Gorilla-style investing: in or out?
URL: cbs.marketwatch.com
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
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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. |
