Startup Trends & Hype: Why We Chase Them

The Allure and Peril of Startup Hype

It's crucial to acknowledge a phenomenon instinctively understood by venture capitalists: the prevailing excitement surrounding a business or industry can introduce bias into investment and idea evaluation. Throughout the tech landscape, instances of poor decisions fueled by fear of missing out (FOMO) and inaccurate market signals are consistently observable.

While enthusiasm is naturally contagious, basing decisions on it when exploring new ventures is ill-advised. Consider the 17th-century tulip mania, where the price of a single rare tulip bulb once exceeded the value of a fully furnished, luxurious home¹. It’s easy to now criticize those who participated in such an irrational trend.

Recurring Patterns of Market Excess

However, this pattern repeats across hyped markets. The collapse of dot-com companies was foreseeable in retrospect, as was the consumer lending bubble that triggered the global financial crisis. Beyond these major events, new, highly-publicized sectors in technology emerge with predictable regularity.

Over the past 15 years, substantial investments have been made – and subsequently lost – in sectors like SoLoMo, clean technology, virtual reality gaming, daily deals, cryptocurrency (including niche offshoots like PotCoin and WhopperCoin), the sharing economy, electric scooters, and special purpose acquisition companies (SPACs).

These bubbles typically originate when a groundbreaking company disrupts the market—introducing a technology that fundamentally alters our lives, like Apple’s iPhone, or providing a superior and more affordable solution to a common problem, as Uber did with ride-sharing. Speculators then attempt to replicate this success by identifying other potential winners.

An Illustrative Example: The Rise and Fall of SoLoMo

Here’s a concrete example, based on data from PitchBook:

• Yelp pioneered a new method for local businesses to connect with customers.
• Its success attracted founders and investors seeking to facilitate customer engagement in other sectors.
• Foursquare launched in 2009, experiencing rapid growth and a valuation increase from $6 million to $115 million within nine months.
• SoLoMo became the “Next Big Thing,” leading to a 30% increase in seed and Series A social platform valuations and a 170% rise in invested capital between 2010 and 2011.
• The ensuing year saw the hype diminish, with valuations falling below pre-trend levels and capital investment decreasing by nearly 50%.

This cycle repeats itself. Uber and the sharing economy spurred hype, culminating in multiple competing on-demand valet parking apps. Groupon inspired imitators like LivingSocial and BuyWithMe, eventually leading to aggregators like Yipit.

More recently, investment and valuation trends in blockchain companies demonstrate a similar pattern. The data speaks for itself.

Why Hype is Appealing, and Why It's Dangerous

The appeal of chasing hype is understandable. We rely on collective enthusiasm to guide choices like where to eat, what movies to watch, and what books to read—decisions with limited risk. While the “best” option may not always meet expectations, it generally proves satisfactory, and requires less individual research.

However, hype frequently leads to flawed business decisions in the startup world. Investors and founders may bypass thorough due diligence, fearing they’ll miss out on a lucrative opportunity. Founders may neglect critical thinking, influenced by the inflated valuations of similar companies.

Resisting this trend requires discipline, as it goes against our natural inclinations. I once found myself captivated by a company during the scooter boom, convinced it possessed a unique advantage. Looking back, I realize I fabricated those differentiators simply because I desired to participate in the trend.

Maintaining Perspective and Avoiding Pitfalls

Investing in a trend is acceptable, provided it’s coupled with an entrepreneur’s genuine belief in a truly differentiated idea. If you are considering an idea, step back from the excitement. Don’t base your assessment solely on inflated valuations driven by market frenzy.

I recall companies in the gig economy proudly showcasing the substantial capital raised by their competitors as evidence of their potential for success. However, early-stage valuations and eventual bankruptcies are often correlated.

Take a moment to envision your company’s future, 20 years down the line. Do you genuinely believe it will become a leading, independent public company serving a large market? If not, reconsider. If “tailwinds” are the primary basis for your conviction, re-evaluate your assessment.

Avoid letting the fear of future regret dictate your decision to launch or fund a new venture. Trends offer genuine opportunities, but founders and investors must proceed with caution.

^{1. This interpretation requires nuance. The Dutch government allowed cancellation of futures contracts for a fee, effectively creating option contracts. While spot prices remained volatile, many investors mitigated their risk.}