I am always raising capital. It is part of my job. One of the questions I get asked most since I first started investing ‘professionally’ as a seed investor is ‘where are we in the cycle‘. Translation… ‘I am worried about the bubble in private and public markets‘.

The internet is filled with daily missives calling the public market rigged, politicized, overvalued, undervalued, overbought, oversold, too high, too low, but Hillary…They are all of the above and none of the above. They are the markets. They do bubble though and they do crash. Fear and greed.

The early stage private markets have always felt different to me. Alex Danco (my podcast with him will be out this week) has a great explanation of how Silicon Valley might be the reason. He says ‘Silicon Valley’ remains a ‘controlled bubble‘:

It has to be! Startups have a major structural problem to overcome, independently of how risky or ambitious they are: you can’t know the value of what you’re building, and you can’t know how much capital you’ll have to raise to get there. If you can’t know either of those two things, then you can’t know the value of your own equity. So how are you supposed to sell it?

In a bubble, mind you, this problem goes away. We don’t care about fair value; we only care about trajectory. Bubbles are moments of temporary financial euphoria, but they contain within them a kind of clarity: startups get a lot easier to fund if everyone just agrees that numbers either go up or go to zero. It sounds ludicrous, and it’s hard to explain to people outside of tech, but it does work.

Is modern Silicon Valley a bubble? Not long ago, we had an argument about this almost every year. But we’ve settled into the right answer, I think, which is simultaneously yes and no. It’s clearly “bubble-like” in that the environment runs on hope, FOMO, and impossibly forward-looking narrative. If everyone stopped believing, it would all fall apart. So, yes, in that sense it’s a bubble.

But if you spend any real time there, you’ll realize this isn’t an ordinary bubble: there are rules. There are virtually no outright scams, there’s a strong social contract, and a complex system of overlapping incentives between founders, investors and operators that keep a healthy simmer but prevent any boiling over. Silicon Valley is a bubble with a superego.

One of the important parts of the system is that it’s pretty illiquid. Startups are not like publicly traded stocks; they do not have a price or a public sentiment index that moves up and down with the daily mood. That’s a really important feature. Startups need to maintain a suspension of disbelief over a long period of time in order to create something out of nothing; nothing kills suspension of disbelief like perception of anything going down. So the solution is for that not to happen. Fundraising and valuation steps occur on a discrete schedule, according to the company’s narrative. It’s locked up in the meantime.

Why is this important? Look at crypto. Crypto, particularly in frothy moments like the ICO mania of 2017 (and maybe now with DeFi and other things), is much more like a classic bubble. Individual stories get pumped and dumped, scams abound, money rushes in foolishly and out painfully. Crypto is a classic bubble, it’s hilarious, and it’s a giant mess. Silicon Valley, for better or worse, is not like that. There are rules, and one of the important rules is that you don’t want FOMO rushing in too fast, because that means it can rush out fast. And the way out is a lot more painful than the way in is fun.

I hope as technology and Silicon Valley further proliferates, the controlled bubble stays intact.