Tag: macro

Jan 2 2019

What’s Your Frame of Reference for a Downturn?

A lot of people are predicting that 2018 was the peak and the beginning of a downturn / recession / whatever-you-want-to-call-it.

I’m not a predictor so I have no idea. I try not to pay attention to the macro (as I’ve said many times), but I do think it is important to have a frame of reference about it.

My frame of reference has a few components.

First, it’s going to be incredibly noisy out here on planet Earth. The year 2018, especially in the United States, was full of endless, chaotic noise that carried very little signal. It was either noise for noise’s sake (and page views), or misdirection (like in the movie Swordfish).

This isn’t just politics. It’s everything. And it’s going to get noisier. So, the search for signal gets harder, more complicated, and more important.

Next, the indicators are trailing, not leading. By the time people are prognosticating on the direction of things, the prices of crypto, interest rates, IPOs, the stock market, P/E multiples, and everything else, it’s too late – you have already missed the moment you are probably searching for. So, put all this stuff in the noise category. This is really difficult, especially given our natural human tendency to try to anticipate and react to things in order to win (or believe we are winning.)

The core of my frame of reference is that I’m playing a very long game. At 53, I’ve already been through a lot of downturns – both large and small ones. Some of the big ones impacted the things I was involved in directly (like the collapse of the Internet bubble) and were incredibly brutal to my world. Others, like the global financial crisis, were adjacent to my world. I didn’t even notice many others. But, in all cases, the downturn ended. And, with the benefit of hindsight, there were huge opportunities even in the downturn.

Ultimately, we all die. I’m currently reading Tolstoy’s A Calendar of Wisdom: Daily Thoughts to Nourish the Soul (I’m on January 31st – I read it in the bathroom.) One thing is clear when reading between the lines – the downturn doesn’t care about us.

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Jul 23 2015

1985: Oil Prices Will Go Up Forever

This is not a post about a bubble, real or imagined. It’s a lesson from when I was 20 years old.

I showed up at MIT as an eager freshman. I was 17, from Dallas, with a nice pair of cowboy boots and long hair. On my first day, at the freshman picnic, I heard that 50% of us would end up in the bottom half of our class. Fifteen minutes later I was whisked away in a white van to ADP, the fraternity I ended up pledging and living in for four years, next to WILG and across the street from The Mandarin (no longer there), Mary Chung (still there and still awesome), and Toscanini’s (still there and even more awesome.) That night I met Dave Jilk, my first business partner and one of my best friends.

Dave was a senior and I was a freshman. He took me under his wing and we became thick as thieves. He was Course 6 and easily one of the best coders around, even though we didn’t call them coders there. I was pretty good also, but limited to BASIC and Pascal, which were the two languages I used to write the commercial software I was working on for Petcom. Dave was into business, read Forbes cover to cover each time it came out, and hung around with some Sloan people. We’d go to Mandarin, Mary Chung, or somewhere in the North End, eat and drink way too much, and talk about computers and business. Ok – we talked about other things that 18 – 22 year old young men talk about, but there was a lot of computers and business in the mix.

Petcom, the company I worked for, wrote PC-based oil and gas software. They had one competitor – David P. Cook and Associates (which, in a twist of irony, morphed into Blockbuster – if you don’t know the story, Wikipedia has a fun history snippet.) In addition to getting paid $10 / hour (which quickly taught me that if I worked more hours, I got paid more money) I received a 5% royalty on gross sales of the two products I wrote (PC Log and PC Economics).

In 1983 the oil business was booming and Petcom was growing quickly. As a freshman, I’d get a monthly royalty check – sometimes $1,000, sometimes $2,500, and once $11,000. I never knew what it was going to be, so I was always very excited when the blue Petcom check showed up at 351 Massachusetts Avenue in my mail cubby. I’d often grab a bunch of frat brothers for lunch, go to Mandarin, and pay for whatever we ate.


via chartsbin.com

The graph gives away the punch line.

While the price of oil more than doubled between 1978 and 1979, from $14 to $31 / barrel, it had been slowly drifting down from a high of almost $37 in 1980 to $29 in 1983. But that drift was seductive since it was so much higher than the $14 / barrel in 1978 and created this sense that it would once again go much higher.

In the summer of 1985, I was working full time at Petcom. Things for the company were absolutely rocking. We had grown from three people (the two founder + me) when I started to over 20 people. We had fancy offices on the 7th floor of a building across the street in the Dallas from the beautiful Galleria Mall. Software was being sold, my royalty checks were huge (I think I made around $80,000 in 1985, but that’s just a vague guess), and life was grand.

I went back to school in the fall. That’s when I uttered a deeply stupid phrase to Dave.

“Oil Prices Will Go Up Forever”

Dave challenged me. We argued. We probably went out to dinner somewhere in the North End, ate a huge amount of pasta and red wine, and then went to The Parker House in downtown Boston and drank scotch until we eventually stumbled back to 351 Mass Ave.

