Steve Case on Angels, Tech Bubbles and Caution
I appeared Friday on CNBC's "Squawk Box" and was asked about a few current topics in investing. Because time was short, I was only able to give partial replies on some of these critical matters. So I thought I would write up my views in a more detailed fashion, to make sure that they are clear, and to continue the debate about where today's market stands.
Is there a 'tech bubble' in private investments?
I don't like the word "bubble," because it implies something very specific and irrational that is more provocative than enlightening. And I don't think that what we are seeing in private markets is limited to technology companies alone—the same trends exist in a variety of consumer and business oriented companies. So I don't find the hypey phrase "tech bubble" particularly descriptive of what I see day to day in my work with start-ups and investing.
That said, I do believe that, in general—especially for companies based in Silicon Valley and New York, where there is a great deal of capital chasing a limited number of promising firms—valuations tend to be excessive, and a lot of investors are paying too much. At Revolution, the No. 1 reason we "pass" on backing companies that we look at seriously is that the entrepreneurs are seeking a valuation we think unjustified and unsustainable. And almost all of these companies find other investors to back them at the valuation level we were uncomfortable with.
To be clear, it is certainly possible that we are simply too conservative, and that we will be proven wrong. And in some instances, that is certain to be the case; some of the companies we have passed on will end up as rocket ships we will regret not being on board for. But we have lived through cycles before where valuations that one day seemed "fair" suddenly seemed frothy and companies (and investors) suffered steep declines. And in the past year, we have already seen some examples of this, as some "high flyers" have seen their values collapse quickly and dramatically.
That said, we also do continue to find—every day—promising companies with appropriate valuations. Often these companies are in markets where the flow of great ideas exceeds the availability of capital—in the Midwest, the South, the Mid-Atlantic, the Mountain region—away from the boom of Silicon Valley and New York. Others are headed by entrepreneurs who understand that great companies are built step-by-step, over the long run, with capital raised at sustainable valuations, and great returns for everyone as real success is achieved. Indeed, it is interesting to note how experienced "serial" entrepreneurs tend to adopt a more 'built to last" approach, as they have learned (sometimes the hard way) that what matters most is the ultimate value creation, and investment rounds are mere stepping stones to greatness.
The record shows that while there are occasional true "overnight successes" (Snapchat is a recent example of that), in most cases it takes five-10 years to build a great, valuable and sustainable company. So some companies will be valuation "hares"—but far more are valuation "tortoises," building value steadily over time. Sweeping phrases like "bubble" fail to distinguish between these two approaches, and that is why I resist it. But my bottom line is this: the entrepreneurs and investors who play for the long run are the ones who are building most of the great companies of the future.
Should 'amateurs' engage in angel investing?
A second question I faced Friday morning was whether the risky world of angel investing—backing very early, unproven start-ups—was appropriate for "amateur" investors and/or investors of more modest means.
In answering that question, I start with a few cautions. Start-ups are risky. The fact is most will fail. So if somebody is looking to take some money that they will need to pay their bills, or send their kids to college, or pay for their retirement, they absolutely should NOT use those funds for angel investing. For them, the risk is just too great.
That said, I am still in favor of allowing "amateurs" to make angel investments, for three reasons.
First, I reject the elitist notion that one's investment savvy is proven by the size of one's bank account. I've seen plenty of wealthy people make horrible investment decisions, and plenty of middle-class people make smart ones. Especially if you are investing in people you know, sectors you know, technologies you know, markets you know, products or services you use and love, then the so-called amateurs may actually be smarter and better informed than many "professional" investors.
Yes, we should have strong investor protections for such investments, and yes, we need to have clear and investor-friendly disclosures. That's one of the reasons I continue to encourage the SEC to put rules for the JOBS Act crowdfunding provisions in place soon, as it would be better for people to make these sorts of early stage investments through vetted, registered platforms. And that's also why I was supportive of the efforts by Congress and the White House to put limits on the size of crowdfunding investments individuals who are not wealthier "accredited" investors could make. But this is America, a country built on individual choice and risk-taking—and I think that we should lean toward letting people make their own choices, and reject a view that says that only rich people are "qualified" to back start-ups.
Second, I have seen time and time again that angel investing is a civic activity, that helps grow communities, create jobs and promote opportunity. As I travel the country on my "Rise of the Rest" bus tours, I see many cities where economic growth and job creation are being unleashed as entrepreneurs get the backing they need—and that initial backing frequently comes from local, small investors.
In this way, angel investing is not just about investing—it's also about helping the community. Even when these "investments" don't "pay off" for the person making them, they make the community a better place and create winners in unexpected ways. For those who can afford—without imperiling their finances or their families' needs—to back local start-ups through angel investing—and who understand the improbability of seeing their capital returned—angel investing can be an important way to make their community stronger and more vital.
Third, too many people are too tech-centric. Angel investors might back the next great tech company, but that's only part of the story. Much of the angel investment activity is focused on nontech sectors, helping an entrepreneur raise money for a consumer product, or business service, or even a restaurant concept that might be the next Subway or Chipotle. If the U.S. is going to remain the most innovative and entrepreneurial nation in the world, we need to support entrepreneurship all across the country, in all the sectors of our economy—not just in a few places, or a few sectors—and not just with investment capital coming from a few people.
I hope this rounds out some of the views I offered on CNBC Friday morning. The bottom line is I am a little nervous about valuations, even if I am reluctant to embrace the "tech bubble" phrasing. But there are many companies—often in these off-the-beaten track "Rise Of The Rest" regions—that have reasonable and sustainable valuations. And, I am optimistic about the potential of angel investing and crowdfunding. It can level the playing field for investors and entrepreneurs, giving more people a shot at the American dream. And it can help grow our economy, improve our communities and launch the next great companies in our country.
Steve Case is the chairman and CEO of Revolution LLC. He is also the co-founder of America Online and a member of President Obama’s Council on Jobs and Competiveness.