Making Sense of the Market Dichotomy

I watch the financial markets and see a stock market that is now totally ruled by fear.

And on Main Street, we are facing inflation in food and energy and deflation in housing and wages. The economy may or may not be in a recession, but it clearly sucks for large parts of the US.

And yet in our business we are seeing a lot of bullishness. Our companies are growing, revenues are up not down.

We are working on a potential investment right now and there's more money wanting in the deal than the founder can or will take.

Many of our companies have done financings recently and most of them have gone exceedingly well (by my measure).

So what gives? How can the public markets and the economy be so bad and the web/tech/venture business be so good?

Yesterday, in the middle of a bad day in the markets, Intel (INTC) announced that it is seeing 'strong demand.' Consumers and businesses are still buying computers it seems.

Some of that is because business (certainly the tech business) is increasingly global and much of the developing world is expanding rapidly. So even if the US economy is stalled, there's plenty of business to be done elsewhere.

And some of this is because technology is driving a lot of these changes. Capital is moving out of the US because technology is making it easier to do so. Jobs are moving out of the US because technology is making it easier to do so

I met with a hedge fund manager at the start of this year and he described his portfolio as short banks and dollars, long oil and tech. That sort of sums it up for me.

Don't get me wrong though. I am worried that the bullishness we are experiencing in web/tech/venture will be impacted by what is happening on Wall Street and Main Street.

I think we are already seeing a more conservative posture by most VCs on the newfangled web businesses that have been created in the past four years. It is 'show me the money' time, as it should be.

I am confident that many of these 'newfangled web businesses' will deliver on their promise of revenues and cash flows. But many will not. We haven't seen a huge number of doors closing in web startup land and I think we are going to see more soon

The fact is that the IPO market is dead as a doornail and the M&A market is behaving more rationally and selectively. I don't think bad investments get bailed out nearly as much in the next couple years

But even so the dichotomy of a bad public market and a good venture market is real and makes sense to me. I've always felt that financing new technologies, companies, and business models ought to produce positive returns in good times and bad. I guess we'll see how true that is.

Comments

[Jimmy Lathrop:]

Web business? It is 2008, not 1998. The market is ruled by fear because banks have been robbed of the one product by which they could get high fees and then securitize off on Europeans - the no income no verification loan. Their aggressive marketing of easy credit made American society look to home equity rather than real savings as their backstop.

Now the banks are forced to recapitalize creating a negative feedback loop as they sell off stocks and houses which have fallen into foreclosure which is constricting the economy. Add in high commodities and rising inflation, and the consumer doesn't have the same inclination to invest in a full tank of gas, let alone some stupid web company. Banks aren't going to be investing in established companies, they have to try and get high returns immediately or risk some senator writing a letter and the OTS shutting down their offices over the weekend. The worst part of everything is that "web based businesses" in credit screening, home appraisals, loan origination and securitization made everything much much worse.

Do your investors a favor. Take their money out oil and commodities, put it all in shorting financials, take a vacation for a year, and then look at the opportunities that are left once we have the year of the long knives for these banks. No one is interested in picking out curtains for the house when it is on fire.

2008 Jul 16 07:42 AM

[spadice:]

Finally a positive but realistic vision regarding corporate America.
Americans are too nervous and too pestimistic in general when something goes wrong. The greed-lesson implies:
Fire irresponsible, unethical, greedy co-operators. Let all Americans try to achieve the objectives developped by management teams, applying effective procedures/controles, timely evaluations, applying recommendations necessarrily, employ responsible workers, incl. auditors, accountants. With united efforts corporate America soon will show its strengh. And the Dow Jones..... up to 18.000 !!!
Read my lips.

2008 Jul 16 09:51 AM

[litemog:]

Spadice - are you for real?

2008 Jul 16 10:08 AM

[Slimsum:]

I'm not satisfied with just fear. Gave me good ole Panic and then lets talk about buying in.

2008 Jul 16 10:34 AM

[Urbane Gori...:]

User 172623 - Absolutely right! ... Maybe I need a handle like "VIX35" or "DieYouCapitulatingDog... ... Lathrop's right too.... Financials are being beaten up for good reason. Not really too sure about tech yet anyway... There seem to be a continual 'acne-like' breakout of various sectors on a daily basis, just to watch them get pummelled the next day...

jegan ;-)

2008 Jul 16 01:38 PM