Just whose switching costs are we considering?
1. The venture investor who spends 10 million to get a share
of a partnership with the operator company(Softbank,CMGI,
ICGE,PFE) to launch a particular company. After that company is launched he can switch any time with his next ten million. There are no costs.
2. The infant company founder. Typically she is only doing this one time. She is not a switcher.
3. The shareholders of the venture capital operator company. Our switching costs are capital gains taxes.
4. The customers of the operator company's portfolio companies. If they are primarily using company A's services
and incidentally using services of company B and C, all A,B
and C being portfolio companies, surely the customer can
buy B and C's capabilities elsewhere. If B and C refuse to
sell their expertise to any but customers of A then they
are eliminating large chunks of the market. So the switching
cost to the customer depends on details, such as how much
company A needs to know about the customer's business. In
other words, there is no switching cost to the venture
business per se. IMHO a switching cost arises when the company manages an aspect of your business that involves
knowing the internal details. Something like printing your
manuals etc. is not such. It would have to be something like
outsourcing or strategic planning or building a customized system etc. An independent company, such as CSC could give its customer big reasons not to switch, if it gets intimately involved in the complicated details of the customer's business, which details are unique. But per se, I can't see switching cost to a venture capital operator. Though I do think they are great investments, just not gorillas or even godzillas. They are great investments because we are at the dawn of a new, internet era and they minimize the risk to us of getting involved, investment wise. Also the biggest rise in a company's stock is usually right at the beginning, when it makes the transition from an idea to a profitable business. The venture capital operator in one way or another gets us into such opportunities.
By the way which one of the above four venture capital operating companies has far and away the best stock performance in 1999 so far? It's SOFTBANK. Surprised?
I'm long 3 out of the four companies. |
