How I Learned To Stop Worrying And Love The Bubble

Rob Bernshteyn
Rob Bernshteyn
CEO & Chairman, Coupa Software

Rob Bernshteyn previously served as part of the executive management team at SuccessFactors (now part of SAP), running product marketing & management for this leader in HCM SaaS software. He also worked in product management at Siebel Systems, management consulting at McKinsey, and SAP systems integration consulting at Accenture. Bernshteyn holds an MBA from Harvard Business School and a Bachelor of Science Degree in Information Systems from the University of New York at Albany.

Read time: 12 mins

 Is Silicon Valley in another tech bubble? Some say yes, some say no

but it seems more and more people lately are willing to entertain that notion.

Tech IPOs are certainly on the rise and we’re seeing some of the same wild spending by early-stage startups that marked the last bubble. But I don’t want to talk about whether there is or isn’t a bubble.

The pundits will talk because that’s their job. But that doesn’t help me, or other leaders do their jobs. As a CEO of a venture-funded software company, I have to react to this bubble talk, but how? Should I panic?

We can debate all day long about whether we're at a peak or which direction the market’s headed. Undoubtedly there are companies that are spending a bit recklessly, that have overpaid for acquisitions or whose public offerings have sold at inflated valuations. In the aggregate, that could point to a trend, but that’s not a very useful discussion for individual companies to have.

The more important question seems to be, how can leadership actually gauge whether or not their company is overspending or otherwise exposing itself to unnecessary downside risk? The bubble discussion is a call to do a gut-check and make sure that come what may, the fundamentals of your particular company are sound.

To determine the answer, here are three key areas to look at: What’s happening with your customers, your employees, and finally, the investment community.

Are your customers paying and staying?

First, you have to look at what's happening with your customers, especially if you’re in hyper-growth mode. Are your customers paying you? Are they staying with you? And are they paying you more and more as you grow?

One can’t help but agree with venture capitalist Marc Andreessen on this point: A lot of these companies are only spending money. They're not making money. They're just technology projects. They got some funding so now instead of eating pizza they’re eating catered lunches, thinking that means it’s a real company.

You need to have real customers paying you real money to have a real company.  The vast majority of them should be staying with you and growing with you, and you should be continuing to get more of them at a steady pace, all the while monitoring your metrics to make sure your growth is solid and sustainable.

Are your customer acquisition costs right for your industry? Are your margins legitimate for the longer term? Are you differentiated enough from your competition to command a continued premium? Is the product sticky and likely to continue to deliver value for customers for the long term? Are your customers successful with your offering?

These are the basics and fundamentals of building a business, and they don't change in cycles of extreme overspending, or underspending.

“Everybody got they cups, but they ain’t chipped in”

You also need to be listening closely to employees and prospective employees and taking the temperature of the conversation. Is everyone talking about going IPO, going IPO, going IPO?

It’s natural for people to be enthusiastic about the prospects of the company, but that needs to be balanced with excitement about what they’re doing.  Is the role they hold at the company a win both for them professionally, and for the company?  Are they truly eager to contribute now and over the longer term?  Are they sober about what it takes to build a great company, or are they looking for a cheap ticket to an early retirement?

If it starts to feel like too many people are just looking to hop on a gravy train that’s a problem. It reminds me of a line from the song “Gin and Juice” by Snoop Dogg:  “Everybody got they cups, but they ain't chipped in." In other words, there are a lot of people who want to come to the party and drink up, but don’t really want to help contribute to the cause.

If you’re a fast growing company, of course you're going to attract some freeloaders. You need to watch for this kind of attitude across the company, and, you need to react quickly to it when you see it and either acculturate these people to your company values or show them the door.

Checkbooks are open

Certainly there's an incredible amount of excitement in the investment community right now. I recently attended a couple of pre-IPO conferences put on by Morgan Stanley and Deutsche Bank for the purpose of connecting growth-stage companies with public and private institutional investors.

I was amazed at how willing and interested people were to get involved with the company we’ve been building, in some cases with very little knowledge about the company or industry. That to me is clearly a warning sign that perhaps we are on the edge of a bubble, and our company could be part of that—if we chose to be. Checkbooks are out and pens are poised. But we're not yet ready or willing to take any of that money, or go faster than we feel is prudent.

The thing to ask yourself in times like these is, are you just trying to take money because it’s there for the taking? Or do you have a well-thought out plan for use of those funds, one that will deliver handsomely for those investors over the long term?

If you’re willing to take lots of money without clarity on how best to spend it, or on the flip side, if you’re willing to write a big check with a relatively vague idea of where the money is going, you’re getting caught up in the frothiness and perhaps starting down a path toward a loud pop rather than building a sustainable company.

Where do we go from here?

It should be expected that when a company reaches a certain phase in its growth, it needs to spend more money to compete for talent and meet the expectations people have of a more established, successful company. That might mean a nicer office and a more professional environment, better food and a nicer holiday party.

There’s nothing wrong with spending some money on that; it’s part of the company’s maturing process and you should be celebrating your successes—to a point.  Better office furniture, yes. Aeron chairs for everyone, no. Bringing in lunch a few days a month, yes.  Having it catered by a five-star restaurant… not so much.

If you’re starting to see a lot of this happening inside your company, or finding yourself spending a lot on keeping up with the Joneses instead of investing in product and customers and core values, you might be headed for trouble. As a leader, you need to be scanning the horizon for these kinds of signs. 

To lead your company and guide it through the storm, you need to maintain laser focus on the fundamentals, while at the same time keeping your eyes and ears open and reacting quickly to forces that might throw you off course. If there is indeed a bubble we may all hit some rough water for a time, but those in sound vessels should sail through just fine.