Silicon Valley VCs: Stock Market Is 'Crazy'

NEW YORK (TheStreet) -- I've been in San Francisco this week and I've had several meetings with some brilliant venture capitalists and tech executives.

I always introduce myself and tell them I run a tech-focused hedge fund that only invests in public equities (although we just started an early-stage angel fund). They usually do a double-take when I say that I only invest in public companies.

One guy yesterday said: "Really? Only in public companies? Wow. I could never do that. The public markets make no sense. It's crazy."

But he wasn't alone. In meeting after meeting, this has been the reaction.

These guys -- and they were all guys -- consistently made the same points:
  • The stock market made no sense to them compared to the private markets.
  • The stock prices of companies are "manipulated." Seriously, I heard this several times from these blue-chip guys. They often pointed to Apple ( AAPL) as an example of this.
  • All stock investors, according to them, are emotional.
  • You cannot "invest" in a company once it's public because it has no basis in reality to the inherent value it is creating. Instead, they thought the stock price was simply a reflection of peoples' perceptions of how a stock would move in the future. In other words, it's a perception of a perception. They couldn't understand how they had an edge in that kind of environment.
  • Several people referred to the stock market as a "casino."
  • The VCs continually pointed out how they "understood" how to make money as a venture capitalist. At every point along a company's maturity as a private company in its life cycle, they felt that they could stack the odds in their favor on how to make money in the future.

    They also constantly referred to how their world of investing was "tangible." They made comments like "I can see how my advice today gets translated into the product and how that increases the company's value a few months from now." By contrast, they looked at the daily gyrations of the stock prices of public companies and had no clue how the markets possibly could determine those movements.
  • After Apple, several talked about the recent Facebook ( FB) initial public offering as an example of how crazy Wall Street is. One also pointed to Yahoo! ( YHOO) and asked me how it was possible that the public markets could value Yahoo!'s core business at "zero" for years, once you subtracted the value of its Alibaba and Yahoo Japan holdings.

I'll be honest. I was quite surprised at this reaction.

If I didn't tell you this was a collection of the Silicon Valley elite who were making these comments to me, you might have thought I'd polled a group of 60-year-old retirees from Des Moines commenting about how crazy Wall Street is.

However, taking a step back, the comments made me realize just how used to the day-to-day gyrations I've gotten used to in watching public stocks. If I only spent 5% of the day looking at stock price movements, I might think Wall Street is crazy too.

We become experts on what we focus on. If I'm a tech operating executive, I learn how to drive sales and cut costs in my organizations. If I'm a VC, I learn to watch the waves of technological change coming, how to build my network of tech execs, how to hustle to get in a good deal at a good price, and rinse and repeat.

The public stock market is a different animal. Unless you're sitting there watching it for years and years, of course it's going to look crazy.

Given all this, I can understand how Mark Zuckerberg and Facebook have helped influence most tech company investors and CEOs to want to delay an IPO as long as they can. I can understand how VCs like Tim Draper rant about the excessive administrative costs and burdens placed on the shoulders of young companies by Sarbanes-Oxley and Dodd-Frank.

There was a time -- in the late 1990s -- when it was seen as a badge of honor to go public. I've likened it to graduating college and moving out of Mom's basement. A company becomes a better company as a result of the process. You can't really mature until you do that.

Of course, another reason why young Silicon Valley CEOs were willing to IPO in the late 1990s is that free money was being thrown at their feet. Greed trumped fear at that point.

It wouldn't be healthy to go back to a world of the late 1990s (although I'm sure it will happen at some point in this upward cycle we're in). But it's not healthy for the tech world to look at the way Wall Street works as some kind of "black art."

Hopefully, we'll find a healthy balance in between in the coming years.

At the time of publication the author had positions in YHOO and AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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