The New Normal

What does the New Normal time horizon tell us about where the smart money goes today? Going forward, who is going to fund growth?

In the New Normal, the big shift is from a focus on growing market capitalization to a focus on creating real economic value. The logic of the late '90s was, spend to grow. You could lose $100 million today because at the end of the rainbow, you were going to make a trillion. The logic of the New Normal is, pay as you go. And guess what? Tech works perfectly well that way. It turns out that you don't need $200 million in venture capital in order to build a great company.

Two of the venture deals that I am most proud of in my career were both founded in the teeth of the last mania -- the PC revolution of the early '80s -- and survived. One of them was Electronic Arts. The other one was Intuit. There was no capital available for either one of those companies. They emerged from very crowded fields and evolved business models that didn't require a lot of external capital. They believed in their categories, and they had patient, committed teams. And now they're two of the most successful and exciting companies in the world. That's living proof of what people who work hard at a great business model can do. Tech is not about overnight success. It's about doing it every day for years and years.

The central problem of the late-'90s business model was that customers got a free ride. In the balance between customers and capital, capital underwrote everything. Today, the best business plans are the ones where customers pay for their share of the cost. That's a very simple test. The customers pay either by acquiring lots of product or by underwriting the development. If the customers don't want your product now, why are you doing it now? I don't care what customers are going to want in the future. Don't tell me about the new, new thing. The thing that matters in the New Normal is, What are people buying today? What are they likely to buy more of tomorrow?

What this means for entrepreneurs is that not only is it not enough to have a great product or service idea, it's also not enough to have a rigorous, detailed plan, a deep understanding of the customer, a go-to-market strategy, and a team that can get it done. You also have to have paying customers signed up. That's why I always tell entrepreneurs, If you can't imagine doing anything else, do your deal. But if you can imagine doing anything else, do that, because entrepreneurship should be left to the truly committed.

What about average investors? How do they get an edge in the era of the New Normal?

You have to distinguish between the technology economy and the technology market. The technology economy will be increasingly productive from now on, while the technology equity markets will be very selective in how they reward. Darwinism has returned with a vengeance to tech investing. Average returns will be low, but the standard deviation will be huge. There will be many more losers than winners, but a few of the winners will be big ones.

When Darwinian forces rule, you have to be a stock picker. You don't focus on sectors or "what's hot." There are winners and losers in every category. And because there's no tailwind for the tech industry (and there's even a slight headwind), momentum is sufficiently unusual, and you've got to take it where it comes. Look for a really good product cycle, a great management team, and strong positioning. You don't want to own the averages. A fully diversified tech portfolio will always underperform. That goes for companies too. Companies that are too diversified are not going to perform as well as the ones that are narrowly focused and have a big product cycle.

Finally, don't underestimate the staying power of a technology franchise -- and the fact that things that work often continue to work. Bigger companies have some advantages. They're too important just to go away. The other thing to keep in mind is that technology markets develop over 15 to 20 years. And the way that compound interest works, most of the money that investors make is in the last five years. You don't have to rush.

As hard as it is to get excited about return on investment these days, it's even tougher to run a business or manage a team in an environment where there are more demands and fewer resources than ever before. What are your lessons for leaders in the New Normal?