China Embraces Its Inner Tech Bubble

Forbes
China Embraces Its Inner Tech Bubble
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China Embraces Its Inner Tech Bubble

There was a great article in Forbes yesterday by Rebecca Fannin. In it, she covered some comments at a recent tech venture conference in Beijing.

One after another VC was asked whether there is currently a Tech Bubble at the moment in China – just like many VCs in the Valley are asked that these days about our own appetite for tech investments.  Since LinkedIn’s (LNKD) IPO, the chatter about whether we’re in the middle of a bubble has gone up astronomically.

Here’s what Sonny Wu, managing director of GSR Ventures said about China right now: “It’s great to have a bubble.”

Richard Hsu of Intel Capital China said: “Bubbles are great.”

Ruby Lu of DCM said: “We’re in the midst of a bubble but a good bubble.  It’s going to create a flight to quality.  The bad companies will lose momentum or die. The market will shrink to a small base of companies.”

GGV partner Jenny Lee said: “We’re advising our companies to go public now, if they can to raise money now because a downturn is coming.”

And Chris Evdemon of Kai-Fu Lee’s Innovation Works talked about the need to mentor his entrepreneurs for what’s to come on the other side of this: “Our job is to get them prepared, to help them keep their feet on the ground because the bubble is going to burst.”

I love these comments because I’m trying to imagine what John Doerr, Tim Draper, Jim Breyer, or Peter Thiel would say publicly if they were asked if there was a bubble going on at the moment.  Somehow, I don’t think they’d be this honest.

But why not?  It’s refreshing to hear these Chinese VCs aware of where they are in the life cycle and what steps they’re planning on taking – both on the continued rise and the inevitable fall – to prepare for it.

As I’ve said before, it seems like people want to slap a label on whether we’re in a tech bubble like it’s a binary outcome: you’re either living in the go-go 90s era bubble or you’re not.  It’s one or the other. Black or white.  There can be no gray.

I disagree with that entirely.  A bubble popping (which is mostly what people care about when they ask if we’re in another bubble or not) comes at the end of a process.  And that ending lays the seeds for the beginning of another cycle which will also pop.

It was always thus, and always thus shall be.

We seem to be hyper-sensitive these days to recognizing when we are in a bubble.  That sensitivity is the scar we carry from the housing collapse and the dot-com era bubble.  If we didn’t have those two fairly recent – and certainly memorable – events, would anyone at conferences or in the media be asking if this was a bubble?

Put it this way, do you remember panels of venture capitalists warning of the perils of a bubble back in 1997?  Maybe a few of them would have told you they were in a bubble back then if you cornered them in the hallway but the vast majority was fairly ignorant then of how their optimism was setting themselves up for a big crash that was still a few years down the road.

Because of our bubble paranoia, we want to shoot a bubble at the first signs of it.  Maybe we are hoping to get a perverse thrill from identifying the next bubble.  Maybe we want to stroke our egos about how smart we are in hopes we’ll be called the next John Paulson – who correctly predicted and profited from the housing crash in 2007 – 2008 – a few years from now.

In any case, we’re not ready for the bubble to pop just yet.  It’s only been two years since the market bottomed.

The Chinese VCs are right.  This boom will end in tears.  There will be massive pain in techland in China.  Some stocks will likely lose 90 – 98% of their value from their peak.  Others will simply go out of business.  It could take 2 – 4 years for the Chinese tech community to get itself back on its feet once this current boom ends.  Many green (meaning young, not some hot solar or wind play) entrepreneurs will likely be shocked at how vicious and unrelenting the crash will be when it comes.

However, I think it’s probably still at least two years away, if not more.

Two years from start to bubble pop is extraordinarily fast.  Dot com was 5 years. US Housing was 7 years.

You could argue that China has the potential to be swifter than other bubbles – the growth has been so quick that the end will come sooner too.  Even still, I think we have another two years of good times.  And I didn’t read any comments from the Chinese VCs at the start of this article that suggests they disagree with that assessment either.

Right now, the motto in the Chinese tech world is: Make hay while the sun is shining.  When the end comes, they’ll batten down the hatches.  It’s easy to say that now before the fact.  We’ll see how it plays out.

How will we know when the end is near in Chinese or in US tech?  When things start going parabolic in value.  If you want to know parabolic, look at the gold chart leading up to 1980, look at the silver chart from a few weeks ago, and look at Nasdaq from the 90s.  They all start growing steadily over a long period of time – and things start to go a little crazy.  Before you’re even aware of it, the prices start shooting through the roof and justifications are made.

A couple of weeks ago, you could still hear people saying the move in silver made sense because of a historical price comparison to gold.

Despite the good times in Chinese tech names and some big recent moves in Baidu (BIDU), Sina (SINA), Sohu (SOHU), as well as IPOs like Youku (YOKU) and Dangdang (DANG), the big move upwards is still ahead of us.  The queue of new tech start-ups prepared to IPO is packed full.  The big US names like Facebook, Twitter, Zynga, and Groupon will add more gas to the fire when they come out.

Prepare for some major fireworks in the next two years.

[At the time of publication, Jackson had long positions in BIDU and SINA and a short position in YOKU.]

Please follow me on Twitter: @ericjackson

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