Welcome to the First year of the rest of our lives.
After 36 months of corrections, recession, and scandal, we're ready for a break. The good news is that the worst is over (war and its aftermath notwithstanding). The bad news is that the end of the bear doesn't signal the start of the next bull. "Sometime between January 1, 2002 and January 1, 2003, the world figured out that this downturn isn't a blip in an otherwise unfettered march to untold prosperity," says veteran technology investor Roger McNamee, who has seen his share of booms and busts (and managed to extract stellar returns during both). "People faced up to the fact that we're never going back. The '90s are over."
McNamee has a message for businesspeople mesmerized by the recent past (mooning over the boom and tallying up their losses from the bust) or frozen by fear of the future (terror, war, double-dip recession). "Forget about the Next Big Thing," he says. "The next thing has started. It's called the New Normal, and 2003 will be the first full year of it. The New Normal isn't where you wait for the next boom. It's about the rest of your life."
McNamee has spent nearly all of his professional life as a tech investor, and he has produced a shining record over his 21-year career. He has not only been ahead of the curve on an array of investments (including venture deals with such tech superstars as Electronic Arts, Flextronics, and Intuit), he has also pioneered new modes of investing. After a stint as a portfolio fund manager at T. Rowe Price Associates (where his Science & Technology Fund delivered eye-popping returns during his three-year tenure), McNamee cofounded Integral Capital Partners around the new category of "crossover investing": a combination of public-market investing and late-stage venture capital. Integral, which is backed by legendary venture-capital firm Kleiner, Perkins, Caufield & Byers and shares Menlo Park, California offices with that firm, outperformed the venture-capital category throughout the early 1990s. The firm's first $85 million fund delivered a 168% return in a period when the S&P went up 43.5%.
Even more impressive than Integral's return is the restraint that McNamee and his partners showed when they gave back $1.5 billion to investors at the height of the Net boom. In the month that the Nasdaq peaked and Cisco Systems was briefly the most valuable company on earth, McNamee returned 60% of his fund's capital, "because we saw rampant speculation and prepared ourselves with our version of duct tape and plastic wrap."
As early as 1997, he says, "I realized that we had escaped the earth's gravitational pull — that we were in the midst of a true mania. The next question was, What do you do after you crash and burn? You need a strategy for investing in a long-term bear market." So, along with a set of superstar partners, McNamee assembled the first large-scale private-equity fund focused on tech. Silver Lake Partners, which launched in May 1999, raised $2.3 billion in a matter of months, attracting a who's who of Silicon Valley and Wall Street, including Bill Gates, Michael Dell, Larry Ellison, major investment banks, and big institutions such as CalPERS and the World Bank. In the four years since its launch, Silver Lake has invested approximately $1.6 billion of the fund in nine megatransactions — which included involvement in a landmark $20 billion leveraged buyout of legendary disk-drive maker Seagate in late 2000 and that company's IPO two years later.
To say that Roger McNamee's career is a triumph of smart money is to say that Jerry Garcia (to invoke one of his heroes) had a decent following. While the world makes excuses, McNamee names the moment — and maps out a productive path forward. In the case of the New Normal, that means unlearning most of the principles of the past decade. Forget everything that you've learned about time (faster is better), money (capital is free), and leadership (no experience required). "Everything takes longer in the New Normal," says McNamee. "Longer is better than never, but it requires a different frame of reference. Wealth is no longer an entitlement. Vision isn't a template in PowerPoint. Patience will once again be a virtue of great consequence."
In the New Normal, the trick is to get real about the new set of challenges we face and what it takes to win in an environment where there are no shortcuts. "You have two choices," says McNamee. "You can say, 'I'm out. I'm never going to do this again.' Or, if you're a lifer, you say, 'Okay, what lessons have I learned? Because I have to do it again, whatever the circumstances in the marketplace. I'm just going to be a lot smarter this time.' If you're willing to do some homework, and if you're willing to be a little different from everyone else, there are countless opportunities worth pursuing. That's what the New Normal is all about."
In a series of conversations with Fast Company, McNamee explained how the New Normal redefines our relationship with time, our grasp of money, and the practice of leadership — and what it takes to invest, compete, and win in that environment.
During the late 1990s, the business world was captivated by the idea that "the Internet changes everything." Does the New Normal change it back?
The trouble with that line is that people used it as license to defer profitability forever to build a really large beachhead against the total transformation of the economy. The rules were: Create your own metrics — eyeballs, page views, it didn't matter what they were, as long as they grew at exponential rates — and capital would be freely available to your idea. Everything was defined in terms of market capitalization. People weren't building businesses so much as participating in a kind of arbitrage. Investing was about the thrill of victory. Everyone from venture capitalists to cabdrivers became a compulsive trader. And while the Internet touched everything, it only transformed three industries: travel, brokerage, and retail (of books, video, and music).
