Any one who ever tells you they know what the (investing) future holds has more confidence than they probably should have. Yet one thing that is clear right now, is that bulls are in part betting on the capacity of the latest crop of new companies to transform how things work for the better.
Of course, many bulls are also banking on the related hope that emerging markets will continue to shrug off the financial woes which have so hurt most Western economies. The vast range of companies which have been lined up for sales on the public markets, and which are possibly set to finally realise the full potential of the internet, could well provide the transformative power to put the world economy back on to a growth trajectory.
Yet public market investors appear to think that any shock is going to hit the companies which think they have a claim on the future as hard, if not harder, than incumbents. The correction that markets experienced in August has left Nasdaq down 10% between the beginning of that month and the end of last Friday – a decline which has been nearly exactly mirrored by the Standard & Poor’s 500 index over the same period.
The temporary difficulties of Nasdaq’s new breed of companies, and fast growth companies generally, which face a more difficult time going public, may well provide a value opportunity, for those who are able to put aside their fears of a new financial crash. Even as markets wobble, the technology bulls’ case has been put in strident terms by Marc Andreesen, of venture firm Andreesen Horowitz, in an excellent Wall Street Journal opinion piece last month. Andreesen argues "software is eating the world". "Instead of constantly questioning their valuations, let’s seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the US and around the world," he said.
Many corporations appear to also be taking a similar view that finding the companies of the future is an area where they should be putting their money. There have been more corporate venturing funds launched so far this year than last year and a record number in the media sector – this month’s focus in Global Corporate Venturing’s magazine. The continuing growth of companies seeking to gain exposure to "the next big thing" inside or outside their sectors, suggests there is a growing body of opinion that this time it is different – usually troubling words – and we are not heading straight for a late 1990s-style technology bubble.
Of course, those with memories of that time will also remember that the corporations came piling in towards the end of that bubble and many pulled out again nursing losses. Risks clearly abound, as well. Last week, the chapter 11 filing of US-based solar company Solyndra, the best-funded venture capital portfolio company ever, according to news provider Fortune, citing Thomson Reuters data, was a timely reminder of what can go wrong when you bet big, and wrong, on positive change. (See our news story on how Virgin’s corporate unit is among those expected to post a loss on the deal.) But the fact that Solyndra had so few corporates from the energy industry involved – Virgin calls itself a branded venture capital organisation – implies there were perhaps concerns about the business that the US government tried to paper over with a large loan rather than leaving it to market forces to eventually pass its judgement. (Global Corporate Venturing will be using Solyndra as a case study in the October issue for those with a view.)
Yet there is no reason why history should repeat itself like the dot.com bust, and it is equally possible that those corporations which have been brave enough to use their cash reserves to position themselves behind those companies which eventually succeed will also be those best positioned to take advantage of the brave new world transformed by technology that we appear to be entering into it.
The cryptic poetry of Bob Dylan, cited above, was written at a time when the prosperity of the West was lurching forward, through times of civil strife. If the long term future can be gauged from the past 50 years, it is probably wise to take Andreesen’s advice and invest, banking on change. As these calculations from Joshua Kennon on S&P 500 returns from 1960 to 2010 show, if Dylan had pumped his money into the stock market and reinvested all dividends at the beginning of his musical career, he would have made a 14.4 times inflation-adjusted return. While, of course, had he had the prescience to pick good times to invest in companies like IBM, Microsoft, Apple, Google, and Facebook along the way, he could have made far more.
If the future can be predicted from that historic period, now could well be a good time to bet on the future.