Public Markets Venture

To Survive This Cycle, Think Like A Cheapskate: Down Is Good

To understand investor types, sometimes it’s helpful to think about shopping styles.

First, there’s the bargain hunter. This familiar type is a patron of thrift stores, discount chains and garage sales who heads straight to the sales rack at traditional retailers. In the investment world, such a person might gravitate to private equity turnaround plays or value stocks.

Then there are the connoisseurs. This type might spend countless hours researching the best TV, laptop or patio furniture set. While price may be a consideration, it’s not the primary driver for the connoisseur, who gives great credence to the notion that you get what you pay for. As investors, such types lean toward venture capital or high-tech growth stocks.

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So, for the sake of full disclosure, let me confess to being squarely in the bargain-hunter camp. That means that for the past decade I’ve felt like an odd duck covering the venture capital space: Constantly in awe of the innovative prowess, but also flabbergasted by the valuations attached to unproven and deeply unprofitable startups.

Venture investors, of course, have all kinds of metrics to justify lofty valuations: forward-looking ARR multiples, discounted cash flow, SaaS Magic Numbers, and so on. At the end of the day, however, the general motive is the same: Pay a seemingly high price for what looks like the best technology and founder talent in the hopes that someone else will pay more.

This mindset worked pretty well for the past 12 years or so. VCs funded hot startups at high valuations, took them public at even higher ones, and watched them soar even further. They didn’t have to deal with penny-pinching stock pickers harping on companies to slow their money-losing growth strategies and post a little profit. Stocks were up and up was good.

The cheapskate principle: Down is good

That brings us to today’s lesson: Not everyone thinks up is good.

In the connoisseur world, of course, up is good. It means validation for your product or investment or collectible. It means you’re ahead of the crowd.

But in the cheapskate world, the mantra is the other way around: Down is good. That $5 bathing suit you bought that was originally marked for $50? It means you outsmarted some sucker who foolishly bought at the peak of summer. Didn’t they know winter was coming?

Bargain hunters have the same mentality for stocks. Snapping up shares at 90 percent below their peak seems tempting. Sure, it may yet explore lower lows. But a cheapskate finds solace in paying a fraction of what a much more monied investor shelled out just a few months ago.

This mentality is something that Bill Gurley, the prominent Benchmark venture capitalist, did not appear to share when he recently tweeted: “Previous “all-time” highs are completely irrelevant. It’s not “cheap” because it is down 70%. Forget those prices happened.”

Note to Bill: Actually, 70 percent off looks kind of interesting, though 90 percent sounds better. Sure, some companies were absurdly overvalued. But a lot of smart investors also bought into the fundamentals of compelling companies at much higher valuations than where we are now.

Moreover, a lot of recently public tech names are hitting or exceeding earnings forecasts. In the SaaS space, for instance, Bessemer Venture PartnersKent Bennett recently told Crunchbase News that by his count, 95 percent of cloud companies reported earnings ahead of estimates.

Yeah, I get it. No one can predict when we’ll hit bottom, and there may be lower lows ahead. But if you don’t see the appeal of 90 percent off, then you’re obviously not the kind of person who buys a $5 designer bathing suit in the middle of November.

Move over Neiman Marcus, it’s Goodwill time

So in conclusion: Perhaps it’s time to start thinking like a cheapskate.

Really. If venture capitalists and devotees of the startup wealth creation machine have any hope of getting through the current market cycle with sanity, they’ll have to find their inner garage sale maven. So what if that $2 espresso maker or beaten-down SaaS stock looks like junk to the masses. A true bargain hunter recognizes a rare steal.

And remember: Some day, summer will return. And when it does, you’ll rue the day you snubbed that $5 rack just because it wasn’t seasonally appropriate at the time.

Illustration: Dom Guzman

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