A VC - Latest Comments in Making Sense Of Dichotomy

Re: Making Sense Of Dichotomy

bernard lunn — Fri, 18 Jul 2008 12:32:56 -0000

It feels like the most disruptive/creative destruction period I have ever seen in my 30 years in biz, which means difficult times for big incumbents and good times for (some) small new ventures. All the "safe" investments look dangerous, while real power and leverage go to entrepreneurs. It feels like the best time to be in the start-up biz, anybody who "pulls in their horns" at this time is making a big mistake. But many will and so we need to plan accordingly.

Re: Making Sense Of Dichotomy

fredwilson — Thu, 17 Jul 2008 09:57:13 -0000

I sure hope they are right, but its the journal for god's sake

Re: Making Sense Of Dichotomy

fredwilson — Thu, 17 Jul 2008 09:56:19 -0000

That's true. I know some big investors in wind farms and they can't get the turbines fast enough from GE. Apparently GE makes the best turbines for wind energy in the world

Re: Making Sense Of Dichotomy

Steve Kane — Thu, 17 Jul 2008 09:20:12 -0000

Fair enough I can't know what I don't know.

But GS's public disclosure in their last few quarters has seemed to indicate
that they did not have much exposure (if anything they appear to have
correctly bet against the housing and CDO markets).

Any case, yes its the fear that creates opportunity. IMHO, GS is being
mightily undervalued not because of fundamental or real weaknesses but
because it is an investment bank/financial services play

Btw, another similar opportunity, though maybe not quite so beaten down, is
Fiserv (NASDAQ: FISV)

Re: Making Sense Of Dichotomy

fredwilson — Thu, 17 Jul 2008 08:59:07 -0000

I am sure you are right about GS being attractive steve, but how do you know that they have no off balance sheet liabilities? How do you know there's no roque trader making stupid bets that will go bad?

I think its that very fear that creates the oppty to buy this at 7.5 earnings

Fred

Re: Making Sense Of Dichotomy

David B. — Thu, 17 Jul 2008 08:26:14 -0000

Fair enough, but what I'm talking about is gambling at a different level. I know it's not as simple as that, but I think that's playing a role. There are other things going on too. Such as the excitement that Web 2.0 still hasn't had its shakeout. There were 20 search engines; now there's essentially just the Goog because it hit the sweet spot. In a lot of other spaces out there, that sweet spot is still for the taking.

Re: Making Sense Of Dichotomy

basilpeters — Wed, 16 Jul 2008 23:11:08 -0000

Great post, Fred. I am seeing the same thing in the angel investor and entrepreneur community up here in Vancouver. I've part of a local angel group here for eight years. All of a sudden, just this summer, the number of companies that want to present and the number of angels attending doubled. The early stage tech market here is almost hot. This is a post I did for our hyperlocal tech blog http://www.techvibes.com/bl...

Re: Making Sense Of Dichotomy

lindsayrgwatt — Wed, 16 Jul 2008 19:48:12 -0000

I'm not surprised that you've still got lots of potential investments as you're capitalizing on some very long term trends that are still in the very early growth stage.

If you look back at the Depression (and I'm totally confident we're not heading into one), you'd see that the following did really well:
-Products & services that capitalized on fundamental technological changes:
-Widespread automobiles led to trailers, car radios, drive-in theaters and motels
-Rural electrification led to more radios and light bulbs sold
-The diesel locomotive killed off the steam locomotive
-Products that made life easier (particularly for women): refrigerators, tampons
-Products that met needs that people never before knew they had: Clairol

I've no doubt that entrepreneurs continue to bring these to you every day.

Re: Making Sense Of Dichotomy

Lumberg — Wed, 16 Jul 2008 16:18:54 -0000

GE is also making turbines for the windmill industry, and demand has sky rocketed.

