Dave Friedberg discusses investing in turbulent markets

Transcript

I'm Dave Friedberg. I'm the founder and CEO of the Production Board. 

In Silicon Valley, in the private markets today, many companies' stocks have dropped. The average growth-stage market return for portfolio of growth-stage, public investments, at this point, it's come up a little bit lately, but it's probably down 60, 70% from peak. So if the average private company is down 60% from peak, the odds are most of them are worth less than their preference stack, than the amount of capital that they've raised.

Now, what do you do in an environment like that? Well, if you as a venture investor have only seen venture investing while stocks are going up, you don't know what to do. And it's a very scary time. And so you sit and you stall out and you go invest in the next hype bubble, which is why AI becoming so frothy right now. Because it's an easier place to make seed and A bets than it is to spend time finding the great businesses that are out there right now in Silicon Valley, that are making money, that are growing. But they just got overvalued. It's a good time to go in and actually buy those shares or figure out a way to recap.

And I think that's one of the things that's really challenging Silicon Valley, challenging private market venture investing today, is how do you navigate a market where valuations are coming down, but there's still great businesses out there that are growing that perhaps are about to become profitable, but they're worth less than the capital that they've raised or they're worth less than their last round. And I don't really want to invest in a company if the valuation is down, and it's creating this real interesting tension in how folks are navigating. And I do think that it will differentiate high-quality investors that understand how to do fundamental valuation and think about and look at a business objectively and say, this is a great business. I should be an investor in this. They're still 100 X upside from here versus, oh, this is a hot company. The stock price is going up. I should be buying this. And I think that's something that LPs should be on the lookout for right now is how are the managers managing through this difficult cycle and how many of them can have that lens on businesses and not just be treating everything like a momentum play?

If you invest with the market, meaning everyone is saying something is absolutely going to happen this way, you're going to get market-matching returns. So if I'm looking at other investors, that's certainly something I'm looking at is tell me where you disagreed with the market, where you were willing and able to say, I don't think everyone's right on this. And if I'm right, I'm going to get a massive payday and wait enough times and do that enough times and be right enough times, you end up getting market-beating returns. I think that that's really critical. 

Now is a good time to deploy capital with the right managers that know how to navigate this environment. And so, the right managers can look at businesses objectively and identify what the potential outcome is for that business from where they're sitting today. Figure out how to manage not just a very simple high valuation, pari passu 1x click deal from the last round, like everything's been done for the last 15 years, but maybe being a little more thoughtful about what's the right way to go in and restructure a company that's actually a great company with a great team and has great opportunity, fundamental business value creation is there, but valuation got ahead of itself or there needs to be some realignment on the current cap table to account for where the business is at. And so managers that have experience doing that, that have experience navigating through difficult structure, I think are going to be more successful in this environment today because there's so many great companies out there than managers who haven't done it before and are just looking for the next momentum play.