In December, 1985, Saudi Arabia flooded the market for oil and by the end of 1986 the price of a barrel of oil was around $10.

I didn’t work at Petcom that summer. Their phones stopped ringing. Customers went out of business right and left. The company shrunk back down to the two founders who then started the first CD music store in Dallas, repurposing their software for the CD business, just like David P. Cook had done for the video business. My royalty checks had stopped, but fortunately I had started Feld Technologies and 1986 was the summer of 2430 Denmark in Garland, Texas.

The oil and gas business wasn’t the only one that got slaughtered by this. Texas real estate was booming, until it wasn’t. My dad, a doctor, was a small partner in a bunch of real estate partnerships. By 1990 he was a large partner in a small number of the real estate partnerships that hadn’t failed, as he was one of the few partners who could keep writing checks. I don’t know exactly how it turned out for him, but since he had staying power I expect he broke even or even made some money. But I remember the stress around the dinner table when I was home in the summer and over the phone when we talked as he was fighting through what was likely a very similar mess to the one I would encounter several times later in my life.

I learned a powerful lesson that laid some fundamental groundwork for how I think about business. In the Internet bubble, while I kept this lesson in the back of my mind, I ended up suspending disbelief, like so many others, in 2000 and into the spring of 2001. I learned this lesson again, but in a more profound way.

Through each of these aggressive down cycles, amazing companies were created. Some of the great real estate fortunes emerged from the rubble of Dallas in the 1980s. You don’t have to look very far to see some remarkable companies that survived and transcended the Internet bubble collapsing in 2001. And for many, 2008 and 2009 seems very far in the distant past, even though it still massively impacts others in a very negative way.

Oil prices do not go up forever. Neither does anything else.

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May 20 2015

Cynic or Optimist?

There will be a downturn. It might be in a day. It might be in a year. It might be in a decade. We have no idea when it will come, but it will come.

I was talking to a VC yesterday who was an entrepreneur in the late 1990s, which we now commonly referred to as the Internet bubble. He was very successful as an entrepreneur and has continued to be very successful as a VC. A VC who has been around for a long time recently told him that you aren’t a real VC until you’ve been through at least one downturn. He commented that while knowing this, it’s hard not to be a cynic when things are going well and he wondered out loud if there was a way to balance optimism and cynicism as a VC. I had a quick reaction about continually being deeply rational about what one encounters, but it didn’t feel very satisfying to me as an answer.

We are in a very positive part of the startup / entrepreneurship cycle. Given that, there is a regularly occurring discussion about whether or not we are in a bubble, or this is a bubble, or is a bubble forming, or some other bubble thing. The conversations devolve quickly into “yes we are” and “no we aren’t.” This is often followed by justifications of positions with a bunch of random data to support the position, where most of the data is either inaccurate, narrowly chosen with huge selection bias, or a function of what the public market guys like to call “talking your own book.”

I have no idea if we are in a bubble or not. And I don’t care since, as an early stage investor, I play a long term investing game, because I have to. I can’t control liquidity or timing, especially when I initially make an investment. The market is going to move wherever it is going to move and is completely exogenous to me so timing it is irrelevant.

I’ve lived through several severe cycles – both positive and negative – as an investor. I’ve had successful companies created and built at all stages of the cycle. I’ve had failure at all stages of the cycle. There are great strategies for success in both the positive part of the cycle and the negative part of the cycle. And you can do completely stupid things that blow up your company in both the positive and negative part of the cycle. While the stage of a cycle has impact on a company, it’s only one factor.

As I pondered the cynic vs. optimist question this morning, I landed on a synthetic view that feels right to me. I was walking around my office looking at my physical book shelves, mostly for words to try to characterize what I was thinking about, and I landed on Andy Grove’s amazing book Only The Paranoid Survive. I bought the physical copy after reading The Intel Trinity (one of the business / history books I’ve read recently) which inspired me to go back and read – slowly and on paper – each of Andy Grove’s books.

Boom – that was it – I’m a paranoid optimist in a business context. As a human, I’m optimistic. I believe in good. I like good. I hope for good. I prefer good. I am hopeful about the future. I love the work I do. I love helping create companies. I love playing with technology. I love seeing amazing new ideas come to life. I love being alive. I hope to live a long time.

But I know that there is plenty of bad out there. I’ve experienced a lot directly in business, whether it’s bad actors, stupid decisions, unintended negative consequences, self-inflicted trauma, passive aggressive behavior, or outright deceit. I’ve made assumptions about what I think will happen only to have my assumptions be completely incorrect, or correct in my parallel universe to the reality that actually ensues. Some of this has been under my control or impacted by my viewpoint while some of it has nothing to do with me in any way, but is like the proverbial elephant that accidentally steps on and crushes the ant.

When I link this to the cynic vs. optimist dichotomy, I’m definitely not a cynic. But I’m not an unbridled optimist that can only expect more positive. And I don’t vacillate between cynic and optimist based on individual situations, companies, or the macro.

