Things to watch in 2009
No predictions, no forecast, that’s above my pay grade, just sifting through this coming year’s most interesting trends. The Chinese curse, May you live in interesting times, being upon us, we might as well try and make the best of this New Year.
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Quickly, starting with the Valley:
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— How many venture firms will struggle with insolvency? Not their investees, their portfolio companies, but their LPs, Limited Partners, their investors. Some of yesterday’s “deep pockets” have become a lot less liquid and may be unable to meet tomorrow’s capital calls. (A LP commits to invest $10m in your venture fund. Only 10% or so when the deal is signed, the rest “called” as needed for the investments in startups. For the LP unable to meet a capital call, contractual penalties apply.) In the past, a “secondary market” helped troubled LPs by repurchasing their investment contract — at a discount. Sometimes we (VC) bought LPs off for our own personal account. This was then. Now, with liquidity gone, what happens to venture firms when their LPs suddenly go broke?
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— Even with the IPO window all but closed, we managed exits, selling our investments in startups. We got “liquidity events” through M&A (Merger & Acquisitions) deals with the likes of Cisco, Google, Microsoft, Apple, Oracle and many others. In a way, this made us a “outsourced R&D” function for the big guys. What happens, now, with all these large companies downsizing openly or discreetly as the economy demands?
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More generally, in the high-tech industry:
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— Will netbooks continue their rise in popularity? Two years ago, American consumers were said to dislike the small keyboard and screen. Low prices (starting below $300) have taken care of the reluctance.
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— Will Google continue to lead the Cloud Computing movement and provide more support for netbooks, including a version of Android, for these devices?
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— Will Microsoft be perceived as “being back”? Perceived is the word because, in financial facts, the company is doing well, it continues to make tons of money. But, once the uncontested leader, it is now seen as losing its grip on many fronts, from Vista to Explorer to game consoles to Search to Cloud Computing.
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— Will smartphones continue to rise and rise? In that product category, will anyone seriously challenge Apple’s current perceived position. Perceived is also the word here because RIM (Blackberry) and Nokia are doing very well and, unlike Palm, have ample resources to fight Apple.
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— What will happen to Android? As mentioned above will Google’s Open Source smartphone operating system branch out into netbooks? Will they manage the right balance between “open” and “simple” as many manufacturers with diverging goals and cultures make widely different handsets? The variety could be a blessing against Apple’s fiercely controlling culture, or the curse of a babelized platform.
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— None of the Big Guys, from IBM to HP, Cisco, Oracle, Intel and the like are in trouble. Unlike the auto industry, they can absorb a decrease in demand without risking bankruptcy. Will they use the recession/depression as an opportunity to absorb/kill smaller competitors? For example, what happens to AMD if microprocessor demand keeps falling? Intel can’t “live” without a token competitor. What about Yahoo and AOL?
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Moving to the auto industry:
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— Will Chrysler survive or merge?
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— How many other consolidations? Volvo, Saab, Subaru falling into Chinese hands?
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— The luxury segment used to be the most profitable; right now, it’s the one taking the hardest hit. How long will brands such as Lamborghini, Bugatti and Bentley be supported by Volkswagen/Audi/Porsche, to use but one example.
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— Will the US market adopt more European vehicles or will Ford and GM keep many of these from competing with their homegrown products and — the real issue — jobs? All this while Mercedes Benz, BMW, Toyota or Honda have no such problem.
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I’ll skip healthcare, I think it’ll stay hopelessly mired into deadening ideological considerations (“socialism” vs. “free market”), not helped by the huge cost in the midst of a recession/depression.
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Speaking of socialism, regarding the recently nationalized financial institutions, if you have the time and patience, two strong papers:
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- One on the fragility of models, as discussed in a previous Monday Note, a column by NYT’s Joe Nocera. Perhaps Joe Nocera ought to have generalized his cautionary advice. The danger doesn’t just stem from too much reliance on the Value et Risk (VaR) model. More generally, most complex models become inherently unstable, unreliable once they’re used by competing players trying to outguess, “outmodel” each other.
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— The other by two great writers, Michael Lewis, the author of Liar’s Poker and Moneyball, among other really good books, and David Einhorn, a hedge fund manager and author of Fooling Some People All The Time. The paper centers on the laziness and/or willing blindness of the financial police a.k.a the SEC and ratings agencies.
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I kept the most important for last: Obama and Congress. What we want to watch is how the new President manages to stop Congress from playing the same dirty old games. I’m first referring to earmarks (funding a congressman’s local pet projects on the back of unrelated legislation) and, much more important, to selling out to lobbies ranging from pharma, healthcare, insurance, Wall Street (remember the CDS midnight vote) and telecom, just to name a few. Depending upon who’s counting, www.lobbyists.info or the Washington Post, there are between 22,000 and more than 30,000 lobbyists in Washington. What Obama has going for him, for us, in his drive for change are the millions of networked supporters he gathered during his campaign and has since carefully maintained via mybarackobama.com and change.gov.
We’ll watch how he uses his direct access to voters to squeeze some real reform from our corrupt Congress — the one we kept reelecting with a feeling of futility.
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Happy new Year! — JLG
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(For the difference between predictions and forecasts, see Paul Saffo’s Harvard Business Review paper here, the full article is unfortunately no longer free but Paul’s contains many other free and valuable essays).
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