No, I am not a Pollyanna. I see the today’s carnage as much as everyone else. This year is going to be tough. The destructive firestorm of leveraged, momentum investing has destroyed much of the forest. But the forest will begin its renewal because Life Goes On, and with it ingenuity, entrepreneurship, and innovation.
This firestorm is like the Year 2000 cataclysm, with a powerful difference. Like 2000, there are questions about the ‘death of venture capital’ the ‘death of the consumer’ and the ‘death of the Web.’ It’s all bullshit. It's just a cycle.
Two phenomena emerged from that last great vc-techno contraction. First, the fire incinerated the weakest companies. It left standing, weakened, but inherently great restart and late-stage opportunities. Yipes.com was a terrific example, founded in July 1999 as a IP data networking services provider. Left for dead twice with two recaps, the third time was the charm. After raising over $300M during the 1999-2005 period. Much of this capital was wiped out. Yipes gave great returns for the investors who saw the opportunity anew in 2005 (disclaimer: we led this round). Acquired for $300M cash in 2007 by Reliance Communications, Yipes was a great company, originally ahead of its time, and made us 5X in 32 months. We will see dozens of these opportunities in the coming years, but it requires an investment discipline tethered to public market realities about who are likely buyers, why, and at what valuations.
The second phenomenon to emerge from 2000 was the re-invigoration of the Web. As with every wave of innovation, much of the activity became more imitative than innovative as this matured. YouTube was but the first of hundreds of video aggregators. MySpace was the first of thousands of social networks. (If Andy Warhol were alive today, he’d probably be telling us that in the future we will all be our own social network.) The venture money that went into most of these imitations will soon be written off.
Some substantial services were built from this post-2000 renaissance. Few achieved both scale and profitability as an independent company. (LinkedIn is one that may have achieved that goal. Facebook?) Nevertheless, there were many successful exits from the web revival, though paltry few in proportion to the amount of capital, media attention and entrepreneurial energy invested.
So why am I so sanguine about the prospects for venture capital as everyone seems to sound the alarm about Recession, the lack of capital, and the fear gripping the markets? It is simple:
- Venture capital returns are predicated on scarcity of risk capital. It has been all too abundant. That will change.
- Many good businesses will be left on the beach as the rest are washed out to sea – the remaining VCs will invest in them and both the entrepreneurs and VCs will get rewarded as the survivors gain market share and become successes in the economic recover.
- The economic recovery plan of the new Administration will be massive and favor investments in productivity-enhancing growth sectors like information technology and energy technology.
Investments in broadband, wireless, and mobile multi-core devices and cloud computing architectures will continue to reduce the cost of providing high value services in healthcare, personal entertainment, and even traditional enterprises. Cloud-based computing will allow enterprises to treat IT as a variable cost, increasing their willingness to adopt by maintaining flexibility without big upfront expenditures.
As the fire continues to rage in financial markets, it is hard to imagine when Opportunity will reappear. But the truth is when everyone sees Opportunity; they are only seeing the reflection. True Opportunity appears at the market bottom, not at the top. It’s times like these that test what you believe in, and I believe in the Business Cycle, Human Creativity, and the stimulative effect of massive Government spending. 2009 and 2010 will be great times to invest to reap the benefits in 2012-2014, for those who can judge both business risk and liquidity risk, and have the courage of their convictions.
