Bubbles And Golden Ages… Continued

The following post is an adaptation from the original one I posted on this topic in May of 2011.

I once watched an interview where Fred Wilson offhandedly noted reading a book which transformed the way he looked at markets and the web in general.  I instantly went to Amazon and ordered it and spent the next week reading it front to back.  Whew… it changed my life as well.  I up and quit my job the next month.  Thanks Fred.

Not a day goes by in 2015 we don’t hear the word bubble in some capacity or another. We are on pace for one of the biggest years in Venture Capital deployment since the dot com bubble of 2000. Massive private funding rounds in excess of $1 billion (Uber, et al) coupled with the sickening obsession of Unicorns have created a market with flu like symptoms. Although I cannot predict the future I tend to agree with others who publicly state it feels like we are in for a correction here very soon. If you are a founder of an early stage company, it would do justice to understand the cycle we are in, where exactly we are in it, and what you should do in your specific situation.

Technological Revolutions and Financial Capital by Carlota Perez is one of the greatest overviews of the incredible economic phenomenon known as the bubble.   What we are currently going though – recessions and expansions, bubbles and bursts, highs and lows, whatever you want to call them – they are inevitable.  In fact, the history of the entire world economy is one big cycle which repeats itself over a period of about 60 years.  I cannot do this entire book justice, just take my word for it, go buy it and read it yourself.  You will publicly thank me later just as I just thanked Fred now.  But I will introduce the general phases a new technology (paradigm) encounters so the “layman” technologist, marketer, social media guru or business person can start to see a clearer economic picture.

I hope I am not being too being blunt, but without grasping this concept you are swimming with your cap over your eyes.  You need to understand what is actually going on in this crazy economic world we live in.

Irruption

As a new technology is developed and deployed into our society, it will enter a cycle of adoption.  Interestingly, Perez notes new technologies are created during the maturity phase of the last great technology expansion.  So although we are starting with the irruption phase, let us take for granted the specific technology has already been created and diffused through very early adopter communities.  During the irruption phase, we see a slowing or declining of the old industries and an early adoption of a new technology.  Carlota notes:

The very intense activity of the new paradigm carriers contrast more and more with the decline of the old industries.  A techno-economic split takes place from then on, threatening the survival of the obsolete and creating conditions that will force modernization.

Old print media anyone?  Taxing industry vs Uber and other on-demand ride services? This irruption phase is started with a big bang (invention and initial diffusion) and will propagate within a small community of early adopters.  Note the image above, depicting very low diffusion, even to a point the general masses dismissing the technology altogether.  Amazingly it is contained within this tight group of people and industries for some period of time.  That is until a tipping point is hit. Today, most people who have taken an Uber or Lyft ride – if given a choice – will only take uber from here on out.

Frenzy

Frenzy is a period of massive growth for a new technology.  It is a time of new market creation as well as for rejuvenating old industries.  Once a critical mass of consumers have been hit, the diffusion of the paradigm takes center stage.  Individualism rules the land, as does speculation, wealth creation and ultimately resulting in over-investment flooding the market.   

Frenzy is the later phase of the installation period.  It is a time of new millionaires at one end and growing exclusion at the other, as in the 1880’s to 1890’s, the 1920’s and the 1990’s.   In this phase, financial capital takes over; its immediate interests overule the operation of the whole system.

Notice the part about the growing polarization between the rich and the poor.  Sound familiar? Capital investments soar during this time, creating a false sense of wealth creation.  This craze attracts more and more individuals wanting to get a piece of the action; so late frenzy is financial bubble time.

Turning point

At some point, the bubble has to burst.   Things that go up must come back down.  Interestingly, the turning point is neither an event or a phase, rather it is a process of contextual change. 

The turning point has to do with the balance between individual and social interests within capitalism.  It is the swing of the pendulum from the extreme individualism of Frenzy to giving greater attention to collective well being, usually through the regulatory intervention of the state and the active participation of other forms of civil society.

The turning point is a space for social rethinking and reconsidering.  It is, in fact, the time when the mode of growth that will shape the next few decades is defined.  I would argue we have been in this phase for a while, maybe starting 5-8 years ago After picking up the pieces of the crash of the early 2000’s we are now starting to see realignment in almost every industry known to man.  Name an industry that is not currently being touched by the internet and mobile?  Exactly.



Synergy

This is a time for production.  Since the foundations and infrastructures were laid out during the previous phases, conditions are there for dynamic expansion and economies of scale.   The diffusion of the new paradigm now reaches far and wide, is accepted as standard, and now governs supreme.  It is a time for promise, work and hope.  For many, the future looks bright.   

Synergy is the early half of the deployment period.  This phase can be the true ‘golden age’.  It is likely to be the closest the system ever comes to convergence within the economy of the core countries of the system.