Re: Making Sense Of Dichotomy

terra210 — Wed, 16 Jul 2008 13:58:53 -0000

As long as branding and marketing can be successful in convincing people that these companies and their products and services are necessary, (like apple does so well), then they will sustain profits for investors. As long as VC's can populate the field with new companies that have this kind of tail, then VC's will skate ahead of the blighted economy. But, if the momentum of those suffering, gets too large, the branding and marketing will not be effective, and losses will occur. So, it is important to make sure, that A.) need is communicated and effectively instilled in the buying public for the comanies work. B.) Something is done to make sure the suffering is not too great by those suffering losses. Setting up a short position on something that causes suffering, is a bad idea in the long run.

There has to be balance, even for those who manage large funds.

Re: Making Sense Of Dichotomy

terra210 — Wed, 16 Jul 2008 13:48:42 -0000

This is a very interesting reply with great insights. I never thought of the long tail of the dot com boom, as the funding arm of VC's but of course. And they are finite; true. Not sure about the online video monetization aspect though. But that may be my own reluctance to see it.

Re: Making Sense Of Dichotomy

rfradin — Wed, 16 Jul 2008 13:02:40 -0000

Wall Street Journal's Deal Journal blog had a great post yestesrday on all the things that are going well and how much is really wrong vs. just psychology - you can read it here... http://blogs.wsj.com/deals/...

Re: Making Sense Of Dichotomy

Druce — Wed, 16 Jul 2008 11:41:25 -0000

If we're talking names I'd be more inclined to short 1 GS @ 165 and buy 6 GE @ 27.

GS is the best company in the worst industry for the next 10 years.

GE got taken out and shot, but their finance stuff isn't exactly subprime and they're not going to have liquidity issues, they produce all that stuff the Chinese can't make yet and need to buy (turbines, jet engines, locomotives, CAT scanners), and the dollar will help them. And a 4.5% dividend.

and let's talk in 10 years :)

Re: Making Sense Of Dichotomy

Steve Kane — Wed, 16 Jul 2008 11:23:45 -0000

i'd argue Goldman Sachs (NYSE: GS) is a screaming buy - at $165/share its trading at P/E/ of about 7.5 (with a small but decent 0.80% dividend) , and is quite near its 52 week low, and with little if any material exposure due to off-balance-sheet mystery meat

Re: Making Sense Of Dichotomy

RacerRick — Wed, 16 Jul 2008 10:54:46 -0000

Back in 2000/2001, lots of folks lost their jobs/companies went out of business.

This time, though the economy seems in some ways much worse, I know no one who has lost a job (out here in the Midwest).

And my friends at manufacturing companies are reporting great years (most of them--some are doing terrible).

And I know people who have quit their jobs to start their own ventures.

It's a weird economy for sure.

Re: Making Sense Of Dichotomy

RacerRick — Wed, 16 Jul 2008 10:51:53 -0000

Funny... publicly traded gambling cos aren't doing well.

Re: Making Sense Of Dichotomy

Lumberg — Wed, 16 Jul 2008 10:43:19 -0000

First of all, Tech / Web / etc. learned their lesson from the dotcom bubble. That bubble rippled across everything related to IT. Then of course 9/11 made it even more severe. But the industry learned a valuable lesson rfom back then and has not forgotten it. Over the past 7 years, IT investment has been very smart and focused. Therefore, the industry was already lean and more efficient than the banking industry.

I think this is why IT (web 2.0 included) has not been hit as hard as other sectors.

Re: Making Sense Of Dichotomy

fredwilson — Wed, 16 Jul 2008 10:41:05 -0000

That's a useful perspective druce. Thanks

Re: Making Sense Of Dichotomy

Chris Dodge — Wed, 16 Jul 2008 10:30:23 -0000

It'll be interesting to see upcoming Q2 and - later Q3 - earning reports from bell-weather consumer companies. That will be the canary-in-the-coalmine regarding how the current economic situation is affecting Main Street. Ultimately, I'm interested to see how online Ad spending holds up over the next 12 months, as so many startups are assuming they can run operations (and get a return on VC investment) through online advertising, primarily display advertising.

Re: Making Sense Of Dichotomy

fredwilson — Wed, 16 Jul 2008 10:28:09 -0000

Ha!

