

Scars

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In general, I think entrepreneurs and VCs who lived through the last bubble and its burst are better off because of it. We’ve seen what can go wrong and what happens when it does go wrong. I think it has made us all better at what we do.

But there are some scars that may not be all healthy. For example, in 1999 we stepped on the gas and made something like 20 investments at Flatiron. Many of them worked out well and we booked a bunch of profits in 1999 and 2000 from those deals. Of course a good number of the 1999 investments we didn’t get out of before the bubble burst went bust or went through painful recaps which are actually now paying huge dividends.

Fast forward to 2006 and Union Square Ventures is going to make maybe 5 investments this year. We made 4 last year. We are taking a cautious measured approach to our investment pace. That was one of the lessons we learned from the last bubble. Stepping on the gas before the crash is a good way to get hurt.

But there are VCs who are stepping on the gas right now and are getting rewarded for it. Are we being too cautious because of the scars we carry on our back from the last bubble? It’s impossible to know. But hindsight will tell us the answer in a few years.

I was in a board meeting recently and the founder, who ran a different company during the bubble, was talking about his team. He said the team was getting a bit uneasy about all the new hires that the company is making. It reminds them of the time they bulked up in the last bubble. And that bulking up caused a lot of pain when the market broke.

Pattern recognition is human nature. When you’ve seen the movie before, you know how it ends. And so all of us who carry the scars from the last bubble are going to think twice before we make the same moves again.

But what if the same moves we made last time are the right moves to make this time? Then we are going to sub-optimize this current market opportunity. We are going to be too defensive. And someone else is going to step on the gas and pass us at the next turn.

It’s a challenge that we have to face. We cannot forget the lessons from that last bubble. But we cannot fight the last war either. As much as things look similar to the last time, they are not identical. This will play out differently. I am not sure how differently but I know that it won’t be the same.

So carrying those scars is both good and bad. Probably more good than bad, but not all good either. And it’s important to recognize that.