How the Product Bubble Burst

The Mystery Box is Out of Outs

For nearly two decades, investors looking for somewhere to park trillions of freshly printed dollars funded the Product Management bubble. Now it’s bursting.

How we got here

Product Managers straddle two economies that are increasingly disconnected. In the Real economy, businesses run, ordinary people work for a living and buy things, and cash changes hands. In the Asset economy, investors own, trade, and bet on three kind of things:

• 🏠Real estate, where you own land and the things on it;

• 💳Debt, where you are due a mathematically calculated series of payments; and

• 🪄Equity, where you get whatever is in the Mystery Box.

Two of those are easy to value. The other is a Mystery Box.

Lies, damn lies, and discounted cashflows

The Lesser Known “Bridge over Troubled Asset Relief Program”

The worlds of owning and doing are bridged on paper by financial models - mixes of narrative and math that assert that THIS piece of the Asset economy is worth a certain amount because it maps exactly to THAT piece of the Real economy. The more degrees of freedom your narrative has, the more you can juice your model, and the higher of a price you can claim for your Asset.

Those paper bridges have gotten more strained as owners collect more wealth than consumers. It turns out that real estate and debt are far too tangible and legible to handle it. At the end of the day, a buyer can look at most Real Estate with their eyes, and the only thing unknown about Debt is the default rate. These valuations are simply too understandable and objective to crank up to where they need to be.

A Boat’s a Boat, but a Mystery Box could be anything! Even a Boat!

But a Mystery Box… A Mystery Box could hold any story, worth any amount. Boosted by storytelling CEOs, corporate equity has absorbed more and more wealth. In the 1960s, the Mystery Box held 10-15% of global wealth and CEOs made 20-30x the median worker’s wage. By the 2020s, CEO compensation had largely shifted from salary to stock and those numbers were up to 35% and 350-400x.

Severance

Things are about to get… weird.

After a 2008 crisis where increasingly weird and implausible stories about mortgage default rates shattered the global economy, the two worlds completely decoupled. From 2008 to 2020, amidst the greatest money-printing operation in history, the Consumer Price Index went up by just 1.8% per year. Economic policy circles in DC were abuzz with discussions of Modern Monetary Theory, a complicated bit of academia that convinced politicians that they could keep pumping out money without inflation. Meanwhile, the Nasdaq ballooned by 18% per year for 16 years in a row in a stunning run of what was definitely “value creation” and not “asset inflation driven by $4 trillion of free money that only went to the people who own things.”

Somehow the prices for things that people owned (corporations, real estate, and bitcoin) had to go up massively without the prices for things that people actually used changing very much. We started to run out of stories that could absorb the trillions of dollars that had been handed to the banks. We needed stories that redlined all the levers on a financial model. The unit costs needed to be plausibly non-existent. The growth needed to plausibly be both exponential and free. And the market needed to be plausibly global.

“Someday never comes” - Creedence Clearwater Revival

Just as importantly, inflated asset prices required those narrative levers to be un-falsifiable for as long as possible. In other words, investors began to value outs in the poker sense and explicitly avoided “fail fast.” Conveniently, zero interest rates meant the last card never came. Investors needed to believe that the CEO’s narrative could still come true at some point, so they began to avoid stories that could be disproven. They wanted something that required up front investment, but could eventually pay off infinitely. “Higher risk requires higher returns” was replaced with “an obscure future can support a higher valuation.”

It’s nothing some Scrum Ceremonies can’t fix

Growth in Post-It Notes and Beanbag Chairs have also been off the charts

There is one type of Mystery Box that ticks all those boxes, and it’s the ones filled with SaaS, Analytics, User Experiences that Surprise and Delight, Sprint Ceremonies, and Minimal Viable Products. From 2008-2020, consumer prices went up 22% while publicly listed tech companies prices on the Nasdaq went up 450%... and those were the Mystery Boxes with reporting requirements. The prices of true Mystery Boxes - privately held tech companies filling up venture and private equity funds - went up by much, much more.

Those Mystery Boxes support an ecosystem of Product Managers, Designers, Engineers, and Marketers whose compensation has been inflated by investor dollars constantly “chasing the draw.” The primary job for these tech workers - especially the PMs - has been to help executive teams and boards rewrite failing stories into ones that could still potentially work some day. These narrative turns, called “pivots,” could theoretically go anywhere. A development methodology called “Agile” took over software shops across the world, trading away rigor in favor of the ability to pivot.

Pop.

Those responsible have been sacked.

In 2022 the Fed discovered that pumping a couple trillion into the economy does - in fact - lead to inflation in the place where you pumped it. Some COVID relief (a fraction of what had gone to banks) actually went to consumers, and the cost of living immediately exploded (by a fraction of the explosion in tech stocks). In an attempt to mop this up, the Fed also discovered that interest rates can go above zero.

Software projects now have to compete with the guaranteed return of higher interest rates. Planning horizons have shortened, and money is being soaked up. Investors are now looking for stories that will come true rather soon, rather than stories that could come true for as long as possible.

In other words, the Mystery Boxes are out of outs, and they’re taking the Product bubble and tens of thousand of tech jobs with them. Welcome to Cold Water, where we explore how we got here and where we’re going.