We are just a few weeks into 2017 and I want to explain what I believe will happen this year and what that means to all of my Portfolio enterprises. I am excited about what President Elect Donald Trump is doing to the liberal establishment in Washington, D.C. and I expect that his election will be great in fostering free enterprise by eliminating numerous and costly job destroying overbearing levels of Federal regulations.
Those of you who know me know that I am an advocate of John Naisbitt who authored the book titled Megatrends that was first published in 1982 and is still in print. His message in his book was that you don’t need a crystal ball to “see the future,” and all you need to do so is to read your newspaper and other news publications. The megatrend news today is, indeed, telling us what the trends are as it applies to the capital markets. First of all I am going to tell you what is happening right now and beyond from recent articles and news stories that I believe are the harbingers of my assumptions and predictions. What I am absolutely certain of is that the timing could not be any better than it is today as it applies to the opportunities for all of my portfolio companies that I and my investors have funded over the last 10-years (two of them have been in my portfolio since 1997).
There are a few factors to note first. Venture Capital firms, corporations, Private Equity Groups, Investment Banks, Money Management firms, major banks and wealthy angel investors are awash in cash. Acquisitions and mergers in 2016 have far outpaced IPOs by a factor of almost 200 to 1. Corporate stock buybacks and mergers have shrunk the number of quality stocks to invest in. The biggest single financial event in our history began in June 2007 when Apple introduced the iPhone. The smart device market today is saturated and is no longer a growing market. The remarkable part of the story is that the introduction of the game changing iPhone occurred when the financial meltdown was starting in early 2008 that subsequently, very quickly dried up access to capital. So the stock market dove but technology stocks like Apple, Google, Microsoft, Amazon, etc. soared. The year before the iPhone’s release in 2007, Apple posted an annual profit of $2 billion on sales of $19.3 billion (their fiscal year ends in September). For the 2016 fiscal year Apple reported $215.639 billion in revenues and $45.687 billion in net income which was their first drop in year-over-year revenues and net income since 2000, 17 years ago. The iPhone tech boom saved the U.S. Economy when, without it, the meltdown would have been a catastrophe. In addition, smart phones became accessible to poorer peoples which began to have a favorable effect on boosting the GNP of many very poor countries.
So where is the big money going now? Bill Gurley, a partner with Benchmark recently stated “The world has never seen an investment climate like this one. It’s hard to express how much money is out there. We’re in a slow correction. You might see a unicorn go down once a quarter, instead of a crash taking them all down at once.” In an article in late October last year titled The Slow-Motion Bust in Business Week written by Max Chalfkin he wrote “Most startup investors, however, expect several years of relative stagnation, which is why many are looking away from the crowded field of consumer software and toward companies focused on business services, where they see more stability and growth potential.” The IPO market will continue to shrink, acquisitions will continue to rise and the focus for “big money” investments now are focused on “cloud based” software business that have already established their “niche” and their uniqueness and are at or close to becoming a sustaining and rapidly growing profitable business. In addition, the VCs et al, have to believe that a significant capital infusion will allow the prospect business to more quickly ramp up in the market it is in and possibly enable the prospect business to enter other markets as well. What does this fact mean to my portfolio companies? All of my portfolio businesses are in the “sweet spot” of just what all the “Big Money” is looking for.
Empathic Clinical Suites and LocaLoop are especially prime candidates to be acquired. They have proven technology, they are both fundamentally; recurring revenue, cloud based, software services businesses. More importantly, they are both fast growing and have no peers in their targeted markets and they are close to achieving the proverbial hockey stick of extremely fast ramp-up growth.
Biothera Pharmaceuticals has been in my portfolio since 1997. On January 6, 2017 Biothera CEO, Barry Labinger sent a letter to their shareholders to summarize their efforts to go public which they had announced at a shareholder meeting in April 2016. They pointed out that 2016 turned out to be the second-worst market for IPO’s since 1992 and that it was a dismal year for biotech IPOs too. And they noted that almost all of the few biotechs that did go public since the first quarter of 2016 now trade below their offering price and that fact negatively impacted institutional investor sentiments regarding future IPOs and related pre-IPO institutional investments. The letter went on to note that they are continuing to work with Citi-Group and are set to move when the biotech segment is ready. In the meantime they are continuing to generate meaningful data from ongoing clinical trials which are under research collaborations with Merck and other pharma enterprises and they are right in the middle of what today is the biggest event in the cancer segment of the pharmaceutical industry and that is “Checkpoint Inhibitors” and immune health. What Biothera is doing now is exactly what they should do to achieve a liquidating event either through an acquisition or by going public.
