As the Dutch Tulipmania of the 17th century and the South Sea Bubble of the 18th century attest, speculative bubbles have been with us since the early days of corporations and market capitalism. Instant mass communication, in the form of the radio, was an amazing invention of the 1920s. Almost 700 new radio stations – the United States’ entire current AM broadcast infrastructure – were established in 1922. But nobody had identified a successful business model for radio broadcast.
Often the opportunity for a bubble arrives on the back of a new technology. And some technologies make for fantastic stories – indeed, sci-fi is a whole fictional genre based on this premise. Bubbles form whenever a new story is not only told, but can also be sold. However, not every new story leads to a bubble. Sometimes stories can be told, but not sold.
These cases highlight two important necessary conditions for the formation of a bubble: first, bubbles need narratives. Every startup begins as a story about an imagined future. Every venture, every investment, is a statement about the future, an attempt to create a future that conforms to the imagined vision of the promoter. Teams are formed, resources acquired, alliances entered, products and services developed, all in furtherance of that story and that future.
Every startup story will have some common elements – a protagonist (sometimes, but not necessarily a technology), a plotline in which the protagonist struggles against a challenge from dark forces (incumbents, or the current way of doing things), and a happy ending where the sun shines and human progress is advanced. Ever incomplete, these stories provide the mental scaffolding for individuals and institutions to invest in new ventures. Good stories sell, and the more uncertain the outcome, the more leeway for entrepreneurs to fabulate.
Bubbles inflate as the distance between fiction and reality increases. Contexts – such as investor liquidity, regulatory frameworks and cultural and macro-economic factors – establish boundaries on how far our stories can depart from reality. But entrepreneurs are also creatures of context, and some are better than others at ‘entrepreneuring’, stretching the limits of plausibility and maximizing time for their imagined realities to catch up to their promises.
Sometimes, we don’t observe a bubble not because the stories aren’t sticky or because the technology isn’t narratible, but because the narrative comes to fruition and the technology or entrepreneur delivers. more>