Gorilla-style investing: in or out?
Sequoia Capital founder on great firms & investments
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 1:16 AM ET Feb 13, 2001 NewsWatch
Latest headlines
Get Alerted
SAN FRANCISCO (CBS.MW) - After nearly 30 years of investing in high-tech start-ups, Don Valentine says of the 60,000 he's reviewed over that period, only ten would be noted as great companies.
A statistic like that appears to support an investment style bent on gorilla-style investing: stick with the 500-pound gorillas and eventually, they'll pay off smartly.
Not quite. Great companies don't necessarily equate to great investments.
Similar to Rod Steiger, a famed actor with an enviable track record who became unbankable after he won an Oscar in the mid-60's, some companies with stellar histories lose their shine.
"There is no history of companies being dominant in one thing and continuing on," said Valentine, the founder of Sequoia Capital, a blue chip venture capital establishment that's banked some of Silicon Valley's finest, including Cisco Systems (CSCO: news, msgs).
Adds Paul Johnson, communications/networking analyst at Robertson Stephens: "Can we play gorilla-style investments? I'm not convinced. We're all traders, owning stocks for a year, maybe two."
Indeed, although financial uncertainty can lead many investors into the arms of the well-known, well-established names, it appears that there's a transition period underway that could redefine the who's who list of the high-tech future.
Consider: Intel (INTC: news, msgs). "Great company; questionable investment," said Valentine. "What is their charter? Bigger, faster chips?"
How about Apple Computer (AAPL: news, msgs), I asked? Valentine, who founded Sequoia Capital in 1972, was one of the original investors in Apple Computer. "Not a great company, nor a great investment," he responded, with parochial dismay. "It should have competed with Microsoft rather than IBM," he said. "It should have known that the market for its operating systems would hit critical mass - not because it was a great product - because it was superior to Microsoft's - but because it had distribution, which it didn't have."
AT&T (T: news, msgs)? "And they call that the stock for orphans & widows?" he asked. Oh, pity those orphans and widows.
Microsoft (MSFT: news, msgs)? "Great company, great investment... in the past. Their market is saturated and laptops will only carry them for so long."
So, are there any companies that earn the peerless status of great company and great investment at the same time, at least at this very second?
The ones to beat
They would be Sun Microsystems (SUNW: news, msgs), Cisco Systems (CSCO: news, msgs), EMC (EMC: news, msgs) and Oracle (ORCL: news, msgs), according to Valentine. To him, these are the four companies that dominate the Internet.
They each supply critical and unique parts to build a world class Internet operation. "And the Internet build-out is still very much ahead of us, and not behind us," he said. "These are franchise companies and they've set the standard. If you want to win, you have to beat these guys," he exclaimed as he jabbed his finger four times on the table to make his point emphatically.
Oracle provides the databases; Sun Microsystems provides the servers on which many point solutions will be layered on top of. For that matter, Sun's servers provide the entry into the enterprise for many point-solution companies. Kevin Trosian, an analyst at Banc of America Securities, believes Sun could be a likely consolidator of Net software firms that provide point solutions as Sun's clients demand edge-to-edge control. One edge represents the server while the other edge represents the end user.
EMC is the gorilla in the storage area networks sector. Shares came under pressure Monday after data-storage network equipment maker Emulex (EMLX: news, msgs) warned that its customers were deferring orders, signaling weakness in the storage market. But storage is still a big opportunity, and EMC may be a thoroughbred. Dane Lewis, an infrastructure analyst at Robertson Stephens, believes there is no other company "pushing the envelop in functionality and operability." EMC is spending nearly $1 billion in research and development and no one comes close to its offering, he added.
Cisco Systems is the hands-down leading networking company. No one doubts its dominant position. But as the one to beat, it is being tackled from all sides as next-generation networking providers are nipping at its heels. Robertson Stephens' Johnson, who gave a presentation titled: "Lessons We Have Learned" to a standing-room only, sitting-on-the-aisles audience at the Robertson Stephens tech conference in San Francisco, was quick to remind investors that Cisco missed results last week. Cisco CEO John Chambers blamed the economy, Johnson said. Yet, why in all those years of beating estimates did Cisco not tip their hats to the economy, he asked. "Blame it (economy) on the way down, but not on the way up." Clearly, the next-generation networking companies, like Juniper Networks (JNPR: news, msgs), are the players on the field that represent the opportunities.
Indeed, even Valentine would be impressed if Cisco were to keep the torch burning for another ten years as technology advances occur at an accelerating pace. To keep up with new advances, high-tech breakthroughs, revolutions and the ultimate winning technologies, Cisco would have to keep up the principle of creative destruction quite rapidly. Creative destruction refers to the notion that companies need to obsolete their own products or else someone else will.
It's a task, most companies fail to do but a strategy Valentine encourages. In fact, 20 percent of Sequoia's investments are created with the intent to be sold to an incumbent.
Revenue recognition
Speaking of new companies, after writing several stories about Critical Path's (CPTH: news, msgs) revenue-recognition problems, I stumbled upon a very interesting privately-held firm funded by Sequoia Capital. DiCarta, a company that helps CFO's or finance units manage the ever-increasing complex software and service contracts that have put many a CFO and salesperson in a quandary. Keep an eye on this one.
Visit the Net Sense archives.
This column is available in e-newsletter format. Click here to subscribe.
-------------------------------------------------------------------------------- |
