Who is truly behind this seedy, year 2000 narrative of overnight business sensation turning into instant penny-stock nightmare? Spendthrift venture capitalists? Greedy underwriters? No, the culprit is ourselves. Investors chose to pay outrageous sums for poor business models. Now they're losing money because of it.
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The fault, dear Brutus, is not in our stars, but in ourselves. -- Shakespeare (Julius Caesar)
Before I broach tonight's subject, I want to alert all and sundry that two months from now we will commence our second annual Rule Breaker seminar, Quest for Rule Breakers 2001. Whether you took the seminar last year or have never taken one, I hope you'll spend a few weeks with us this January as we learn together and scour the world for Rule Breakers. To that end, we've composed a 60-second survey to enable you to let us know what you'd like us to focus on this year. If you took last year's seminar, click here to help us out. If you did not, click here.
Thank you very much for your feedback, as we'll use it to compose our curriculum. (I wish all my college profs had done that!)
Now, the game's afoot. It's a mystery, and it begins with yesterday's thoughtful Jeff Fischer article on the demise of Faker Breakers like Pets.com. Jeff points out that (my words) the "free money" mentality created by a world awash in venture capital has its own destructive aspect, beyond just a bunch of failed public companies. It can unfairly cast an entire business sector ("online companies," what have you) as not worthy of additional capital or attention. "Unfairly" because that view fails to notice obvious breadwinners, such as America Online (NYSE: AOL), Yahoo! (Nasdaq: YHOO), and eBay (Nasdaq: EBAY). Or what about the dozens of others that have made a ton of money using the Web, such as Dell (Nasdaq: DELL) and Cisco (Nasdaq: CSCO)? These companies have thrived, and will continue to do so. Yet here we are actually contemplating the possibility of venture capital drying up for Internet-based companies, should the present trend actually worsen.
How did we get into such a situation? Whodunit?
Some will put the blame for the whole high-tech market sell-off on venture capital. But the free-market system matching up money with new business opportunity works so much better in turn-of-the-21st-century America than anywhere else that we should leave it alone. Many -- some statistics say most -- businesses do fail. That's always been the nature of the game. It's no big surprise that the copycat companies who tried, too late, to copy the smart and fast-moving visionaries didn't work. I'm unshocked.
Rule Breaker investors may rightfully feel somewhat irked because we never were (or will be) buying third- and fourth-tier players. We invest in top dogs of important, emerging industries. We know the risk we take is large, given that the industries our top dogs lead are often so fledgling that the leaders themselves can flap around like unsecured jibs in a nor'easter. Listen, Celera (NYSE: CRA) or Human Genome Sciences (Nasdaq: HGSI) may look strong with their boats pointed in the right direction all the way through the horse latitudes. But a sudden shift in the wind could cause them to take on water. An entirely new geography could cause either to capsize, should they fail to develop profitable businesses. Thus is the nature of our brand of investing; we invest like venture capitalists. And if we are truly taking the risks we should be, then guess what? Some of the companies we invest in WILL fail. We do not seek out failure, of course, we seek to maximize our investment returns. But doing so means we will champion some clunkers. These things said, we were never financing Dr. Koop!
Again, I will ask you: Who is behind this "dot-com 2000 sell-off"? Whom can I blame if eBay is never again able to raise a secondary offering, given that it is (bwah-bwah-bwahwahwahwahhhhh) a "c-to-c" company? Who is at fault for the falloff in shares of Internet-based companies?
If you have read today's epigraph, you already know the answer. We have met the enemy, and he is we. None of these stocks that IPO'd at $37, ran up to $100, and presently sit below $2 could ever have gone public and had a market if we human beings had been unwilling to buy them.
Because someone WAS buying them. Lots of someones.
The model of a start-up backed by a venture capitalist that then finds an underwriter and goes public has a necessary step at the end of that process. You and me, WE, buy the thing from the underwriter and the venture capitalist. Listen, I know that many VCs buggy-whip their companies toward a Nasdaq Stock Market listing, but again, guess what? We don't have to pay attention to their buggies, let alone buy a piece of them... especially when their wheels aren't even fastened on yet.
If we're all smart enough not to invest in Pets.com, it can't come public.
Thus, the ultimate culprit in this tawdry scheme, in this financial whodunit, is certainly not the butler. It is the willing share purchaser. Abstracting that to blame "Wall Street" or "VC vultures" or supposedly cynical fly-by-night CEOs, these are all efforts to shift the blame. For we are the market.
The fault lies not in our VCs but in ourselves. I continue to believe that some great companies were born at the dawn of this technology hitting the mass market: AOL, Yahoo!, Amazon.com (Nasdaq: AMZN), eBay, etc., and I remain invested in 'em. However, for every good visionary there were a dozen or more copycats who flooded the market with xeroxed business plans, and who unsurprisingly lacked the smarts (and ultimately the cash) to pull off success. In the end, the failure of those many was predictable, just as the Small Business Administration statistics tell us that most businesses fail before long. Same ratio, grander scale.
Earlier, I exonerated Rule Breaker investors from our share of blame because we didn't play these games. Neither Jeff, Brian, Paul, nor I were ever tempted to take a flyer on Pets.com. Yet we still share the blame indirectly, and here's why: Amazon.com owned a portion of Pets.com. Rule Breaker Starbucks (Nasdaq: SBUX) actually owned a healthy slab of Living.com! America Online bankrolled any number of small business failures, and @Home paid a high price for Excite. I own each of these stocks.
So the next time you hear someone preciously explaining how Wall Street or the VCs or shaky adolescent CEOs are all to blame for where we are, consider that this someone is possibly as much to blame as you or me or anyone else. (Why wasn't Mr. Smarty Pants shorting everything to keep the prices reasonable, eh? Though I don't exactly consider that a sound long-term investment strategy.)
For we, dear Brutus, are the market. No one but the underwriters had to buy any of those IPOs.
David Gardner, November 14, 2000
P.S. A reminder: We'd love to hear from those who took last year's seminar and those who did not, if you have an extra 60 seconds. Thanks, and Fool on.
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