Venture Capitalists See The Window To Dump Their Losers Closing This Year

The venture capital crowd are desperate to get out of these deals and  as the equity markets were getting hammered in December you could hear a low moan rising from Sand Hill Road.

Here's a vignette from 2011, in a different context, but which could be repeated word for word re: the attitude of the VC's:

I'm reminded of a situation I watched back in the day. A trader sold a position to another firm a few minutes before a trading halt. The news was negative. The buyer D.K.'ed (Don't Know) the trade, meaning we'd still own the position, at which point the head of the firm got on the phone and told his counterpart "I don't want the shit, whyd'ya  think I sold it to you?"

From FT Alphaville:

GMO's Montier on the rise of the dual economy

In this week's instalment of The entire economy is Fyre Festival (TEEIFF), we bring you the latest from GMO’s resident Hawaiian-shirt fan James Montier, as he notes, with our emphasis:

. . . the US is witnessing the rise of the “dual economy” — where productivity growth is reasonable in some sectors, and totally absent in others. Even in the sectors with good productivity growth, real wages are lagging (wage suppression is occurring). All the employment growth we are seeing is coming from the low productivity sectors. On top of this, the paltry gains in income that are being made are all going to the top 10%. This is not what a booming economy should feel like.

To recap, a few weeks ago we made the argument that the rise of mystic job titles like “chief vision officer” — especially in the trendy start-up sphere — was indicative of corporates having lost their purpose. By that we meant that it used to be the purpose of corporates to make or provide stuff people wanted so much they were prepared to pay for it. This therefore loosely translated into a profit-generating operation.

In the modern corporate sphere the desire to make profits, however, has been replaced with the desire to achieve growth at any cost. Often this means the adoption of loss-leading strategies where products or services are given away for free or subsidised — because people are unlikely to want to pay for them — for the purpose of capturing customers.

This is justified by two notions. First, these products and services are so visionary and forward thinking that we the customers can't yet understand, or imagine, what they will mean to us. Hence, while we may not be prepared to pay for them today, one day in the future — perhaps once we have fully lost the skills to make our own food, drive, write lists or interact with people face-to-face — we will eventually be prepared to pay top dollar for them.

The second justification is that if you hook enough customers to your brand you will eventually be able to sell them something they will be prepared to pay for. What that thing is doesn't necessarily have to be determined yet, and may or may not be determined in countless corporate pivots that follow onwards.

This is why the mystic vision officer is so important. Establishing a vision of what tomorrow's needs may be, rather than what today's needs actually are, is essential to keeping the investment case alive. It has little to do with the practical realities of operating a profitable and successful business on the ground in the here and now.

And it's all very believable because this is exactly how a selection of today's most profitable technology stocks have made it.
The problem is, it's a strategy closely linked to monopoly and not one that every single corporate can make work.

Thus, the more we mistake and celebrate this sort of bullshitting as legitimate corporate enterprise, the greater the risk actually worthwhile corporations mimic the exercise, and in so doing become increasingly useless.

Bear that in mind as we return to Montier, who reminds us that the current recovery is still the slowest and weakest in postwar history (our emphasis):

Real earnings growth in the corporate sector has been below the rate of GDP growth even after the significant boost from the financial engineering known as buybacks. So investors have little to celebrate. Indeed, a breathtaking 25% to 30% of firms in the Russell 3000 are actually lossmaking! Yet the stock market remains well bid. In large part, this bid is sourced from the buybacks (and mergers) from USA Inc. itself. However, individual investors have returned to the “party” — never a good sign. Other portents of late-cycle capitulation include global fund managers throwing in the towel and buying into US equities.

And continues:...

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