There is a lot of stuff in the blogosphere on the subject of the impending crash in seed investments and its corollary: that all this seed investing that is going on is somehow bad for entrepreneurs and investors and, by extension, the entire ecosystem. The various arguments are nicely laid out in a couple of posts by Andy Payne first “Coming Seed Fund Crash” and second “More on the ‘Seed Fund Crash’”. There is also a nice summary of the discussion at Cloud Avenue. Finally, Paul Kedrowsky and Chris Dixon have weighed in.

The thing that strikes me about this conversation is that it is all about the effect on individual players in the ecosystem entrepreneurs (is this breeding too much competition?), VCs (are they good choices or bad because of signaling?), superangels (can they support companies in hard times?), and for all is the frenzy producing downward pressure (even eliminating) good returns on exit?

The lesson that everyone seems to draw is that there is going to be a crash in the superseed market and that the whole frenzy (if it is fair to call it that) is bad for the ecosystem.

I wonder, though, if you step back and look at the “big” picture with some historical perspective if the last conclusion (the bubble and the inevitable crash is bad for everyone) is true. It is certainly bad for the investors who lose their $500K (or whatever) investment. It sucks for the entrepreneur who goes belly up.

But is it bad for the ecosystem?

I am going to argue that it is necessary for the ecosystem and that good stuff comes out of these periodic bubbles and crashes. 

The obvious example is the dotcom bubble. It resulted in way too much money chasing way too many ideas and lots and lots of carnage. Lots of investors lost their proverbial shirts and lots of entrepreneurs shut down lots of companies. But it did result in a lot of good stuff – not the least of which is the place of the internet in world culture today (and lots of great companies that employ lots of people).

There is something creative about the scrum. 

Another way to look at it is this: Can you imagine an orderly world in which the correct amount of capital is logically paired with the right entrepreneurs and ideas to eliminate (or at least massively reduce) investment risk and boost investment returns? Just stating the proposition makes it seem unlikely (impossible). Isn’t that what the old Soviet Union five year plans were supposed to do?

I am no academic, but I would love to know if there is any compelling research around the benefits of bubbles and crashes.