Friday, December 26, 2008

Ghosts of Christmas Past

I gave a talk to the Monte Jade society a few years ago in the midst of the 2002 tech nuclear winter. In Asia, America was often referred to as the land of the golden mountain--hence the jade mountain term evolved for Taiwan although in that case there is actually a mountain (whether or not there is jade to be found remains an undiscovered jewel). I broke the talk up into three segments, and since it was around Christmas, I called them the ghosts of Christmas past, present, and future. This year we are all feeling some déjà vu from that heady time and the subsequent fallout of the last tech bubble, and I was again visited last night by three ghosts--whether it was from the grave or the gravy I’ll leave up to you.

I first came to the US in the late 80s and landed in search of the gold mountain, but found myself in the middle of a recession. It was a tough time to build business, and that first company we started almost went bankrupt several times. While it was hard to get customers, it was actually easy to get people, space and resources. It was actually a great time to build a startup but we couldn’t raise money because we simply had no idea how to go about it, and perhaps even if we did, no one would have funded two inexperienced entrepreneurs with funny accents--Dan Hogan taught me a huge amount about building business’s. It’s a long story, but that company created a successful Nasdaq IPO in Feb 1996.

In the last crash, here in the Valley we felt it first and worst, while the rest of the country really didn’t get hit all that badly. There was a big swing of assets from equities into real estate, and the rates were so low that it fueled a boom in real estate that ironically could be blamed for a significant part of the current financial meltdown. In 2002, I found this quote:
“America fell into an economic slump. The crisis capped a decade of frantic speculation in [space] securities and land stoked by heavy borrowing. The exuberant boosterism of the [space] was suddenly and dramatically quelled.”

Now if you put telecom or internet in the first space, and 1990s in the second, this quote applied perfectly to the tech nuclear winter of 2002. This quote was actually from Rockefeller, in the 1880s after speculation in railroad securities--you could also substitute mortgage securities for the 2008 recession--the two constants are land, and its all happened before. Telecom interestingly boosted railroad stocks again for the rights-of-way.

In my 2002 talk, the ghosts of Christmas future, predicted that telecom would come back in wireless, had no idea about cleantech, and had visions of optical processors. So the cleantech industry was born in the worst tech recession of all time, and ironically driven by the same people who had shifted from solar in the late 80s into telecom because solar was a dead space, then shifted back to solar when telecom crashed.

This recession's ghost of Christmas future, is simply this--innovation and creativity never die, recessions bring out the best in them, and great companies still get funded even through the decision paralysis of the biggest market meltdown we’ve ever seen (so far….).

To get funded in this market you have to be aspirin for the pain, not steroids for performance. Some VCs would even say you have to be antibiotics or an open heart surgery, rather than aspirin because the latter just covers the pain but doesn’t fix it … if we can't even agree on the right metaphors imagine how hard it is to agree on the right strategy ;-)

In this current recession the feeling in the Valley is somewhat opposite to that in 2002, back then we were badly hit here, and the rest of the country was lightly touched. This time the Valley is somewhat insulated while the rest of the country has been hard hit all year. Have no illusions, wherever you are, we will all be hit by this--the world’s economies are intimately connected as never before, there is no such thing as recession proof. China is hurting, India slowing, there is a wave coming so be ready for it. If you can get funded now, do it, always take the money when you can. At some point, greed will overcome fear again, but first there will be capitulation--my guess is real estate reaches bottom in Q3 next year, equities maybe six months later. You will know when it happens because, just like the taxi driver giving you stock tips signals the peak, when everybody stops caring about the price of a home in the Bay Area and are just sick of hearing about how bad things are we will have hit bottom. Companies that stick together during these times become great. That said, the next wave of great companies will emerge from this downturn, large corporations have more cash than ever there was in 2002, so M&A will be a rich area albeit at tough prices.

So to all a Merry Christmas and to all a goodnight ;-)

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