September 11, 2001

Joseph W. Bartlett, Founder of VC

The terrorist attacks of September 11th were unlike anything this country has ever seen. But, in some respects, there is a parallel between September 11, 2001 and November 22, 1963, the day John F. Kennedy was assassinated. JFK's assassination ended an era of enormous U.S. confidence economically, culturally and politically. The torch had been handed to a new generation, and suddenly, in the blink of an eye, it was snuffed out. When Kennedy was shot, the near term effect on the public markets was brief, but severe. However, there was little impact on that sector of private equity called venture capital, which was then in its infancy. In fact, in the late `60s, when the tech stocks did crash, the downturn had a modest impact in most of the country. Who cared that the stock of a company whose name ended in 'onix' or 'tron' had been cut in half by reason of extra or internal developments? The country was still making automobiles, breakfast cereal, farm machinery and aircraft, and bending metal like crazy in the Rust Belt. Nobody cared about venture capital because so few players were involved.

No longer. The shock of these attacks is a double whammy, coming on the heels of an enormous meltdown in the prices of both public and private securities, producing a much wider effect than did Kennedy's assassination. At the height of the boom, it appeared that everybody was playing the market, and the focus was "tech, tech, tech". The financial crash deflated the NASDAQ and the values of personal portfolios, and the terrorist attacks have threatened to put a period at the end of the sentence. But the question that was being asked before is still relevant: "What will it take to get the tech sector, particularly the private equity end, energized again?"

The answer, in my view, is more of the same, meaning more 'tech'. Regardless of the level of the financial markets, advances in science and technology are not likely to slow appreciably, particularly now that technology is being developed and communicated amongst the entire civilized world. Based on developments that are already in the works, my grandchildren will live healthy and productive lives well past the century mark. Disease will not be conquered entirely, but biotech will be out in front of today's crippling diseases. Defense research has been an enormous spur to all sorts of useful items in the private sector. Shortly, airport security will be so advanced that the chances of an attack from inside a plane will be essentially nil. And, energy efficiencies and renewable sources of energy should reduce the global economic importance of the Arab states.

However, there is no precedent for the current one-two punch, which may well be followed by a third as the war on terrorism develops. The danger for venture capital lies in a growing herd mentality, the phenomenon that has been remarked by those new economic theorists who combine research in economics with observations drawn from psychology and social sience. And, the herd is thundering in its flight from risk of any kind. Herd mentality or no, one problem facing venture investing is that the risk of a prolonged market downturn, driven by political instability, cannot be calibrated. It is difficult to do any kind of risk/reward analysis or figure out the `delta' of a given investment, unless one can at least take an educated stab at triangulating the risk and factoring that element into the price of the investment. If risk analysis is simply impossible, then preservation of capital becomes the only prudent course.

However, there is an enormous amount of liquidity in the system. Interest rates are low, government spending is high and taxes are relatively low, at least at the moment. The government is pumping money into the economy because inflation is not perceived as a current threat. If all that capital seeks a home in bonds, the returns are likely to be anemic. The returns on public stocks also seem pretty gloomy, as this is written. Gold, real estate, oil and gas might attract investment, but the risk profiles are as scary as stocks. In the world of venture capital funds, there is also the `investment period phenomenon,' denoting a clause in typical limited partnership agreements governing venture capital funds which provides that fund managers must either use their commitments or lose them in that period averaging four to five years from the date the fund was initially closed. After having spent upwards of a full year attracting commitments to his or her fund, fund managers are unwilling to watch that commitment evaporate because they are unable to find places to put the money. So, committed capital pools will likely to be put to work by fund managers.

The short of the matter is that no one can be certain at this juncture, or even confident, on the ultimate outcome. My overall view, however, is that the science and tech juggernaut will not stop, and that the "New Big Things" will be so compelling that the venture capital sector will not stop in its tracks.