There's an old economists' joke that goes like this: A little boy is walking with his grandfather, an economist. He spies a dollars 10 bill lying in the street and runs to pick it up. His grandfather says sharply: 'Leave it there! It must be a fake. The market works, and if it were real someone else would already have picked it up!' There's a modern version. A young banker is evaluating a high-tech company seeking to go public. A senior (but not necessarily older) banker says quickly: 'Grab it quick! The venture capitalists paid dollars 40 million for it; it must be worth at least dollars 100 million!' But recently we've gone back to a better approach to evaluating companies: actually examining the value of the asset in question. Over the past few months, a sense of reality has set in. Previously, investors were snapping up companies to sell them to other investors. Now they are looking at them with the eyes of someone who may be owning them for a while. In other words, they are looking for a story they will believe themselves. Page views, audiences, traffic and buzz were once taken as indicators of future profits; it turns out they were merely indicators of investor interest in a market frenzy that is now over. But it's profits that interest long-term investors. For a venture capitalist, this cuts both ways. Start-ups are no longer asking for more money than they deserve and their business plans are more realistic. As a small investor, I could rarely play in last year's market; I refused to put up my own money for a company with no clear earnings prospects.
But now opportunities are all over the place. 'One venture capitalist turned me down and then told me to come back if I couldn't get funding anywhere else. He was interested in 'buying' the company for nothing if he had the chance,' says an unhappy entrepreneur. The companies I did invest in all need money for growth, and new money is hard to get these days. Investors are generally busy rescuing their own investments, not looking for new ones. The new environment also imposes a healthy discipline.
My companies are now focusing on their core business rather than going off in too many directions. They no longer want to crack the big time by going global; they want to make money in their home market.
Another piece of good news - while we can't afford to lose money, neither can our competitors. Suddenly, we no longer have to compete with people who are funded to lose money for years. I'd much rather compete by running the business well than by raising money well. It's also easier to hire managers, and they have more reasonable expectations. Most are not being solicited by five other companies; some come from companies that have folded or are capsizing. In some cases, the potential managers were not responsible for their companies' failures; in other cases, they were. In either case, they probably learned a lot from the experience, and it's usually easier to learn from failure than from success.
To quote another old joke: a company fails and loses the investor dollars 10 million. The investor calls the founder and asks him to join another company he has funded. 'I'm amazed,' says the founder. 'After all that, you still want me to work for you!' 'I spent dollars 10 million on your education,' says the venture capitalist. 'Why should I let someone else get the benefit?'