The relative value of capital - an interesting interview from Knowledge@Wharton.com with William P. Egan II, a founder and managing general partner of Boston-based Alta Communications – a big private equity firm (@$1 billion under management). Basically - it all comes down to supply and demand...
"At the end of the boom cycle, money had no value. The idea was worth so much more than capital. Frankly, ideas tended to be worth more even than management. That is why you ended up with so many companies that could not succeed being funded. These companies had neither good management nor the function that good management performs – a thoughtful use of capital. So all you ended up with was a bunch of ideas. And most of us in the private equity business were part of this folly...This is not unusual. The same kind of phenomenon went on in the early 1980s when there was a biotech bubble. The difference this time was the unprecedented size of the private equity business and the scale at which things were done. But you can go back and see the same kind of mentality in biotech, or when Lotus 123 was developed and everyone was saying there would be 10,000 successful shrink-wrapped software companies. There have always been these periodic waves of euphoria. It’s what Greenspan called "irrational exuberance," but in a curious way, that is probably what makes capitalism work... (Or as Sec O'Neil put it - the genius of capitalism) The right time to make an investment in an early stage investment is during a downturn. One reason for that is that capital tends to be valued higher so you can get a better deal as an investor. Second, people resources are far more available. A lot of good people are looking for work. And third, in a startup you are not going to get many sales, so in a downturn you don’t care that there aren’t many orders coming around. So you focus on developing opportunities that will surface two or three years from now... I have come to the conclusion after 30 years in this business that management talent is a necessary but not sufficient reason to succeed. Management can never be overvalued, but it can be overestimated. Warren Buffett once said, show me a bad business and a good management and the bad business will prevail every time. So the lesson I have learned from the recent mania is that you may have capital and a talented management team, but if you are fundamentally in a lousy business, you won’t get the kind of results you would in a good business. All businesses aren’t created equal." |