Mary Meeker anyone?  She has identified this expansion phase quite eloquently, particularly in the mobile space.  I would argue we are still at the turning point but on the cusp of this synergy phase.  We should expect to observe massive expansion and economies of scale in almost every industry imaginable for the next few decades.  New industries and markets will emerge.  Old ones will finally die off.  Will it be all golden?  I am not so sure.  But if history is any indication, we shall see an expansion of scale only experienced once every 60 or 70 years.

It was this exact point in the book which urged me finally jump off the fence and into my entrepreneurial pursuits full time.      

Maturity

Once again, the cycle continues.  Every paradigm has a shelf life and can only survive so long.  As it enters maturity, deep questions are asked about the system and the climate is favorable for politics and ideological confrontation.  Markets are saturating and technologies are maturing.  

Gradually the paradigm is taken to its ultimate consequences until it shows up its limitations... yet all the signs of prosperity are still around.  Those who reaped the full benefits of the ‘golden age’ continue to hold onto their belief in the virtues of the system and to proclaim eternal and unstoppable progress, in a complacent blindness, which could be called the ‘Great Society Syndrome’.

During maturity, the stage is set for the decline of the whole mode of growth and for the next technological revolution.  Since we are entering a synergy phase, I will not spend much time on maturity.  According to Perez, the next maturity phase should not be entered for quite some time and the decline of our current paradigm should not influence ones innovation or investment perspective.  Yet it is always smart to keep an eye on something like this.  Interestingly, it is in this period inventors and innovators are tinkering with what will eventually become the next great paradigm.  This begs the question:  What will supplant the internet?  I would suggest not worrying much about the answer to that question and take advantage of the current conditions.  According to Perez, it should be quite good for years to come.

The lesson I see here is to know that we are in a smaller bubble within a larger economic cycle.  The smaller bubbles grow and pop fairly regularly with the net result of growth throughout the 60-70 year larger cycle.  The key is to make sure you have made the correct decisions to protect yourself and your company from the small bubble gyrations.

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Prediction: There Will Be No Bubble

Update: This was republished on BusinessInsider.com.

You do realize it’s us, with our words, who actually create the Bubbles we will then loathe.   Yes – you, me, all of us… we create the hysteria and the irrational exuberance necessary for a “bubble” to actually form.  If we can just refrain from the word this time, maybe better things will happen.  Plain and simple.  I know the conspiracy theorists out there will indeed flame up the comments with a variety of criticism – and that’s fine, commentary is a good thing.  But I argue we are not going to see a bubble since we just entered the Golden Ages of the Internet.  Don’t want to take my word for it?  Let’s go ahead and use some logic backed by historical analysis to peel this onion a bit.  We’ll see what can come of it since I think it’s better than just running around yelling BUBBLE every time a round of funding is raised or a new company rings the opening bell.

In my recent article, The Evolution of the Tech Bubble, I referred to the book Technological Revolutions and Financial Capital by Carlota Perez.  I have to say again, quite an amazing book.  On a surface level I described the general phases of each cycle (Irruption, Frenzy, Synergy, Maturity) and laid out a nice framework to grasp the magnitudes and movements of the cycle.  I will now go deeper in an effort to bust this silly Bubble talk.

As you can see, our economy has gone through 5 major cycles since the late 1700’s.

1) 1770s through the 1820s – water power and introduced factories and canals, primarily in Britain.

2) 1820s to the 1870s – the age of steam, coal, iron, and railways.

3) 1870’s through about 1910 – steel and heavy engineering.

4) 1910 through 1980 –  the rise of the automobile, petroleum-based materials, the assembly line, and the motion picture and television.

5) Our current cycle began around 1970 – based on silicon: the integrated circuit, the digital computer, globaltelecommunications and the Internet.

These are not my opinions, Perez illustrates through factual analysis each cycle lasted roughly 60 or 70 years.  I argued we have just entered the Synergy phase of the fifth cycle, probably sometime in the mid 2000’s.  Like it or not, this means the core paradigm (the internet) is about to spread into every corner of your life.  This period is pleasantly referred to as a Golden Age.  The image to the right provides a view of the Synergy and maturity phases, which together last 20 or 30 years.  There’s the internet, going into everything around you.  One thing to note here, the financial recession we just experienced is not directly correlated to these cycles.  I am not passing off the idea that sometimes things rise and fall unexpectedly.  It happened, and will happen again.  The image used in my previous post illustrates the  rate of diffusion of a technology into a society, not the rise in markets or a bubble, per se.

Here is what I think will happen next and why it will be mind blowing.

Fred Wilson recently stated at TechCrunch Disrupt we will very soon experience an incredible cultural revolution on a level we might not realize yet.  Many things will be created to challenge the establishment (think Egypt) and new applications will change your life in very profound ways.