Instead, I ignore the macro. I recognize that I have no control over it. I try to use the experience and lessons from the last 30 years of being in business to guide me steadily through whatever part of the cycle we are in. I know the cycle will change and the companies I’m part of will have the opportunity to be successful regardless of the situation. But I also know they have the opportunity to fail. And that’s where the paranoia comes in. It’s a powerful calibrator.

When I reflect on Andy Grove’s leadership of Intel, it was through a series of intense up and down cycles – both within the semiconductor industry as well as the global macro environment. While he leads with the idea of being intensely paranoid, there’s a thread of clear optimism through his big decisions. When faced with brutal challenges, he dealt with them. When there was daylight in front of him, he ran incredibly hard in a positive way to cover as much ground as possible. But he always knew he’d face more challenges.

The next time I get asked the question, “How can you avoid turning into a cynic when things are going well and you know it won’t last forever” I now have an answer. Be a paranoid optimist.

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Apr 21 2014

The Great Internet Stock Correction of 1997, or 1999, or …

Yesterday I read Kara Swisher’s post What Does the Recent Tech Stock Downturn Mean? The Truth Is Nobody Knows. It’s great. Go read it – I’ll wait for you.

In the last two weeks there’s been a flurry of articles about the implications of a 25% decline in the public market value of a bunch of Internet stocks. They range from “the sky is falling” to “the IPO market window is closing” to “there will be more stupid television shows about Silicon Valley” (I prefer Game of Thrones and 24, thank you very much.)

As many of the Cylons from BSG are fond of saying, “All this has happened before, and all of it will happen again.”

I remember a moment in time in 1997. We were in the middle of fundraising for Softbank Venture Capital (which became Mobius Venture Capital.) It was the first VC fund I’d helped raise. We probably had about $150m committed and were running around trying to get to $300m for what we had positioned as a dedicated Internet VC fund. I can’t remember the month, but I think it was in the summer, that all the public Internet stocks dropped a bunch (probably 25%). Suddenly every meeting we had turned cold with all of our potential LPs either asking how we were going to make money on the Internet or asserting that there was no way that we’d make money on the Internet. A few months later the public markets for Internet stocks turned around and we closed a $330 million fund which ended up doing extremely well.

In 1999 we filed an S-1 to take Sage Networks public. I was a co-founder and co-chairman. We were planning to go public in the early spring, but in February we acquired a company called Interliant which doubled our side. We had to grind through a refiling of our S-1 which cost us a month. We finally hit the road with the intention of going public by the end of April. Our underwriters (Merrill Lynch) told us not to worry that the SEC hadn’t cleared our filing yet – they always did it a few days before you went public. I spent three weeks on a road show with our president and CFO building the book. Day after day passed and we didn’t hear from the SEC. Two days before we were supposed to price, the book was 10x oversubscribed and our $9 – $11 price looked like it could move up meaningfully. They day we were supposed to price we still hadn’t heard from the SEC. “Don’t worry” said the banker at Merrill Lynch, “We’ll get it done.” The next day, when we were supposed to be trading, a fax came through from the SEC. It was 20 pages long and had about a month’s worth of work to pull together on the F-pages of the filing (we had acquired 20 companies.) That night we all drank a lot of scotch – we knew the IPO wasn’t going to happen that week and we’d just wasted a road show. I remember being completely numb the next day as I flew home from NY to Boulder, not completely understanding how we had just blown the IPO.

A few weeks later Internet stocks started to fall. I vaguely recall that eBay was one of the bellwethers at the time and I think it had a big drop. Suddenly the IPO market window closed. No one was interested in Internet stocks, let alone one that was being tortured by the SEC for accounting disclosure on a bunch of acquisitions of tiny companies.

At the end of June I went to Italy for a week vacation with my wife Amy and my parents. We did a walking trip which I remember being wonderful – 10 miles a day finished off with lots of food and wine in a beautiful Italian countryside. No phones, no email. Until Thursday, when I got a call at the villa we were staying at from one of my board members who said “you have to come home right now.” I responded with “I’m flying home Sunday and will be back on Monday.” He said, “No – now – the road show starts again Monday and you have to be at the printer on Saturday to sign off on the filing.”

I scrambled to find a flight home from the middle of Italy, got to NY by Saturday mid-day, re-started the road show on Monday, and we were public by the end of the week. We went out at $10 and traded up to $15. When I checked the market indexes, they were basically the same as they were two months earlier before things dropped.

Lots of folks are going to pontificate about what is going on in the public markets. Most have an agenda or a vested interest.

If you are an entrepreneur, ignore the pontification and go build your business. Pay attention to the dynamics in the macro, since they will impact you, but don’t get caught up in. Don’t create a narrative to justify something that is going on. Focus on the reality – your reality – and do your best operating in the context in which you can’t control.

All this has happened before, and all of it will happen again.

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