, things like customers, product and revenue.

The companies and the founders who aren’t prepared for that get swept away. If they’re not willing to reduce their burn to a level that’s implied by the new rules; if they’re too anchored on the past and not adaptable enough—they will be swept away.