Following are quotes from cited publications that confirm what I am predicting. Keep in mind that, as I noted earlier, there are huge caches of cash in corporations, Venture Capital Funds, Hedge Funds, Index Funds and numerous financial institutions that are all looking for the next hot new deal.
Below are a few of the cited articles that are the megatrend stories of today that support my conclusions.
I am starting with an article in the October 24, 2016 to January 6, 2016 issue of Bloomberg Businessweek by Max Chafkin titled The Slow-Motion Bust. The byline or Lead-in was “This wasn’t the year the tech bubble popped, as a lot of people predicted. But the industry’s stratification into a few sure bets and everybody else isn’t helping guide us out of the iPhone era into whatever’s next.” He goes on to say, “Now, though, smartphone growth rates are near zero in the U.S. and falling around the world. And, while there are candidates to succeed the iPhone as the next revolutionary computing platform (wearable gadgets, virtual reality), none has made a compelling must have argument to the mainstream.” He also cites the fact some formerly hot companies like One Kings Lane, an online home goods retailer that once was worth $1 billion, earlier this year sold itself to Bed Bath & Beyond for $12 million. There are many more formerly hot ideas that today are down 50% or more than they were valued in 2015. He notes that CB Insights has counted 80 “down rounds,” instances of a startup accepting a reduced valuation to raise more venture funding. He quotes Roelof Botha, a partner with Silicon Valley VC firm Sequoia Capital, “There was this fog hanging over Silicon Valley in 2001, referring to the last big tech bust. And there’s a fog hanging over it now. There’s no underlying wave of growth.”
Chafkin further states, “A few years ago, a big VC fund might have had about $500 million to play with. Today, ‘big’ means well over $1 billion. VC’s raised $12 billion in the first quarter of 2016, which the industry’s trade group says marked a 10-year high.” He quotes Bill Gurley, a partner with Benchmark who led the firm’s investment in Uber, “The world has never seen an investment climate like this one. It’s hard to express how much money is out there.
“Most startup investors, however, expect several years of relative stagnation, which is why many are looking away from the crowded field of consumer software and toward companies focused on business services, where they see more stability and growth potential.”
There was another article posted on January 6, 2017 by Mark Fahey who is a data journalist and graphics editor at CNBC titled Why buyouts are blowing away IPOs when investors want to ‘cash out.’ He says “It’s been a while since we’ve had an Alibaba. In fact, it’s been at least a year since we’ve had an initial public offering that raised as much as Facebook ($16 billion), Hilton Worldwide ($2.7 billion) or even Twitter ($2.1 billion). And yet, we can’t go more than a few months without a major corporate acquisition. In 2016 Microsoft bought LinkedIn, Tesla bought SolarCity, and over 1,000 other companies changed hands, often for billions of dollars. That includes hundreds of smaller private companies that in the past may have opted to go public. Something has changed in recent year – IPOs on American exchanges were at their lowest level since the recession, while mergers were at their highest level. For every dollar of IPO proceeds, $143 was spent last year on mergers and acquisitions, the highest that ratio has been in nearly 30 years, according to CNBC calculations.
IPOs and acquisitions serve similar purposes in the investment ecosystem: Both allow early investors in a private company to cash out either by selling their stakes to the investing public or to a larger company. While some mergers are between two public companies, the majority involve a bigger company buying a small private company.”
Later in this article Mark Fahey states “Since 1985, there have been two periods in our data set when they went out of sync: It’s happening today, and it happened in 1988. That’s when IPOs plummeted after the 1987 stock market crash, but a wave of mergers persisted.”
I have always said that the most important thing about any early stage business is its timing to uncontrollable events. You can have a poor technology and still have a big win just because of the timing. What is clear now is that Empathic, LocaLoop and Biothera Pharmaceuticals are in the right place at the right time. This fact will become very clear throughout 2017.
Crawford Capital Corp