We were in London a few weeks ago and had dinner with an investor who used the word “‘picker” when describing the best investors. Fred and I talked about pickers for the next few days. It is such a great word.
In the mid-90’s, I was at Silicon Alley Reporter. At the time, Meckler would put on a classic trade show event at the Javits Center around the start-up world. SAR always had a gorilla presence giving out our publication without paying for a booth. We also put on a party one of the evenings around the show. I remember walking into the party, that was humming with people and a person who walked in with me, turned to me and said: “Wow, it feels like the record industry circa 1980”. I remember that conversation as clear as it was yesterday because what it said to me is this whole thing is going to crash.
The world of venture capital has grown rapidly over the last decade. In the 80’s everyone gravitated towards investment banking and now everyone is gravitating towards venture capital. Right now, companies are overvalued from the onset. Too expensive early on means too expensive later on which equals minimal returns for venture funds which means at one point LP (limited partners) will start turning their attention to other investment opportunities. It will take time but it will happen.
The successes we are currently seeing were seeded 5-10 years ago. Those companies were not valued at the prices we are seeing today. They were valued significantly less and the inflation of the past 10 years does not equal the inflation of these new companies value. Currently, the successes (and that means exits) look great for everyone involved and it should but look back to where it began. As in, at today’s prices to believe that the winners will have the same payback well I would say, don’t believe the hype.
The rise of the big fund means bigger management fees and less returns but for the firms that stay lean and mean, the Catch-22 is that it is hard to get into deals at reasonable prices and get the ownership that their thesis calls for. In the past weeks, I have seen one company do their first round, on a consumer brand product without having a product yet to sell, at a software valuation. I saw another get a price that was so out of whack to the value that has been created. I don’t get it.
Let’s get back to the pickers. It is the pickers, who find the gems that nobody is looking at, understand the voids in a market and are able to find a small group of people working on a problem that nobody else sees. Those companies will be valued at what they should be and the investors who are counter-intuitive to the herd will be the winners.
These days I feel like I am back at that Silicon Alley Reporter party and the aftermath was really not very pretty.