ETRE 2008 – day 2, part 1, Marcus Wallenberg, Norio Wada, Giles McNamee

Alex Vieux
Alex used the Darwinian evolution statement. Has he been reading this blog, I wonder?
This Credit Crunch is a global financial event and is still echoing around the global community. The idea of globalisation, so new at ETRE 1, is now the keys both to understanding the scale and consequences, and to taking advantage of the changes. Long timescales give long perspectives. Herman Hauser was one the of the first attendees at ETRE 1. He is still coming, so that experience takes us through several economic cycles.  
With a quick canter around the BRIC countries, it was straight into the first major segment.

Marcus Wallenberg, Chair SEB
With our heads still trying to get around the way Alex had proposed that Scandinavia has defined the moral agenda of the Western World for 50 years (an interesting concept, and one for which a heap of examples were wheeled out), Dr Wallenberg walked up and began to lay down the big picture from a banker’s perspective in very measured tones.
Being Scandinavian, this kicked off with a view on social investment and the general failure of Scandinavia to turn patents into wealth. Apparently Sweden has the highest R&D spend per capita and the highest number of patents per head but has not had huge success in turning that into wealth for the innovators or the investors.
His overview of the credit crunch was fairly standard, but his perspective was somewhat more personal (given the family history and family bank) and was pleasantly different to many other people that we have read or talked to recently. He was moderately optimistic about the probability of recovery after the recent co-ordinated government action. He walked us through the effects of rapid global de-leveraging which was being driven by fear, and gave his own view that it will only be reversed by a return to confidence and (a little) greed. The decisive action by the G7 nations has – in his view – been well co-ordinated and very creative.
What many people had not fully understood was the way in which the recent G7 action would also change the accounting rules, the control structures, the power bases of banks, and the competitive landscape in which banks operate. It was clear that there would be more global coordination of regulation and investment in future.
He did however expect a moderate to severe downturn in the immediate future; but the recovery would be led quickly and strongly by BRIC nations.
 Historical perspective was something the Wallenbergs have in spades: he pointed out the bubbles always pop. Be they Tulip Fever in 1636, the Railroad stock bubble in 1845, or the Internet boom of 2000. Each bubble has always popped.  But each popping bubble has propelled some great new infrastructure and technology companies to the front.
What his bank had learned, was that bubbles elsewhere in the world quickly come home to Sweden. And yet real value can be created anywhere in a bubble and bust. The important factor in finding that value was to recognize that you had to support innovation at all times. This time around he would be looking towards innovation in new technology and clean technology. And it looks like he is also a believer in the interface theory of wealth creation, in that his strategic focus is on:
1.    interfaces between computing and the biochemistry
2.    the convergence of intellectual property and telecoms,
3.    and a very large scale environment changing clean tech which is on the borders of engineering, physics and biology.
I’ve heard this quote from lots of engineers, but it came as a real surprise to hear it from a banker: ”every good innovation takes double the time and double the capital you first thought” I’d like to see that written in every single business plan and properly accounted for by investors when capital is first raised.
 He also gave a quote from his ancestor in 1870 “in tough times, good business gets done.” His advice to entrepreneurs in such tough times was to support the spirit of your innovators, invest in the long term, have committed but flexible strategic capital partners, hire the right people, into, and persevere.
He also touched on the way in which making new markets can really pay off. Plays to create new markets take a long time and the leisure investors are providing stable finance throughout any company attempting this will have big difficulties that weren’t needed or expected from the core business plan itself.
 At the end of the session Alex Vieux asked a really good question “how can Banks stop the disasters that quarterly reporting creates because it is forcing short-term thinking on boards of directors?” It was obvious that there would not be an easy answer to this question but it was heartening to know that work is being done to reduce that burden whilst avoiding the creation of bad financial engineering  at every year end. They both agreed that it was the board’s job to focus on the real horizon not be distracted by short-term investor pressure, and they both agreed that a good investor should be clear and supportive about what the company should be trying to do.

Norio Wada, Chairman NTT
Wada-san Took the stage and it was immediate and he had the kind of gravitas and humility which we rarely see in the West. Unlike any Western speaker he straight-away described the parent group as being below the rest of the group and supporting and providing services to the rest of his hard-working community teammates. I’d like to see a few more European companies understanding that their whole business is not really about subsidiaries providing benefits to head office.
He genuinely seemed to have a long-term vision of ubiquitous broadband and next-generation networks (“NGN”) delivering IP over optical. That sort of leadership goes a long way to explaining much of Japanese business structure. As to NGN, I am not competent to understand all the new protocols or the benefits of them, but I will be welcoming any form of secure sender ID and routing as a way to weed out spam. Whatever this next generation is, and does however fast it works, it’s going to take a couple of years more to build – at least. Meanwhile on mobile, it appears that things are blazing towards the 300 megabits a second download through super 3G. and with 4G. on the design horizon.
So why are they spending so much time in Japan doing all of this? Well it does appear that they have a nicely thought out consumer and business strategy I picked up on the collaborative working, software as a service, and media streaming. And I felt that he was at his best talking about how the Next Generation Network will act with other society transforming factors like remote interactive healthcare. (I did however find it funny that all Japanese IT solutions appear to have to include some reference to karaoke!)
NTT sees media distribution to digital signage as another network driver. All of those advertising hoardings need data. But where is all that digital content going to come from to fill all the digital signage? Perhaps, and this may be hopeful on my part, Moviestorm has a role to play here Moviestorm users could set up an advertising media company develop the digital signs. Whereas I quite like video signage, I wasn’t quite sure that I like the idea of aroma emitting digital signage with network remote control and viewer interaction. It filled my head with the idea of persecuting somebody through hacking screens to bombard them with foul smells wherever they went.
Overall he may have been a small man, but he had big ideas, total dedication and could clearly make really big things happen. He finds it funny that no one now says that he’s crazy – which they did he first set out to create a service business around a fibre and wireless network.
Perhaps, just perhaps, the huge global changes and the global innovation framework is good to begin to corrode the walls that surround Japan.

