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The Dark Side of Hype

Operations & Management

Isadora Teich wrote this article

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As the old adage goes, “what goes up must come down.”

In the era of unicorns, dramatic rises and falls, and almost every startup claiming to be a revolutionary industry disruptor, it can be hard to keep it all straight. Not every idea will survive and not every business will thrive in a competitive market.

When it comes to figuring out what will succeed or fail, there is no rulebook. We are all taking on exciting uncharted new waters together, and there are no guarantees.

Hype can play a big role in both the potential success and failure of an enterprise. After all, it is human nature to get swept up in an atmosphere of excitement and act fast.

In this blog post, we will explore the history, roots, and consequences of hype.

What Exactly Is Hype And Why Can It Cause Problems?

Hype can mean a few different things. According to the Oxford dictionary, it simply refers to the act of excessive or extravagant promotion, or over the top promotion itself. However, you have probably heard people say things like “it was all just hype.”

In this last case, they are saying that something doesn’t live up to whatever they heard about it. While the vernacular has definitely changed throughout history, we have seen numerous examples of how incredibly hyped markets ultimately crash.

One of the most famous historical examples of this is the Dutch Tulip Market Bubble of the 1600s.

You might be thinking, what do a bunch of flowers from hundreds of years ago have to do with FinTech, PropTech, and all of the other Techs popping up in 2021?

Hear me out.

Tulipmania

In the early and mid-1600s, the Dutch went crazy for tulip bulbs from Turkey. This got so wildly out of hand that, at the height of the craze, the rarest tulip bulbs cost more than 5 times the average Dutch person’s yearly salary. According to The Smithsonian:

“The rage among the Dutch to possess [tulip bulbs] was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade.”

People became so confident that the Tulip market was a guaranteed money maker, that merchants began to purchase large numbers of the flowers on credit, expecting to make the money back when they sold the flowers for many times their actual worth. Then the craze died down, as all of them do.

A lot of businesses were left in deep debt with countless flowers that no one wanted to buy. The entire market fell apart.

While there is some debate amongst experts as to the actual extent of the ruin and severity of Tulipmania, it is a story that is often brought up when bubbles, hype, and excess are discussed.

A Bubble That Historians Agree On

A bubble occurs when an asset or commodity is priced at a historic high compared to its actual worth. When this happens, a backslide is inevitable. If something is wildly overpriced, the market figures this out eventually. This can occur with anything from tulip bulbs to homes.

Arguably, the largest and most famous bubble and resulting crash of all time was the infamous Dotcom Bubble.

To keep it short and sweet, when the internet started to take off in the 1990s, a gigantic speculative wave of cash was poured into “new economy businesses.”

Almost no one really understood what the internet was and how it would fundamentally impact society. No one really understood its pros, cons, and limits. Regardless, there was so much hype that almost every dotcom company became a multibillion-dollar company the second they went public.

If you want to learn more about how modern startups and tech companies are valued when they go public, and the IPO process, check out our posts on the IPOs of WeWork and Coinbase.

Why Did The Dotcom Crash Happen?

Whenever anything becomes highly overvalued, it is inevitable that a crash will happen. Depending on how overvalued something is, even if it simply returns to a more realistic and reasonable valuation, this may appear to be a devastating crash.

In the case of the tulip market, many business people who had unwisely sunk all of their resources into it were ruined when it crashed. However, it was not a massive issue for the Dutch economy overall. In the case of the Dotcom crash, the entire US economy fell into a death spiral.

The NASDAQ was home to most of these hot tech stocks.

In 1990 the NASDAQ was below 500. By 2000, it had surpassed 5,000. After an insane decade of growth fueled by speculative overvaluation, it dropped almost 80% by the end of 2002.

This triggered a recession in the US. It took about 15 years for the NASDAQ to recover.

Hype And Human Nature

It might seem weird to suggest that an old-world Dutch tulip craze and businesses getting bullish about Dial-Up are the same.

However, at the end of the day, regardless of the era or culture, people are just people.

When something new and exciting comes along, it is easy to get swept up in the excitement. Also, we rarely get excited about things on a vast scale because of the things themselves. It is all about what they represent. This can be seen in both the tulip crash and dotcom crash.

Flowers and Companies as Symbols

Maybe it seems insane to you that people went so wild for tulips.

While the tulips were seen as something exotic and precious, they were also a symbol of wealth. You not only needed money to buy them but access to resources to keep the delicate flowers alive. Wealthy Dutch people flocked to them as symbols of status.

So, anybody who wanted to prove their social standing saw the flowers as a powerful way to do that. It was never just about flowers.

If you think about it, these tulips were basically just the 1600s version of a Supreme Hoodie or Gucci belt. To this day, people still wait in lines for hours to get Supreme items and pay thousands of dollars for designer items that may be made in the same factories as things you can buy at the dollar store.

Likewise, pouring all your money into hot tech companies in a cool new arena was never just about the companies themselves.

I guarantee you a lot of people didn’t even truly understand what they were throwing money at. It was about taking part in something cool, new, and exciting.

It was about making an investment in a seemingly limitless future. It hinged on the promise of incredible wealth doing something the world had never seen before.

What Can Startups Learn From All This?

It seems so simple. People may even get offended if you remind them to stop and think for a second.

If you have ever been in a situation where someone was being clearly irrational and making poor decisions, and you told them that, they likely did not appreciate it. They probably didn’t change what they were doing either.

This is likely a part of the reason why the same mistakes keep happening over and over again. Century after century and decade after decade, all of the people at the top keep falling prey to hype.

Sometimes they even tank the economy, all while thinking they are too competent to ever need to be checked.

Countless businesses of all sizes get caught in the crossfire.

How To Avoid Bubbles

As a startup, knowing this history is invaluable. There is always definite pressure to conform to whatever the hot thing of the moment is and get in on it.

However, if thousands upon thousands of other businesses are already clamoring to fill a market that might be out of fashion in a month, do you really need to kill yourself to hop on the bandwagon?

Probably not.

If it seems to you like something is absurdly overvalued, it probably is. That is the power of hype at work. However, keep in mind that whatever we are talking about is likely destined to crash.

Focus on doing what you do best and don’t worry about hot trends. Sometimes hype is deserved, and sometimes it’s not. This in itself can be a contested thing. For example, some people swear by the cosmetics produced by massive cult beauty startup Glossier. Other people say they have a cool social media presence, but useless products. There are always a lot of different opinions about almost anything.

Regardless, all you control is the work you do and not the chaos of the entire market. You can’t change history or decide outside opinions. If you feel FOMO or otherwise pressured, let it go.

Stay focused and keep moving forward.

About ChopDawg.com: Since 2009, we have helped create 350+ next-generation apps for startups, Fortune 500s, growing businesses, and non-profits from around the globe. Think Partner, Not Agency.

 

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