When the music stopped, there were only three chairs for tens of thousands of people. The rules changed again, but nobody told you what the new rules were. Suddenly, if you weren't already profitable, you were never going to get a chance to become profitable. As unreal as it was on the way up, the consequences of that were inescapably real.
You know what? That's the textbook definition of a "mania." And that's what the late '90s were. This is how it works: When great new technologies come along, everybody wants a piece of the action. Speculation tends to go hand in hand with entrepreneurship. Capital is infused indiscriminately into the industry. This funds a huge burst of creativity — which is followed by a Darwinian process that rationalizes the industry.
The bad news is that the speculators lose a lot of money at the end. The good news is that as much as we lose in the short run, there's more to win in the long run. Every great industry in America has been built on the back of a mania, from railroads and autos to PCs. We're not talking about tulips; we're talking about industries that have become central to our economy.
So let's be clear: The '90s were not normal. The thing I am most certain of in this world is that the technology universe will not see that '90s type of growth explosion again — not in our lifetime. This is the New Normal, and it's about the rest of your life. So the first piece of advice is, Let's move on.
Before we get on with the rest of our lives, isn't there a monster hangover to deal with? Do things still get worse before they get better?
Without a doubt, there's a lot of adjustment left to be done. There are three-legged deer running all over the place, and we have to thin the herd. Phase one of the New Normal is about every company looking at its cost structure. The quick hits are to head count and the IT budget. For the first time in history, IT people found it to be good for their careers to spend less than their budget. As a result, we're in the midst of a kind of truce where the whole economy has decided that we're not going to invest in tech while we figure out what went wrong. But it would be dangerous to forget that technology still remains the principal weapon in terms of creating a competitive edge.
There's another key issue here. To focus exclusively on the negative reverberations is to miss the point. We may not be going back to the boom days, but we're not going back to the normal of the '80s either. Technology is completely interwoven into the social fabric. That's the "new" part of the New Normal. Twenty years ago, technology was a noncore activity for enterprises, and it barely touched individuals. Today, it's nearly 10% of the GDP, and doing without it is inconceivable to most people.
|Measured in days, weeks, and dog years (for the business cycle). Absolutely everything was accelerated, from hiring to going public. Eighteen months was the magic number for major undertakings, from startup to ship, from funding to IPO. The bumper sticker was, "Stop for lunch and you are lunch." Says McNamee: "It was a kind of hormonal reaction. There was so much urgency that every standard — for due diligence, leadership, recruiting, and investment — was relaxed."||"The New Normal," says McNamee, "is about real life — and real time. Getting things right the first time is more important than getting things done quickly." That's the opposite of the late-'90s mantra, "Fail faster to succeed sooner." Everything — whether it be building companies or hiring top talent — takes longer in the New Normal. Even more important in the new time frame: Don't waste your own time. Dedicate it to what you truly enjoy doing.|
And because Moore's Law has pushed down prices, almost every new consumer device is priced under the discretionary-spending limit of the average family. Cell-phone penetration is staggering: More than 400 million handsets were sold last year. DVD players represent the fastest penetration ever of a consumer-electronics device. You can buy a good one for $200. My favorite new product is Roomba, a $200 little robot that vacuums your whole house without any human intervention. I gave 10 of them away at Christmas. It's going to get cheaper, and it does something truly useful. We'll never again have to worry about down cycles where nobody buys this stuff because they don't understand it.
This is a very solid foundation to work from. Sure, the cost of marketing is high, because markets are now mass markets. But there are a lot of things in life worse than mass markets. Some of these markets are too big for venture-backed deals. So what? That just means that there will be interesting opportunities for large companies. That's a positive reality. To anybody who thinks that there's no room for innovation, I point to Google. It's one of the five most compelling private companies I have seen in my career. This stuff will continue to happen.
If we can't expect another startup revolution anytime soon, how will all of this growth and innovation happen?
Here's the "normal" part of the New Normal. If there's anything you need to understand about this environment, it's that the time scale has returned to a more rational level. Internet time measured everything in days or weeks. New Normal time is measured in years (probably not 3; more like 5 to 7, or even 10).
Internet time didn't actually change the nature of time; it was a kind of hormonal reaction. There was so much urgency that every standard — for due diligence, leadership, recruiting, and investment — was relaxed. Things moved so quickly that even dumb ideas were successful.
The New Normal is all about real life — and real time. Everything just takes a lot longer now. If Internet time lowered every standard, today there is a compensating amount of selectivity in the system. People aren't sure what the right metrics are, so they pick arbitrary ones, and for now, the metrics are arbitrarily conservative. That applies to investing. It applies to recruiting. It applies to IT spending.
