The investment market is driven by two things; fear and greed. Fear is temporary, greed is permanent. Markets over time always move up but there are periods of fear and doubt that cause investors to retreat. Greed takes over when investors see others making money and want to get back in the game before the opportunities get away. This happens in the stock market and in VC investing.
When fear takes over it consumes everyone. Everything looks black. Investments that looked great 6 months ago look like risky charades with no business fundamentals. We saw this happen in 1987, 1994, and 2001. There are usually a few high profile examples of "irrational exuberance" that were indeed big mistakes. Then the rest of the market gets slammed irrationally.
But fear is temporary, greed is permanent. Greed is a much stronger emotion than fear. Greed in this sense is a good thing, more like motivation and risk taking.
Every year at this time investment gurus review the performance of the stock market for the year and make predictions about next year. Everyone has an opinion, but from all of this a consensus emerges, and it is usually pretty accurate. I am reminded of the book "The Wisdom Of Crowds" by James Surowiecki. The premise of the book is that the consensus opinion of the masses will be more accurate than the opinion of one expert. The book cites many examples where the wisdom of the "crowds" was superior to the expert. The consensus this year seems to be moderately positive.
Regardless of the environment, entrepreneurs are always going against conventional wisdom. We think big, we think about what could be, and ignore the naysayers. Yes, entrepreneurs do take big risks, but they don't look so big to us. It just looks like a big opportunity. If it were easy or obvious everyone would be doing it. Entrepreneurs ignore the fear and focus on the opportunity.
We had some dark years from 2001 to 2003, but the pendulum has swung back to where good deals are being funded at reasonable valuations. Angel investors have been very active over the past four years but are starting to see deal quality fall as the VC's grab the good deals.
Some might argue the pendulum has swung too far. Social networking and user generated content companies are attracting a lot of attention and investment. Proven revenue models are still a question mark. But, greed is alive and well. There is lots of money sitting in VC funds that must be invested. 2006 is shaping up to be a great year.
Happy New Year!!
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