NOBODY Expects the Spanish Inquisition

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:

1. 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.
2. The energy sector needs to replace manpower deficiencies with information technology – they understand this.
3. 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.
4. There is a great opportunity to bolt together quickly an ecosystem of leadership talent.
5. Energy sector’s spending on IT is going to take on unprecedented levels – this is happening now.
6. 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.

Man's Search for Meaning and The Current Popular Practice of Blogging

Sometimes I am embarrassed to refer to my blog. Many times it seems an act of hubris to suggest that one's insights and perspective are grand enough to warrant public interest. My judgment is that blogging is rapidly becoming a cheap cliche'.

In my search for truth, I began to investigate other VC blogs. I wanted to know what they [others like me] wrote about...and how. I was doing this to calibrate my self-opinion. I found sites that I liked and those I didn't. For those I liked, I sent the authors emails describing what I liked and why - I wanted to acknowledge the human being. I sent about seven such emails.

Interestingly...I heard back from only one blog author among the seven sites I visited - ONLY ONE. It made me start to wonder...why are people doing this...why I am doing this? It is a fair assumption (I think) that authors are doing this for public consumption and that somewhere in there...is a need on their part for feedback and acknowledgment - as opposed to divine world betterment. The Internet is, in fact, the most public medium ever created and therefore public consumption is implicit. I think VCs are particularly vulnerable to the need for acknowledgment as their entire world is about testing the theory, testing the theory, testing the theory. In addition, they have to wait years to see if their investment theories translate into investment successes.

If a peer's perspective judgmentally and expressly is supportive of the authoring VC's theories...it seems that some type of further human exchange would develop between the proud father of a new theory and his admirers. Get two passionate hobbyists in a room talking about their common interests and you can't shut them up.....but not here...why?

We live in a world of diminished individualism. Among the insecure human race this trend is harmful...individualism is a mechanism for acknowledgment which shouldn't be stifled. Publishing via the web should be a tonic through which in the individual raises his head above the noise and declares "I exist and look how smart I am." The problem is that the blog medium is losing its unique capabilities do to overcrowding. The noise level has been simply raised by this fast moving medium. Perhaps this is why the response rate to my emails was low. Perhaps the authors have figured this out. The once promising "blog" no longer offers the hope of recognizing individual achievement. If this is true...man can no longer find meaning through his blog........and if this is true.... then...... blogging just died.