Today March 28, 2006, I was thoroughly interrogated by a limited partner in SMH PEG I, L.P. (“PEG I”) (http://www.smhpeg.com/). This specific limited partner (“LP”) was not in a particularly good mood and decided to pan sear me via a very intense line of questioning. When talking to me he held in his hand our latest quarterly report on PEG I. I noticed that on his copy of the report (which I thought was pretty favorable) there where several notations in the margins, words circled, and some exclamation marks. Several of these notations were not very complimentary. This was starting to remind me of certain days during my academic career.This LP has made a lot of money in the oil field. He is experienced. This experience is not to be taken lightly. When verbalized it can be intimidating, it is authoritative. One of the comments he made while I was on the witness stand was that none of the portfolio companies had any significant hard assets and thus no backstop for investors if things went south. The implications here may have been that our investing model was flawed – I assumed this..I didn’t ask. He seemed fairly upset that we had put him into something with no hard-asset backstop. He made an interesting point. The perspiration was starting to flow. He wanted to know exactly when the money from one of our portfolio companies was going to start flowing back to him…his RPM was increasing with each question.
I will not go into the obvious counterpoint debate against LP’s observations (i.e. all the details about why software companies can be valuable despite the absence of material hard assets or current dividends). What I will say is that this is almost EXACTLY why we are investing the way that we are. What we are doing is generally not recognizable to LP. It is not recognizable to most of the venture world. If it was… …it would be “conventional”. So I love his angst…it is based on the fact that there is no established history of energy-focused general IT companies making investors piles of money (see “What is Happening in Front of Me”, November 2005 at http://www.energyit.blogspot.com/).
This is validation to me. If there were such a history, the sector would be full of money, pre-money values of companies seeking capital would be high, talent to run these companies would be difficult to recruit and too expensive, etc. etc. Our investment thesis would sound like everyone else’s and managing PEG I would be approximately no fun whatsoever.
OK…if you’re so smart what exactly is your investment thesis? OK…I’ll lay it out:
- The energy sector’s production capabilities are stretched and it is going to only get worse if some form of mitigating action isn’t taken by its participants– they know this.
- The energy sector needs to replace manpower deficiencies with information technology – they understand this.
- The rest of the venture world has never really spent any time in the energy sector or in Houston, Texas - this is not a competitive market at all.
- There is a great opportunity to bolt together quickly an ecosystem of leadership talent.
- Energy sector’s spending on IT is going to take on unprecedented levels – this is happening now.
- Other large IT companies are going to wake up to this and find out they have to buy their way into energy sector – must be present to win in the oilfield sector.
A really smart investor once told me..”you never make money by running with the crowd…always bet against the crowd.” I have played this in my head over and over during my career…this statement is right so many times. As a result…when people start agreeing with me en masse too soon…I get paranoid and nervous…I become uncomfortable….I start looking for an exit. But based on today’s re-creation of my own Spanish Inquisition….I am inclined to sit very still and feel much better about what we are doing.
