Finding Bubbles and Predicting the Burst

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Many innovators and entrepreneurs have dozens of ideas every day for the perfect new business. They're sure that this is the next big thing, that this idea will outlast the competition. Unfortunately, some of those ideas may fall prey to the “bubble” problem: they begin quickly, expand rapidly, and burst just as fast, leaving their founders floundering for new solutions or potentially out huge amounts of capital.

predicting bubbles

Consider, for example, the dotcom bubble from 1997-2000, when every company jumped on the new “internet” bandwagon. It was “e” this and “.com” that, with everyone looking for ways to bring their business into the online domain. Unfortunately, it broke just as quickly: many businesses discovered that online just wasn't in line with their goals. How can you avoid a similar trap, and make sure your idea can hold on for the long haul?

Defining “Bubble” Concepts

Bubble growth is experienced when an industry sees unsustainable levels of expansion within a short span of time. Typically, the reason for the lack of sustainability is simple: growth isn't supported by demand for the product in question.

The news likes to report on them, from the slowly dwindling tech bubble to the 2013 stock market bubble. Professionals in the industry or in business like to predict their potential effects, from the effects throughout the duration of the bubble to the effects of its crash. Unfortunately, the bubble effect is, by definition, pretty unpredictable, and figuring out how to successfully rise above the bubble crash can be difficult for even the most savvy entrepreneur.

There are plenty of things that can cause the inflation of economic bubbles. Sometimes, it's assets: something becomes very inexpensive while appearing to hold the potential for a great deal of growth over the next several years. Other times, economic bubbles are caused by expanding innovation.

Still others are perhaps more aptly called fads: numerous people jumping on the bandwagon created by a new idea. For example, the first one I noticed was frozen yogurt shops, which many have found to be much more volatile ventures than they initially seemed. More recently, it’s subscription box businesses, which deliver monthly boxes to subscribers’ homes that contain everything from makeup to nonessential baby items. New ones pop up all the time that seem so incredibly niche that they couldn’t possibly be sustainable.

For many entrepreneurs, these bubble-like trends are a great way to experience rapid expansion and get new ideas off the ground fast. It's important, however, to remember that their behavior is unpredictable, and the crash can come unexpectedly, leaving you in a very poor position indeed.

Is Your Idea Too Bubbly?

If you're attempting to avoid bubbles or fads, or want to be sure that you're taking the proper precautions to safeguard your innovation on the other end, there are several key questions that you should ask yourself before going ahead with executing on your idea.

Have prices risen quickly, to extreme levels? The up-front cost for getting started in this particular industry may appear to be very low, while the potential for reward is immense. Unfortunately, that type of profit usually isn't sustainable, particularly if it's focused on luxury items.

In the case of the current subscription box trend, for example, it doesn't take long for people to start to tire of the goods that they're receiving. Initially, subscription boxes are thrilling: a surprise in the mailbox every month! But perhaps that makeup box has more items in it that she doesn't use than that she does, or he's discovered that he already has most of the “one of a kind” items in his comic book paraphernalia subscription. A couple of months in a row of items that simply aren't to someone's taste and that they don’t need, and they're going to quickly decide that the expense isn't worth it.

Is your idea just a variation on a theme, or is it truly different in some way? If someone else is already doing basically the same thing you've thought of, you're going to be competing with them. A truly unique idea will set you apart, while an idea that duplicates another with small variations will leave you struggling to find the business you need even from the beginning. You also run the risk of being written off because the other idea similar to yours didn't turn out as well as intended.

For example, there are currently dozens of subscription beauty boxes on the market. If you were going to start a new one, what would be different about yours? Will you serve a previously neglected market? Price yours dramatically differently from the others? Simply saying, “My innovation will be different and better” doesn’t make it so. It’s important, with any product, to differentiate yourself in the market, but especially so when it comes to these kinds of trends.

Does your idea rely wholly on the continuation of a trend, or is there an opportunity for expansion into other markets? That is, when the tide goes out on this trend, will your idea still float? Will people still have a use for it, or will it go out of style? In the subscription box example, you might consider offering an item that:

  • people need regularly
  • they often forget to acquire
  • doesn't require a personal “taste” that could lead to regular disappointment

A practical item—razors, for example—is more likely to withstand the volatility of markets. With something like that, you have the opportunity to take your services beyond “subscription” and into a way to make consumers' lives easier. Tapping into a need that people will always have, not just in times of luxury, and making your service valuable to them long term is one of the best ways to create sustainable business growth over time—no matter when you get into the market.

 

Avoiding bubbles and volatile fads is really just a matter of good business sense. It’s easy to get excited by what looks like a perfect investment, but anything that seems too good to be true probably is. If there’s no opportunity for diversification or differentiation, you’re likely to be crowded out sooner than later in an already inflated market.

If you're looking for more information about the bubble concept, building your creative efforts, or taking your innovations to the next level, contact me.

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