Luke Johnson: Entrepreneurs ignore the past at their peril

Too few people heed the lessons of previous boom-and-bust economic cycles.

by Luke Johnson
Last Updated: 20 Aug 2020

I started writing a regular column for Management Today a decade ago. Much has happened in the business world since then, but there are some basic truths which do not change. Experience over the years has demonstrated to me that the success or failure of companies is determined by their people, and that most of their behaviour is dictated not by facts but by emotions.

At heart, human behaviour in the commercial world is a contest between fear and greed – even in the digital age. Business cycles are the product of these extremes of pessimism and optimism. At the bottom of a bear market – such as the recession of 2008/9 – confidence is depleted, investment is scarce, and the news appears unrelentingly bad. At the top of a bull market, projections and budgets are soaring to the sky, valuations are stratospheric, and greed conquers fear.

Years ago, I read a marvellous, long out-of-print book called The Funny Money Game by Andrew Tobias. He wrote it when he was just 23. It describes how he was employed as a fresh graduate by a high-flying public company called National Student Marketing Corporation, and experienced a surreal journey as the shares rocketed up four-fold on the back of the Go-Go Wall Street market of 1968, enjoying a P/E multiple of over 100. In due course, the bubble popped, the whole facade collapsed and the author's boss went to jail.

It is a witty insider's account of the rise and fall of a stock market boom, complete with fraud, instant millionaires, phantom profits, deluded investors and corporate jets. The detail, honesty and humour of the book offer a wonderful depiction of the madness that prevails during the height of an investment mania, and how almost everyone's disbelief is suspended while the adrenaline and cash flow.

It rather reminds me of another, very recently published book, Disrupted by Dan Lyons. In this case, the author is a journalist who has covered Silicon Valley for many years, and has even written for the HBO comedy Silicon Valley.

Like The Funny Money Game, this book is an autobiographical account of what it's like to work in a roaring start-up, flush with $100 million of venture capital. Like Tobias, the author is a cynic who never really falls for the hype.

In Disrupted the business concerned is a software company called HubSpot, and it is still very much a going concern. HubSpot went public in October 2014 – while Lyons worked there – even though it had lost $34.2m on revenues of $77.6m in the previous year. It was valued at almost $1bn when it went public. Since then, the shares have risen by around a third, but the business appears to have lost money every year since it was founded in 2006. I'm clearly too stupid to understand its economics and potential.

Nevertheless, having read Lyons' book, I would steer clear of HubSpot's shares and its products. I don't for a moment suggest that the company is repeating any of the skulduggery that went on at National Student Marketing Corporation. But I experienced a strong sense of déjà vu. Some of the bonkers goings-on he describes made me laugh out loud. If this is really an example of the culture and practice of Silicon Valley, then the whole Californian tech bubble is much flakier than even the sceptics would dare suggest.

Yet there are already plentiful signs that all manner of asset price bubbles are popping. Posh apartment prices are falling everywhere from New York to London and Hong Kong to Shanghai. In many ways, the world's stock markets have had a more volatile start to 2016 than any year on record. The IPO market is the worst since 2009. The hedge fund industry is in disarray, as institutional investors withdraw money at an increasing pace. Mutual funds are hurriedly writing down the valuations of their so-called 'Unicorn' technology holdings. Commodity prices mostly remain close to multi-year lows. And all these declines are taking place while interest rates are stuck at all-time lows.

It does appear as if this party is over. The rollercoaster has started its descent, and the slump will probably gather pace in the coming months. This should come as no surprise to those who believe in cycles, or indeed history. Unfortunately too many entrepreneurs and investors follow Henry Ford's dictum, 'History is more or less bunk... We want to live in the present, and the only history that's worth a tinker's damn is the history we make today.'

I'm always disappointed at how few business builders pay any attention to the lessons from the past. Just as economic cycles are inevitable, so the same follies are duplicated by capitalists each time. Success inevitably leads to hubris and misallocation of resources. Each era has its geniuses who are revealed as buffoons, or heroes who are exposed as crooks. Too few founders listen to those who have seen it before, and remember how it went wrong. Too few bankers read history books, and from them learn the mistakes of last time.

Of course, each turn brings forth marvellous innovations and real progress – but somehow the process feels amazingly wasteful. I suppose that is all part of the creative destruction, which is the essence of entrepreneurship.

Luke Johnson is chairman of Risk Capital Partners. Follow him on Twitter: @LukeJohnsonRCP

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