Giles McNamee, Managing Director & Co-founder, McNamee Lawrence & Co
Giles had a very light hearted way of presenting some very serious statistics. Every politician should have someone keep a scoreboard on them in the way the Giles has kept a score board on George Bush.
Showing that clip of Casablanca (when they tried to close Rick’s Café) as Giles did, was a stroke of presentation genius.
Have to disagree on his view that Gordon Brown is the hero of the banking world. No one – especially Gordon Brown – should cause a problem, benefit from it, and then get credit for appearing (temporarily) to have solved the problem.
As he pulled back to the long view of the world in Credit Crunch he made some brilliant points:
•    Software companies have no debt – no one lends to them
•    Software companies have no leveraged assets – they cant raise debt against IPR
•    Software companies go on to make huge piles of cash that change everything
The banking crisis is not as bad as the silly tech bubble and crash in 2000. The fundamentals for getting into software as an investor are still excellent, and fantastic investments and levels of investment are still likely in 2008/9. History says that tech crashes are not followed by massive reduction in investment or M&A deals.  Given that 90% of all deals are under $10m, the canny investors can work out their average portfolio values and risk profiles quite quickly. What has already changed, and had changed before the Credit Crunch, is that the route to IPO has totally clogged up and slowed down.
The real action is in corporate M&A – listen to Larry Ellison, who is acquiring through ORACLE. Listen to the big corporate investors like Steve Balmer at Microsoft who are taking bigger gambles despite some harsh accounting penalties for doing so. M&A has become the new R&D, and it works out that big corporates are better off acquiring clever fast moving technology than trying to make R&D work in their dinosaur parks.
Right now – Right now – sort out the capital structure so you all make a lot of money at an average exit of $25m. That has been true for 10 years.  A lot of money is anything more than 3x capital.
•    Canny CEO’s should grab control of their companies and their destiny.
•    Control expenses and headcount.
•    Stop wasting energy on anything that does not matter.
•    Shoot at the BIG targets, not the small ones. (so your failure is bigger than a smaller success)
•    Never let go of the quality of the customer experience – in a bad market the customer is doubly important.
•    Run your business as if you are going to own it forever. Or you will…
I’ll be laughing for a while at his analogy that the banking system will work out its problem in the same time that an elephant can pass through a snake. Wonder who is the snake? He was spot on, in my view, that rewarding banking employees for driving up fees and volumes, while shareholders became increasingly exposed to leverage risk and the underlying assets was a classic and obvious recipe for complete disaster.
As a banker, he sees a whole host of utterly irrational decisions by VC’s, mostly negative ones. He was at a loss to explain cases where VC’s had acted on sentiment – and against the fundamentals – and pulled support from companies which were growing, which had customers, which had potential, and which were undercapitalised. When the one thing that a VC can control is capital levels, why do they kill deals and companies for their own past behaviour. What he did urge was rapid intervention by investors when a company was really missing the market and going away from the evidence.
The interesting highlight was the way in which the panic driven quarterly revenue target for the big companies will actually benefit start ups as it will cause them to acquire small companies for the next  1-2 years just to buy revenue to top up the next quarter. That will turn back to buying for longer term fundamentals and, as a real winner, sell some MAGIC! No one else has that.

Keynote Panel on Global Financial Outlook.
•    SEB
•    Carlyle Group
•    Texas Pacific Group
•    UBS Investment Bank

No need to rehash the reasons for the Credit Crunch, or the macro-economic effects of the discrepancy between short and long term borrowing rates on leveraged buyouts and lending / leverage. Go read a book, there will be a heap of them soon and you should already have known it if you are in any business other than a corner sweet shop.
What was interesting was the predictions for failure of smaller VCs who aggressively leveraged their equity and where they have underinvested in the past and are now going to be incapable of supporting their investee companies just when those companies are finding it hard to get credit.
The clear winners will be larger VCs and PE firms who have huge cash reserves.
Yet, at the top end, it was suggested that the large PE firms are going to run into major trouble as they can no longer rely on the leverage effect to suck huge fees out of deals in which they put very little of their own capital (and most of that they repaid themselves in the first few months through staggering fees and rebates). The panel felt no major firm was at risk. In a time of no confidence, it was drummed in to them by Alex Vieux that just before 60 banks failed, everyone was publically saying there was no problem.
What struck me was how strong good PE firms can be if they structured their deals in a way that protects them from having to return capital they have already pulled down. But they remain at risk if the LP’s decide to pull out of future commitments. Right now, every company’s senior debt is “junk bonds” and yet is returning 20% IRR. The availability of deals like that will drive some LPs out of smaller VC and PE vehicles and into buying debt for a few years. That will slow down some VCs and PEs.
The point was well made that smaller companies would be well advised to fly as fast as possible towards a larger investor who is patient and who has a strong, cash rich position from a powerful and relevant portfolio that has no obvious urgent needs for capital.
The other side of the issue was that VCs were not going to be keen to buy small minority stakes. They want to invest and then control their investment. This is going to result in fewer bigger deals and hence benefit the better investee companies. It is, however, going to result in some interesting conversations between the investors and the founders of those companies over dilution.
On balance, the VC and PE firms were confident, they had seen it before, and were optimistic about the near, medium and long-term future for tech investments.
Cash is king, guys, cash is king.

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