Friday, 01 March 2024 04:33

6 strategies for spotting and avoiding an overcrowded market

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In finance, a bubble is too much money chasing assets, greater asset production, and a herd mentality. In new venture plans, a bubble is too many aspiring owners and too many investors chasing the latest "next big thing," like a Google search engine, Facebook social network, or Amazon e-commerce site. In all these cases, a burst is inevitable and everyone may lose.

The big question is how to spot these bubbles and jump to a better alternative, rather than get sucked into the vortex.

Based on my own experience, and insights by Vikram Mansharamani on the financial side in his classic book Boombustology: Spotting Financial Bubbles Before They Burst, here are some keys to business bubbles for growth and new opportunities as follows:

1.  Avoid the herd mentality 

In theory, this is called the "emergence of group order," or swarm mentality, where everyone rushes in without regard to whether there is enough food to go around.

For new ventures, investors usually toss out business plans with 10 or more competitors, especially if they see the penetration of a Facebook or Google.

2.  Overconfidence 

In finance, "this time is different" is the beginning of a new bubble. In business proposals, it is the idea that "this solution is different" without sufficient analysis of base anchoring features, differentiation features or no new early adopters. Change is always hard, so people already on Amazon are not easy to convert to another e-commerce system.

3.  Supply and demand ignored 

We all believe that supply and demand meet to create stable prices (reflexive). But sometimes higher prices create higher demand, causing a boom.

Busts result when lower prices stimulate more supply. In new ventures, a great success like Google causes busts by stimulating more supply, without regard to demand.

4.  Cheap money 

The Austrian school of economics asserts that "cheap money is the root of all evil" as an explanation for all boom and bust cycles. This also works for business, where cheap money occurs when too many investors jump on a bandwagon. Experts argue that a higher percentage of ventures fail with too much money, rather than too little.

5.  Policy-driven distortions 

Government actions sometimes meddle with normal supply and demand equilibriums, or money allocations. In new ventures these days, governments are incenting health and alternative energy solutions, to intentionally create a bubble. All too often, that leads to a burst for owners who have not adequately prepared or executed.

6.  High valuation, low profit

A sure sign of a bubble is when assets are artificially valued high, without a corresponding intrinsic value or cash flow. Social media darling TikTok is an example of these bubbles. In my opinion, now is not the time to bet your future business on another TikTok clone.

Every new business wants to be the one to start the next bubble, but these are impossible to predict. It's much easier to spot current bubbles and resist the urge to build a "me too" product.

The focus should always be on execution, revenue and profits. Vision, growth over profit, and eyeballs won't do it every time. Startups that master iteration, momentum and the ability to pivot will win.

I'm personally looking to Gen-Y as the source of the "next big thing" that will become the next bubble. To the rest of us, new great things often start out looking like toys and Gen-Y knows their toys.

In addition, they have less baggage, more creativity, and already understand the market segments with the most buying power.

I also believe we are beginning a new wave of new business investing, now that the pandemic appears to be behind us.

Angels are becoming more aggressive as their stock market and real estate assets recover and institutions again have earnings to risk in venture capital funds.

It's a good time to start some new bubbles and win. Don't let the fragile old ones burst your bubble as well.



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