Letter from Washington
Editor Oscar Bartoli
Oscarbar1@msn.com (Beyond the News)
Circulation 5100 in Italian and English
“I
CAN’T BELIEVE MY EYES”
An interview with Enzo Torresi, Venture Capital Guru.“I can’t
believe my eyes”, that’s what venture capitalists, bankers,
entrepreneurs and investors were saying a year ago when they saw their
Information Technology earnings grow at a rate of over 300 percent a year.
Then, within one year, the crash. We interviewed Enzo Torresi, a Sicilian
who emigrated to California many years ago to run Olivetti’s offices
in Cupertino and then strike out on his own. Since then Torresi has created
and sold a large number of companies, Today he is considered a venture
capital guru. Evidence of this is easy to find. All you have to do is
go with him to “Il Fornaio” one of Palo Alto’s most fashionable
restaurants. Once there Torresi is met with a procession of greetings,
and whispered requests, all of which underline the stellar professional
reputation of this flying enthusiast ( he owns two planes) engineer from
Catania.
For the past year
Torresi has been a co-partner in MyQube, the fund created in Italy by
Gianluca Braggiotti. Thanks to Torresi, MyQube has been expanding its
“incubator” activities also to the US.
CNN aired a
piece on vacant office space in San Francisco and Silicon Valley saying
realtors are offering heavy discounts even for one-year leases. Are we
in a recession or have we hit bottom and are on our way back up? Basically,
how do you see things?
Let’s take one
example. In Las Vegas, rather than in Monte Carlo, if you play roulette
the rule is that the bank pays out 35 times the number landed on. Let’s
then imagine that Monte Carlo had gone crazy and started, for promotion,
to offer a pay out of 350 times what bet. Well the promotion is over.
Monte Carlo has said: “Sorry, now it’s back to normal”,
meaning back to 35. What happens first: all the dilettantes (whether entrepreneurs
or venture capitalists) had to pack up and go home. They understood that
the game isn’t rigged anymore and it’s back to how it was 15
years ago with the birth of Compaq, Intel, Businessland, etc. It’s
just a return to normalcy, not an earth shattering Collapse. Nasdaq’s
Profit Price Earning Ratio has historically been set at 17. Currently
we are a little above that, but we are slowly moving back to that level.
As for the large companies that in recent years have grown at a frightening
rate, they are slamming on the breaks due this recession, or crisis, call
it what you want. In any event, the Information Technology sector isn’t
doing very well.
But couldn’t someone have foreseen that the Nasdaq bubble was
due to speculation?
What we are seeing
now is the birth of the anti-Greenspan faction. I am not part of it because
I believe the FED’s chairman has done a good job. But perhaps he
wasn’t aggressive enough in moving to cool down the market earlier
on this year…
Do you think
the recession is due to the fact that we are entering a period of market
saturation and the only sector left open is the “replacement”
one?
I believe the two
phenomena (bubble and recession) are not linked. The “cooling down”
we are going through is a cyclical phenomenon. In the early 80s we had
the PC explosion. In 1987-90 there was a big crash and a lot of companies
were forced out. This negative cycle will continue, everyone says, until
the middle of next year. Then things will pick up.
What about you?
Are you still wearing your entrepreneur’s hat, or have you completely
gone over to the side of finance and venture capital?
I continue to finance
companies where I can input a heavy contribution in terms of ideas, management,
and technology ….
You are straddling
the fence. But venture capitalists are being accused of having misread
the tealeaves.
Look, in a situation
like today’s to point the finger is not easy. Some say it was the
fault of the bankers, some of the venture capitalists or the brokers.
Some say it was because of the day traders who went in and out of the
market every half hour. The real cause is certainly more complex than
a simple combination of multiple responsibilities. Personally, I believe
the bankers are mostly to blame; the venture capitalists just went on
doing what they always do. The bankers woke up one day and said, “
Let’s offer these companies on the stock market since there’s
an Internet boom. It may be premature because there haven’t been
any profits yet, they don’t have any sales yet, but they are ‘euphoric’
and have great future potential.” The bankers reeled in their analysts
who checked and concluded that these companies would have a 500 percent
growth rate. Then they tried it out with a few companies…..
That’s
a bit of faint praise of the analysts.
You know that bankers
have their so-called “Chinese walls”. It’s a bunch of baloney,
believe me. The bankers asked themselves if there was some way of leveraging
the euphoria to their own advantage. After all, the bankers hold the keys
to the IPOs (Initial Public Offers). And when they submitted this theory
to the venture capitalists no one rejected it. The reply was, “Try.
Worse comes to worse the company won’t get listed on the stock exchange.”
But in reality, any such company wouldn’t have been listed for another
two years. And everyone used and abused this feeling of euphoria. The
analysts got astronomical commissions and bonuses. The bankers were making
commissions of 7% on each IPO and the returns for venture capitalists
were out of sight. Everyone was Saying, “I can’t believe my
eyes”. Even they couldn’t believe it. It was a kind of collective
hallucination, a euphoria born from who knows what, a snow balling effect
that kept creating wealth. For a year and half everything was left to
the professionals. Then grandmothers and people in retirement in Florida
joined the act. People who had never made an investment in their lives
jumped in because they were seeing returns of 400%.
OK, but then
someone started to check the numbers…
That’s right.
And the runway concept was born. If you stay on the runway too long without
taking off, you ended up crashing. And so they started to cross off the
list the companies that had a 10 year cash flow forecast. And we are talking
about companies listed on the stock market. And as the skepticism started
to grow, fear set in. On March 25, 2000 the Nasdaq was over 5200. And
then the free fall started. By the end of the year it had gone down 48%.
The funny thing is that pension fund experts got caught because the phenomenon
had lasted so long that they had become used to the idea that it would
last forever. But when people started checking the numbers they realized
that the bubble could not be sustained and the massacre began. Today,
the key words are maintenance, selectivity and wait and see. Maintenance
means staying the course with companies that will have value when the
market picks up but need money to keep going for another year. Selectivity
means adopting Herod’s criteria, so small initiatives with a dim
future are killed while still in the cradle. Wait and see means sitting
on the fence and waiting to see what happens.
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