Re: Making Sense Of Dichotomy

Druce — Wed, 16 Jul 2008 10:26:23 -0000

I dunno, if fear was really ruling, there would be a lot of screaming buys.

Fear is ruling financial stocks. But are you going to buy Citibank, with $1 trillion in 'mystery meat' off-balance sheet assets that even executive committee chairman Robert Rubin didn't understand, and said he was surprised they had 'liquidity puts' requiring Citibank to backstop them? And that doesn't even go into the Level 3 assets? (You have fallen into the pit and reached level 3. You are likely to be eaten by a grue).

You can still buy Google or Apple at 35 times earnings. You can buy materials or oil stocks at cheap multiples of possibly peak earnings. You can buy some bellwether consumer stocks with international exposure at OK valuations. But it's hard to see fear ruling the market in any sense that would predict a bottom.

If you know financial stocks that have been taken out and shot but aren't going to be exposed to credit problems, those would be screaming buys, but I don't know any. Elsewhere, if anything there has been surprisingly little contagion.

Re: Making Sense Of Dichotomy

fredwilson — Wed, 16 Jul 2008 10:17:06 -0000

Excellent points and all very much true

Re: Making Sense Of Dichotomy

Chris Dodge — Wed, 16 Jul 2008 10:15:07 -0000

Fred,

Question: how much of this "bullish" VC investing in portfolio opportunities do you think is being driven by 10 year VC funds that are nearing the end of their tenures? 10 years ago (1998) we were in the middle of the Web 1.0 phase, so is there a lot of unused capital lying around from those funds?!?

However, I do sense that the recent rise in startup valuations will have to tick dowards to remove some of the risk from the investment. Also, I think one of the key Application drivers of Web 2.0 (online Video) is on the downward tail of it's investment lifecycle and there will be a large consolidation of online video companies H2 2008 and into 2009 as they burn through their series-C and even D money. Unless - of course - there has been solid progress made in online video monetization.

- Chris

Re: Making Sense Of Dichotomy

kidmercury — Wed, 16 Jul 2008 10:05:55 -0000

the web is definitely going to be a lot better off than almost all other niches, and i for one am extremely grateful that this ended up being my career path (rather than one of the many other industries that is going to feel this real bad). the US is entering a hyperinflationary depression; most likely the rest of the world will follow (as the rest of the world is so tied to the US dollar). this could take a while (i hope) but it could also happen in a relatively short amount of time, especially if our slavemasters decide to exacerbate the war agenda.

but a hyperinflationary depression is in the midst of unfolding, and that's a real issue for all US businesses, web-based or not. i think this is pretty much consensus amongst legit monetary economists (i.e. economists who understand how much of a fraud the fed is). IMO attempts to minimize this threat via speculative hedging is very much worthwhile.

one underappreciated concern i feel is the growing threat of regulation. the govt is increasing its power grab and we are clearly moving to a bigger and more socialist/fascist form of govt. hyperinflation introduces the threat of price controls, which is almost always a horrifyingly awful idea. again, we web people are probably more safe from stupid price controls than our land-based peers, though web regulation is far from inevitable (especially since the almighty al qaeda could bring us down at any moment and so we need greater regulation to save us from that bunch of wily cave dwellers).

Re: Making Sense Of Dichotomy

Chris Yeh — Wed, 16 Jul 2008 09:47:53 -0000

Public market issues inevitably impact the venture market, though there is a definite lag. During previous downturns, venture investing has always been impacted. Those who deny this fact are like the real estate economists who repeatedly and loudly proclaimed, "Housing prices never decline."

However, this doesn't mean that we should stop making investments. Many of the best investments are made during bad times, when bold investors have less competition and can get better terms, and when portfolio companies don't have to worry about scores of me-too competitors getting funded.

The issue is that when investing during a downturn, it becomes even more essential to have a plan for raising subsequent rounds of funding. The "Field of Dreams" approach no longer suffices, and high valuations from the good times may turn into dangerous millstones when trying to raise more.