No.13: "This Time It's Different"
Curated news and insights about entrepreneurs building real businesses and the investors who want to finance them.
Good morning folks,
Today we discuss why “this time it’s different”. Also Accel is crushing it, a profile of a VC who’s seen it all before, and by the way, how are those newly public tech companies doing?
This Time It’s Different
Since I started my career in investment management, there has been a short list of professional investors from whom I read or listen to anything they have to say. One of those investors is Howard Marks, the co-founder and co-chairman of Oaktree Capital Management, an investment firm specialised in alternative assets. Marks has also been writing his “memos” to the firm clients, sharing his views on the market and his investment philosophy in general. In his latest memo called “This Time It’s Different”, the renown investor explains that market participants often use their emotions to justify investment decision, saying that their specific investment case does not fit the historical norms (e.g. in asset prices) and that “this time it’s different”. Marks goes on commenting on 9 different propositions about future economic and market performance and I want to share with you 2 of these propositions which I think are relevant for entrepreneurs as well as investors active in today’s market.
Howard Marks, credit to Knowledge@Wharton.
1) Profitless success: companies can thrive even in absence of profits
In 2018, over 80% of companies that went public were losing money. The record number of unprofitable companies going public has not stopped since then: Lyft, Uber, Pinterest, Fiver, Slack … Such dynamics can be seen as very similar to the tech bubble of the late 90s’ when companies where valued based on eyeballs and not real revenue potential. In such period, it is useful to remember that companies are valued based on the profits they can produce today or in the foreseeable future.
Tech and venture investors have made a lot of money over the last ten years. Thus there’s great interest in tech companies and willingness to pay high prices today for the possibility of profits far down the road. There’s nothing wrong with this, as long as the possibility is real, not over-rated and not over-priced. The issue for me is that in a period when profitless-ness isn’t an impediment to investor affection – when projected tech-company profitability commencing years from now is valued as highly as, or higher than, the current profits of more mundane firms – investing in these companies can be a big mistake.
2) Growth investing preeminence forever: growth investing can continue to outperform value investing in perpetuity
Marks argues that value investing (investing in companies which real value is not recognised by the market and therefore are underpriced) seems to be falling out of favour because it is getting harder to find such undervalued companies with today’s wealth of data being so easily accessible. Instead, today growth investing is en vogue thanks to the disruptive potential of technology companies, which have much better growth prospect than “old-economy” companies. Yet, even in this optimistic market, price matters:
On the other hand, companies that do have better technology, better earnings prospects and the ability to be disrupters rather than disrupted still aren’t worth infinity. Thus it’s possible for them to become overpriced and dangerous as investments, even as they succeed as businesses (this was often the case with the Nifty-Fifty in 1968-73). And I continue to believe that eventually, after the modern winners have been lauded (and bid up) to excess, there will come a time when companies lacking the same advantages will be so relatively cheap that they can represent better investments.
And in the end..
The stocks of companies with bright futures are likely to be outperformers in times of economic growth and optimism, when investors are happy to pay up for potential. But stocks of companies with tangible value in the here-and-now are likely to hold up better in less positive times because (a) they’ve previously been disrespected and valued lower and (b) the rationale underlying their prices is less a matter of conjecture and faith. Thus a swing in favor of value may have to await a period in which the “champions” lose some of their luster, perhaps in a market correction. But it’ll come.
Whether you are an active investor, or just generally interest in market and economics, I highly recommend reading Howard Marks’ memo (≈10min). It dissects the current market environment perfectly well and remind us how much of an impact investor’s optimisme has on assets prices.
*** READ THE FULL MEMO HERE ***
In other news
How the tech unicorns of 2019 are doing on the stock market (tracker)
Recode built an IPO tracker including the recent tech companies and it is in quasi real time - pretty cool.
Recode IPO tracker
Some 84 percent of US tech companies that went public last year did so without turning a profit. The last time unprofitable tech companies went public at this rate was in 2000, the year the dot-com bubble burst. In 2019, these companies are riding high on venture capital money and investors’ hunger for growth above all else.
Accel is excelling at the IPO game (article)
The Bay Area firm Accel made $7.5B from exits in less than 3 months with the listing of Slack, CrowdStrike and PagerDuty. FYI, the firm was also a backer of Spotify, DocuSign and Qualtrics before their $B+ IPO/acquisition.
Accel—which, with a 23.8% holding, is Slack's biggest backer—now owns a stake in the messaging company worth about $4.5 billion. It was only last week that CrowdStrike, another Accel portfolio company, conducted a major unicorn IPO, […] which values Accel's 20% post-IPO stake in the business at more than $2.6 billion. And it was less than three months ago that PagerDuty went public. Accel owned a 10.8% post-IPO stake in the software unicorn, a holding that was worth more than $420 million at Friday's close. Add it all up, and Accel's stakes in three of the biggest companies to go public this spring are now worth about $7.5 billion.
Lessons from the VC who's seen It all before (article)
Polina Marinova has published a great profile about Jeff Jordan and his success as a venture capitalist:
Jordan is a bit of an outlier at the epicenter of the global technology industry, a place of titanic egos and triumphs borne of brilliant ideas. He didn't become a VC, widely acknowledged to be a young person's game, until he was in his fifties. He's not a technologist but rather a general-management type, typically second-class citizens in the Valley. And he at least professes to hate being in the spotlight. What he has, in spades, is something that is gaining currency amid the scandals and missteps of the Valley's behemoths: experience.
About Mereo
Mereo is a newsletter-driven publication about entrepreneurs building real businesses and the investors who want to finance them. Mereo is written by Michel Geolier, a venture investor based in Munich, Germany.
You will find the Mereo archives here.
If you like reading Mereo, you can tweet about it here.
If someone forwarded you this email, consider signing up here.
If you liked this week’s edition, please hit the like button below.