Friday, November 28, 2008

Stars, Planets and moons

I suppose, similar to the Thanksgiving meals enjoyed by most of you, the center topic of conversation moved from last year's 'gee, Bear Stearns looks in trouble' to 'man, my portfolio is down 40%'. The painful shift from 'them' to 'me' highlights 'our' recession.

I've been thinking about the sage advice for our CEO's to 'get profitable' ASAP and 'cut expenses across the board' and continue to be troubled by such blanket statements. It seems to me that triage is the order of the day where deeper investments should be made in companies doing well and decisions to stop funding laggards is the way to go. Business decisions, such as this, should not be across the board socialistic share the pain missives(though we may be heading towards such an economy).

This is really a preamble to the criticality of agreeing on, or reinforcing, the objectives that shareholders expect from the business and management. It's impossible for a CEO to run a company serving too many conflicting simultaneous masters (growth, profitability, reduce expenses, etc.). Over the years, massive returns have inured to shareholders backing firms that became the stars of their solar systems (MSFT, Oracle, Google, Yahoo, Ebay). Fine returns have been earned by planets who, lacking the mass and energy to be stars, still have sufficient weight to capture satellites and enjoy unfettered orbits (Adobe, Intuit,Symantec, etc.). With the seismic market shifts that has limited access to capital across the board, all stakeholders ought to understand what are we building or funding towards?

As a venture community, unless we provide clarity of direction, we will be on a collision course with our CEO's. On one hand, we invested with the objective of helping them create planets, and just maybe, stars. In an environment suffering spasms of dislocation, we have asked for a change of direction. Now, we are asking them to scale back and defer building stars, even to simply go for the moon. Beware what we ask for, too many moon shots does not reap portfolio returns that justifies the risk of our asset class that is littered with black holes.

It seems to me that existing portfolios ought to be 'rationalized' with all resources going to the 'feeders and growers'. New portfolios can still gain the benefit of diversity across many promising investments,with the day of reckoning delayed. But, most of all, alignment with the CEO's and shareholders is critical. It's not the time for ambiguity of direction.

2 comments:

  1. Early stage compnaies alignment and direction are simple these days: stay alive and get through a period of virtually no funding at all. Some tough discussion to be had over the next few months as investors courage and stamina will be tested.

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