The world clearly has changed. Long gone are the days of Rotary Club and Elks Lodge America, and of Tuesday afternoon tea. Replacing them is the brave new world of social and virtual networking, of Linked-In, of Facebook, and of Twitter. And from a standpoint of access to and diligence of great deal flow, this is an extremely good thing.
Let's compare how deals can be and are identified and diligenced today to how it was done 20 years ago. Back in the good old 20th century, opportunity flow was limited to that which could be introduced to you directly by people you knew, usually in your local community or in your immediate circle of family, friends, and business colleagues. Oh what a simpler, more innocent time that was! But it was also a parochial and limited one.
There was first the limit of geography and introduction. If you were far from the major entrepreneurial and finance centers (New York, Chicago, San Francisco, Boston, and Los Angeles), the likelihood of crossing paths with the "special deals" was very, very limited. Back then, opportunity flow really was limited to the "old boys club," and what you knew was far less important than who you knew.
Compare that to today. Sites such as Linked-In, Facebook, BizBuySell, RaiseCapital.com, The Funded, The Private Equity Exchange, Second Market and even Twitter are treasure troves of startup, small business, and emerging technology deals and ideas. This is to say nothing of the World Wide Web itself, where all of the serious entrepreneurs and private companies (a number that runs into the millions) have websites that explain, in various degrees of succinctness, what they do, where, why they do it, and how they make money. And if they can't, with a click of a button, you move on.
And there was enormous information friction 20 years ago. Getting quality information back then was time-consuming, expensive, and prone to omission errors. There were no websites, where you could quickly get that critical feel for the "realness" of a business' growth prospects. There was no ability to "Google" someone and to find out about that bribery conviction 10 years ago – conveniently omitted from conversation and the business plan. There was no Linked-In and Facebook to identify the various "degrees of connection" that confirm resume and background representations.
Now to this you may say, “But heck in a Norman Rockwell America this stuff wasn't needed,” because, back then, you did business like men: face-to-face with guys you knew from the club.
To this I say two words: Bernie Madoff. Mr. Ponzi himself could never have gotten away with what he did if he traveled amongst the modern "technocrati." His M.O. of secrecy and opaqueness would have screamed suspicion immediately to any one even basically versed in online networking. This brave new world is one that if you have nothing to hide, then you ain’t opaque. And it is a better world for it.
Finally, you may say, “Well Jay, if this new world of ours is so abundant and so filled to the brim with such incredible money-making deals, why are we all getting killed in the markets? Couldn't we all kind of go for some of those 1980's-esque returns about now? If this new world of ours is so great, why is everything so bad?”
To this, I refer you to Nassim Nicholas Taleb, author of the paradigm-changing treatise, "The Black Swan." At the risk of over-simplyifying Taleb's big idea, the good old days were a world of "Mediocristan," or in the inimitable words of Garrison Keiller, one where “all of the children were above average.” There were business successes and failures for sure, but they were of more of a gradual and tepid form. The 21st century, in contrast, is a world of Extremistan - characterized at the macro level by outrageous bubbles and busts, and at the micro level by a quite small number of enterprises and business models that are responsible for the significant majority of an investment class's return.
Our contention is that, as we move into the 2nd decade of the 21st century, more and more investors will both be able, and prefer, to hunt for these future supernovae via online social networking and deal exchanges and the Internet itself. From here, most but not all of the traditional deal diligence rules apply. In future blog posts, we will explore which ones do, which ones don't, and how to assess and price private company deals in the current environment.