How do I know?  Take a look at what happened the last time we were sitting in this position.

 The car was at the heart of the last technology surge, based on mass production, which started in 1908 with Henry Ford’s Model T. The installation phase was about increasing car ownership and building road networks. The crash came quite early, and the deployment phase was delayed by depression and war. But the deployment phase was the period in which the suburbs evolved and supermarkets became the dominant mode of food distribution and retail.

Looking back, we realize it was because of the automobile (transportation) we now have suburbs, supermarkets and shopping malls.  Now think of the Interstate network, and how important it was to connecting our country.  Thankfully, this is how you can easily have food on your table…  which you bought from the supermarket… which you drove to in your automobile.

Yes, it is amazing.  And it’s all small potatoes compared to what is going to happen next.

Applying that perspective to today’s environment you can now start to grasp the notion we just entered the Golden Age.  Mass adoption of the internet, real time communications and real time data will create adjacent industries we haven’t even thought of yet.  Just ask Reid Hoffman what he thinks about this subject.  For the first time in human civilization 2 billion, maybe even 3 billion people will all be connected on one platform.  Almost a third of our world population is online or using some sort of connected device.  This is even more moving: in the emerging markets of China, India, Brazil, Russia, and dozens of smaller developing nations, a billion people will soon enter the expanding global middle class.

Do you even realize the magnitude of what this will do to our global society? Place communication technologies on that platform.  Include a way to exchange currency and do commerce.  Find a way to locate a mobile device, right down to a 10 foot radius.  Now imagine three billion people using this each day!  Not everything will be rosy, but I argue it will be golden.  For a little economic context, in the year 2000 the AOL/Time warner merger was at the time valued at $350 billion with AOL having roughly 30 million subscribers.

If you look back at the previous 4 cycles, it’s important to keep in mind how little of role communication technologies played.  This is not something to overlook.  Until the fourth phase (early 20th century) people were isolated on their own continents, lest they endured a few months boat ride to a new world.  They were also confined to their local flea market if they couldn’t snag a horse ride.  And information was short supply, limited to neighborhood gossip and a letter which mostly arrived too little too late.

Today, only 1oo short years later, I am theoretically one finger swipe away from anyone in the world (or 2 billion at least).  I can video chat with someone in remote Africa, literally seeing them as we talk while they are on another continent.  I can learn about an earthquake that hit another part of the world less than one minute after it happened.  If you are reading this on your mobile and wanted to buy Perez’s book right now from a random person on the East Coast, an Amazon transaction will take you less than 30 seconds and you will be back reading this next sentence before you know it.

Take a step back and juxtapose those last 2 paragraphs.  This is why I recently quit my job and finally got serious about building something.  I am pretty excited to see what this synergy phase will bring out from within us.  Don’t get me wrong, I don’t pretend to know the future. But I am using solid facts from the past to help me gauge where things might be going.  If you are not serious about doing something amazing, now might be the time to reconsider.

Referencing my last article on the Bubble subject, the Frenzy period was characterized by individualism, excessive investment and miraculous manipulation of wealth.  These ridiculous actions create Bubbles.   Since the foundation of the web is already in place, this Synergy period is a time of Production.  It is because economies of scale, maturation of the core technology and a new understanding of our global network we will not see a bubble burst.

I will leave you with a thought from Perez:

Whatever time it takes to set up the framework to overcome the recession, the beginning of Deployment is usually characterized by synergistic growth, extension of markets and increasing employment.

Bubble schmuble…  can we just stop saying that word?  I suggest we start using the words Internet Golden Age.

Image courtesy of Flickr user timtom.ch

Bubbles and Golden Ages

Update: This post has been republished on www.businessinsider.com.

I once watched an interview where angel investor Fred Wilson offhandedly noted reading a book which transformed the way he looked at markets and the web in general.  I instantly went to Amazon and ordered it and spent the next week reading it front to back.  Whew… it changed my life as well.  I up and quit my job the next month.  Thanks Fred.

Technological Revolutions and Financial Capital by Carlota Perez is one of the greatest overviews of the incredible economic phenomenon known as the bubble.   What we are currently going though – recessions and expansions, bubbles and bursts, highs and lows, whatever you want to call them – they are inevitable.  In fact, the history of the entire world economy is one big cycle which repeats itself over a period of about 60 years.  I cannot do this entire book justice, just take my word for it, go buy it and read it yourself.  You will publicly thank me later just as I just thanked Fred now.  But I will introduce the general phases a new technology (paradigm) encounters so the “layman” technologist, marketer, social media guru or business person can start to see a clearer economic picture.

