The New “Great” means “Less Bad”

September 23, 2009

As I talk to venture capital investors, expansion stage companies, and others in my growth equity network, I am hearing more and more positive comments on the economy, but I am not seeing the results in the real economy yet (at least as of mid-September ’09).

My overarching sense is that there are a few things driving a more positive stock market which seems to be at least partially responsible for people having a more positive outlook:

  • Leading economic indicators are continuing to go up
  • The change in market sentiment from a meltdown scenario to a more positive scenario
  • Incredibly low interest rates
  • Increasing inventories (from very low levels)
  • Recently announced acquisitions at healthy prices
  • Continued growth in certain pockets of the economy (e.g., value-based retail)
  • Positive profit results (relative to expectations) reported by companies

As more people increasingly have a positive outlook, I find fewer and fewer people that share my view that today’s economy (rather than future expectations) is still very unhealthy, particularly in the area of business investment. This is not good for growth capital players, at least in the short to medium term:

  • Top line revenue growth for companies is weak at best, particularly in the area of new customer growth
  • Extremely high unemployment and underemployment that continues to go higher
  • Business Investment is extremely weak, having declined much more than the overall GDP year over year and worse in the second quarter than the third quarter (and I suspect that the third quarter will not be significantly better)
  • The number of companies that have solid positive new customer growth has shrunk considerably over the last year (bad news for growth equity investing)
  • All of this even with extreme government stimulation that will need to stop at some point

The third quarter GDP is supposed to be better according to everyone (including most of the Venture Capital Investors that I know), but I suspect that better means that inventories will be replenished, government spending will be higher, and government programs like cash for clunkers and first time home buyer incentives will be the main drivers of this improvement rather than fundamental improvements in the core economy (consumers spending more without going into debt further or living off of home equity loans, B2C companies growing their top lines, buying more from their supply chains and investing in people, technology, and innovation, government living within its means).

I suspect that government agencies are painfully aware of the real situation, but they seem to be putting a positive spin on the situation (I am guessing that this is to stimulate consumer outlook to be positive to try to get the consumer spending up and create a more virtuous cycle in the economy). Most of the financial news outlets also seem to be putting a positive spin on the situation (I am guessing it is because businesses reduced expenses and low interest rates…creating profits in a declining revenue environment generally helps capital market valuations and future growth expectations are helping growth equities). Growth Equity players seem to also be putting a positive spin on the situation (which is generally the case, as they are optimists)

There seem to be fewer and fewer people pointing to the economy these days and saying anything but good things about the economy. As an Expansion Stage investor, I look forward to the time when real economic growth more closely matches the current positive views!

The new “great” means “less bad” I suppose.

Founder & Partner

As the founder of OpenView, Scott focuses on distinctive business models and products that uniquely address a meaningful market pain point. This includes a broad interest in application and infrastructure companies, and businesses that are addressing the next generation of technology, including SaaS, cloud computing, mobile platforms, storage, networking, IT tools, and development tools.