Grow Market Cap
Create Real Value
|The '90s were all about fast money. Capital was quickly available and virtually free to businesses growing at exponential rates. (And it didn't matter what was growing. Any metric would do: eyeballs, page views, or click throughs.) The logic was, spend to grow.||Today, it's all about smart money. Capital is expensive, but it's available to truly committed entrepreneurs who have rigorously developed business plans that demonstrate real positives in the near term. In the late '90s, customers got a free ride, and capital underwrote everything. The new logic is, pay as you go.|
Investors and businesspeople alike have to adjust to that new time horizon. Cisco is a great example of smart thinking in this context. The company may have lost 80% of its stock-market value, but it has a clean balance sheet, a ton of cash, no debt, and respectable growth rates. One thing that Cisco is doing today that reflects a five-year time horizon is using its balance sheet as a weapon. Whenever Cisco competes against a Lucent or a Nortel for big business, it offers to finance those top-tier customers. That's smart.
Even more important than adjusting the length of your time horizon is adjusting your expectations about what the end point is. If the animating payoff of the '90s was an exit strategy that would land you on the Forbes 400 before you were 40, the New Normal expectation is, "Make your life a little better." In the late '90s, people did things that they hated for brief periods of time because they could make a lot of money doing them. When everything takes longer, it's really important to enjoy what you're doing. The question on your mind shouldn't be,
"What's my exit strategy?" It should be, "Why am I here? What am I good at? What work is the best fit for me?"
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.
|In the age of Biz Dev, PowerPoint was confused with "vision" and exit strategies were mistaken for actual strategies. The urgency was around marketing communications rather than creating real value. Leadership was more about looking good on CNBC than in-the-trenches management.||Now there's a premium on a management team willing to commit for the long term. Serial entrepreneurs from the boom are like World War I generals adjusting to World War II conditions. Success has less to do with looking good than with crafting change-the-world (or at least improve-the-world) ideas and executing them every day.|
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?
What's challenging about the New Normal isn't so much that it's strange or brand-new. It's that so many of the people running companies were trained in the late '90s. The analogy I would use is that of the military in World War I. Between the American Civil War and World War I, the technology of armaments progressed rapidly, and military strategy didn't move at all. In Europe, almost no lessons were learned from the American Civil War. The result: Generals on both sides persisted with outmoded strategies in the face of mass destruction. The incredible tragedy of World War I is that nobody figured it out. Right up until 1940, the French insisted that the Maginot Line would protect them from Germany. And during the course of World War II, various armies made progress in direct proportion to how quickly they incorporated new technology.
By the same token, what made people successful in the late '90s is not particularly relevant right now. The late '90s were all about people who looked good in the spotlight. I call it the CNBC CEO. Now it's about people who get things done. The question isn't, What's your vision for the future? The question is, What are you doing today? You still need a vision, but that is no substitute for a realistic plan. Without a doubt, it's harder now, and you get paid a lot less. But the battlefield promotions go to people who are willing to take the world as it is and make the best of it.
That means two things. First, the management team has got to want to invest in itself. Leaders have to be buyers, not sellers. In the first two years of running Silver Lake — 1999 and 2000 — almost every meeting that we had was with executives from companies whose stocks had gone from $100 to $2. They had figured out in their heads that if they could get the stock to $4 they could keep the airplane and the house in Hawaii. And they would spend the entire meeting trying to figure out how to sell the business to us for $4. Obviously, we were more interested in leaders such as Steve Luczo of Seagate, who not only was interested in owning a piece of the business, but who was also committed to pursuing an exciting strategy to grow the business, a strategy that had nothing to do with the priorities of the public markets.
Second, we need more leaders who aren't afraid to act in the midst of uncertainty. The problem with the New Normal is that there's no obvious one-size-fits-all strategy. And in the absence of an obvious strategy, most people would like to change as few things as possible. People are paralyzed when it comes to setting meaningful strategy. That's why flexibility and responsiveness are the most critical skills of the New Normal leader.
Take Eric Schmidt, CEO of Google. Eric has totally modified his behavior in order to play a new game. When you have been as successful as Eric has been, you're entitled to think that you know a thing or two. He could have been forgiven if he had shown up at Google and said, Hey, you young whippersnappers, let me show you how it's done. Instead, he listened. He watched. He figured out what the business was. He figured out which parts of what he did well would make it better and which parts of what the original team did were going to make him better. That's the essence of management. For all of Google's success, Eric is less visible today than he was a few years ago. He's spending time on the business, not in the spotlight.
Polly LaBarre (firstname.lastname@example.org) is a Fast Company senior editor based in New York. Her most recent cover story was "How to Lead a Rich Life" (March 2003). Learn more about Roger McNamee's ventures on the Web (www.slpartners.com and www.integralcapital.com).
A version of this article appeared in the May 2003 issue of Fast Company magazine.