I hope I am not being too being blunt, but without grasping this concept you are swimming with your cap over your eyes.  You need to understand what is actually going on in this crazy economic world.

Irruption

As a new technology is developed and deployed into our society, it will enter a cycle of adoption.  Interestingly, Perez notes new technologies are created during the maturity phase of the last great technology expansion.  So although we are starting with the irruption phase, let us take for granted the specific technology has already been created and diffused through very early adopter communities.  During the irruption phase, we see a slowing or declining of the old industries and an early adoption of a new technology.  Carlota notes:

The very intense activity of the new paradigm carriers contrast more and more with the decline of the old industries.  A techno-economic split takes place from then on, threatening the survival of the obsolete and creating conditions that will force modernization.

Old print media anyone?  This irruption phase is started with a big bang (invention and initial diffusion) and will propagate within a small community of early adopters.  Note the image above, depicting very low diffusion, even to a point the general masses dismissing the technology altogether.  Amazingly it is contained within this tight group of people and industries for some period of time.  That is until a tipping point is hit.

Frenzy

Frenzy is a period of massive growth for a new technology.  It is a time of new market creation as well as for rejuvenating old industries.  Once a critical mass of consumers have been hit, the diffusion of the paradigm takes center stage.  Individualism rules the land, as does speculation, wealth creation and ultimately resulting in over-investment flooding the market.   

Frenzy is the later phase of the installation period.  It is a time of new millionaires at one end and growing exclusion at the other, as in the 1880’s to 1890’s, the 1920’s and the 1990’s.   In this phase, financial capital takes over; its immediate interests overule the operation of the whole system.

Notice the part about the growing polarization between the rich and the poor.  Sound familiar?  Capital investments soar during this time, creating a false sense of wealth creation.  This craze attracts more and more individuals wanting to get a piece of the action; so late frenzy is financial bubble time.

Turning point

At some point, the bubble has to burst.   Things that go up must come back down.  Interestingly, the turning point is neither an event or a phase, rather it is a process of contextual change. 

The turning point has to do with the balance between individual and social interests within capitalism.  It is the swing of the pendulum from the extreme individualism of Frenzy to giving greater attention to collective well being, usually through the regulatory intervention of the state and the active participation of other forms of civil society.

The turning point is a space for social rethinking and reconcidering.  It is, in fact, the time when the mode of growth that will shape the next few decades is defined.  I would argue we have been in this phase for a while, maybe starting 5-8 years ago After picking up the pieces of the crash of the early 2000’s we are now starting to see realignment in almost every industry known to man.  Name an industry that is not currently being touched by the internet?  Exactly.



Synergy

This is a time for production.  Since the foundations and infrastructures were laid out during the previous phases, conditions are there for dynamic expansion and economies of scale.   The diffusion of the new paradigm now reaches far and wide, is accepted as standard, and now governs supreme.  It is a time for promise, work and hope.  For many, the future looks bright.   

Synergy is the early half of the deployment period.  This phase can be the true ‘golden age’.  It is likely to be the closest the system ever comes to convergence within the economy of the core countries of the system.

Mary Meeker anyone?  She has identified this expansion phase quite eloquently, particularly in the mobile space.  I would argue we are still at the turning point but on the cusp of this synergy phase.  We should expect to observe massive expansion and economies of scale in almost every industry imaginable for the next few decades.  New industries and markets will emerge.  Old ones will finally die off.  Will it be all golden?  I am not so sure.  But if history is any indication, we shall see an expansion of scale only experienced once every 60 or 70 years. 

It was this exact point in the book which urged me finally jump off the fence and into my entrepreneurial pursuits full time.      

Maturity

Once again, the cycle continues.  Every paradigm has a shelf life and can only survive so long.  As it enters maturity, deep questions are asked about the system and the climate is favorable for politics and ideological confrontation.  Markets are saturating and technologies are maturing.  

Gradually the paradigm is taken to its ultimate consequences until it shows up its limitations... yet all the signs of prosperity are still around.  Those who reaped the full benefits of the ‘golden age’ continue to hold onto their belief in the virtues of the system and to proclaim eternal and unstoppable progress, in a complacent blindness, which could be called the ‘Great Society Syndrome’.

During maturity, the stage is set for the decline of the whole mode of growth and for the next technological revolution.  Since we are entering a synergy phase, I will not spend much time on maturity.  According to Perez, the next maturity phase should not be entered for quite some time and the decline of our current paradigm should not influence ones innovation or investment perspective.  Yet it is always smart to keep an eye on something like this.  Interestingly, it is in this period inventors and innovators are tinkering with what will eventually become the next great paradigm.  This begs the question:  What will supplant the internet?  I would suggest not worrying much about the answer to that question and take advantage of the current conditions.  According to Perez, it should be quite good for years to come.