March 31, 2011
Things have been particularly crazy around here of late and as a result, I’ve now broken my “If I’m going to blog I need to do it at least once a week rule.” Ugh. I’m sure it will happen again, but I’m trying, really.
I ran into my friend Dan yesterday on the train, and we were talking about the state of the world, how active and exciting the markets are, and wondering where and how it’s all going to end. He asked me what I had been up to and I told him that my partners and I are finding ourselves in that rare but incredibly energizing circumstance of drinking from an absolute firehose of good dealflow, and starting to wonder what to do about it. Is this one of those waves that you should ride hard and long, doing all the deals that clear your hurdle so long as you keep that hurdle high? Is that true even if it feels like you’re taking on every bit as much as you can handle, and maybe more? It’s certainly tempting, and we know that there are ebbs and flows in this (and every) business. And we know that it feels a whole lot better to be stuck in an ebb if you were super-productive in that last flow. But maybe instead it’s time to take advantage of the high volume of quality stuff and just get super-selective, operate at a normal pace, but only pursue the very best stuff. How to know??
The venture market is remarkably frothy right now, like nothing I’ve seen since 1999. In some ways it’s even every bit as frothy as that period. Fortunately, though, while supply and demand are leading pricing to get a little out of whack in many situations, today is radically more grounded in reality than was the late 90s. Nobody’s talking about throwing out the fundamentals of Keynesian economics or anything. And the activity we’re seeing in our existing portfolio companies is incredibly encouraging – by and large, there’s a lot of firehose drinking there, too. So while the world feels pretty good right now, and the fundamentals of the things we’re excited about are all really interesting and positive, at some point you have to wonder when you’re running up against the end of a cycle. Timing markets is not advisable in this (or any?) business, for sure, but it’s awfully hard not to think about it.
Dan made me feel a bit better about the macro-environment, fortunately. He runs a large and very successful asset management firm, and is a former Goldman MD. His team spends a lot of time thinking about big market forces, and he had just been at a Goldman event yesterday morning where their economists were presenting their prevailing view of the state of the world. Fortunately, despite Japan’s crisis, the Middle East uncertainty, and our own national debt and political gridlock, I can report that both Dan’s team and the Goldman guys seem to think that this party isn’t going to have ‘last call’ for awhile – all the “tip of the spear” indicators they focus on are moving in the right direction.
So what to do? As I think through my twelve years of investing, I’ve never gotten in trouble for doing too many good deals at once. I’ve gotten in trouble when slow times have led to lower standards or loss of focus in the interest of finding things to be excited about. And when I think about our portfolio companies, they for the most part don’t get in trouble for trying to respond positively to too much good, on-target, inbound business interest. It’s when they’ve gotten off focus or stretched too far to make things work that they get in trouble.
The key, clearly, is to not let a lot of market momentum and excitement lead to over-exuberance and pursuing things that are off focus, even when so much looks so good. Keep standards high and focus consistent, and accept that higher volume at the top of the funnel will lead to more coming through the bottom. Within reason, I think we all have it within to surprise ourselves by dialing it up a notch and squeezing more out of ourselves than we thought possible. And if we do, we’ll be really glad that we had this super-productive period when things turn and the flow of exciting opportunities slows to a trickle, which it undoubtedly will.
So, comforted by Dan’s advice and our own experience, we’re pressing ahead. The sun is shining, and it’s time to keep making hay. And besides, it’s a hell of a lot more fun to be busy and productive than cowering in the corner, awaiting disaster.