?Yes? is the answer to the question of whether innovation thrives more amidst abundance or scarcity of capital. When money flows, more ideas (and yes, even more bad ideas) reach fruition from the fuel of funding. When the spigot drips dry, it is necessity?that maternity of modernity?that births inventions.
Whatever may come, we are thrilled. We?re at once indifferent to uncertainties pervasive in headlines and plaguing so many investors, unsure of what to do as they are pushed out further on the risk curve (if you were a saver you were pushed into Treasuries, where you were nudged into corporate bonds, structured credits, high yield, equities, high risk equities, and on and on).?We are thrilled by the progress of our existing portfolio companies and we are thrilled with the new opportunity set before us. Rational optimism (or optimistic caution) has us extra selective as we see growing signs of pockets of excess. We have defensive and offensive strategies to take advantage.
Apt for biological analogies, it is the slime mold where we turn for a clue. When the environment is resource rich, this multicellular superorganism spreads out, spores off, takes risks and searches more widely than it would when food supply is scarce. And when the food supply gets scarce, chemical stress signals sound an alarm telling the individual cells to congeal, return and rejoin into one. The economy follows this undulating pattern of dispersion in good times and consolidation in bad.?Today we observe signs, each an individual point of light, each part of a faint constellation growing brighter. In public markets, mergers are called off and spinoffs are called on with increasing frequency. We see individual investors, once part of larger VC fund partnerships, spawning off and raising single GP funds. Many bankers and management consultants are following suit, leaving behind their suits and trying their hand as venture investors. Family offices and LPs, happily allocated to Fund-of-Funds, are going directly to GPs and increasingly directly to companies. Real estate landlords are also benefiting from the current rising demand. Sparse spaces once vacant are revamped as incubator and co-working spaces and, comforted by ascendant valuations, landlords are accepting equity in lieu of cash rent. Until, of course, they begin demanding six months cash up front.
The fittest investment strategy we can deploy?? against an ever-shifting and ever-evolving landscape of structural shifts and fickle sentiments (themselves as likely to accelerate as to reverse course without warning) ??is to deploy all the arrows in our investment strategy quiver: thesis-driven contrarian newcos, people-driven audaciously-bold high-growth ventures, and special-situations affording late stage assets at early-stage prices. Perceptions and expectations of others matter (though we can only control our own). The more stable the environment is thought to be, the further out people will look. And the more unstable the environment, the more steeply others will discount the future and have less forward-looking behavior. This seems to be universal, whether across the behavior of bond market participants, populations of differing socioeconomic demographics and animals in ecosystems facing abundance and calm, or scarcity and stress.
In a loose-money rising valuation environment, our best offense is to emphasize starting new companies from scratch, where we control valuations and terms from the very start, immunizing ourselves from excess and positioning ourselves to take advantage of it. We call this ?ball control,? and it historically accounts for one-quarter of our portfolio construction.
In an environment where capital ? whether generally, in specific sub-sectors or specific companies ? gets scarce, then we emphasize special-situations where we can own later stage assets at early stage prices, whether through recapitalizations, divestitures or spin-offs. Here we have the chance to earn returns and get paid on the money, time invested and risks borne by others (who stumbled).
This healthy positioning makes us indifferent to whether we may have a rising or ebbing tide. It?s an offensive stance making us neither dependent on donning rosy spectacles nor speculating on less-rosy times. It?s especially useful (and intellectually honest) because in the overlapping magisteria of what matters and what we can control, the (mis)behavior of markets (and others) serves us.
The Vast Un
While we seek to be agnostic to macro forces, we?re true believers about one thing: the invariable march of progress driven by the exponentially expanding cornucopia of new technologies, innovations and investable companies commercializing them.
Nobody can predict the future, but there are undeniable directional forces in both biology and technology. We know that whatever just happened is about to be eclipsed by whatever is about to happen. Whether (as in biology) there is a Cambrian explosion or a Permian extinction, technology, like life itself, progresses in a clear direction. To understand where technology is going, it helps to study from where it came. Technology has much in common with biology: it trends from simple to complex; from few species or technologies to many specialized ones; from isolated organisms or ideas or objects to highly networked combinations; from disorder to high-order, information and energy density and energy efficiency. And while?life and technology?follow these parallel paths, they?re?now co-evolving and influencing each other.
Inspiringly staggering is the number of technologies not yet invented that can be. We can call this the vast ?Un?. All the things yet to come. The things that don?t yet exist but can and will. All the books as yet unwritten and unread. The stories as yet untold. The people as yet unborn, technologies as yet uninvented, companies as yet unformed.
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