Investors in the technology, information, and media space should expect a “culling of the herd,” say two of the sector’s big players.
“Looking at our portfolio today, it’s either feast or famine,” said Jonathan Nelson, CEO of Providence Equity Partners. “Some [companies] are knocking the cover off the ball.” In subscription-based businesses, “growth has developed undisturbed,” while those that have been hurt the most rely on an advertising model.
“People right now who have winners in their portfolio, they have a chance,” said David Roux, co-founder and co-chief executive of Silver Lake. Investors who have money to spend in a rebound will also do well, he said.
Count Roux among those with money lying around. He said Silver Lake, which counts companies like Seagate (STX) and Flextronics (FLEX) among past and current investments, has about $9 billion to invest right now.
“We’re at a point in the cycle where we feel like we’re being paid to take risks,” he said. While companies would like to keep their valuations from July 2007, Roux said that a term of art in the industry now applies: “the valuations have begun to season.”
In deciding whether to invest, Roux said he tries to determine if a company has good technology at its core that’s hard to build and replicate. He wants a business model that’s predictable and scalable, and it’s also got be misunderstood and therefore undervalued by the marketplace.
Providence Equity’s current and past investments include companies like CDW, MGM, and YES Network, but Nelson focused on its stake in Hulu.com.
“It’s not typical for a large fund to make a small investment in a startup,” he said, “but this seemed compelling to us because we as a specialist, we think like industry players.
His company did not need to be convinced of the wisdom in creating the online video service, he said, noting that site’s like Hulu with a focus on digital distribution keep traditional media company’s up at night.
Roux noted that the perception of technology investing has changed from the 1980s and most of the 1990s when he quipped that taking a stake in a tech company was viewed as finding a 25-year-old kid wearing shorts and with a lot of body piercings. But now “the technology economy has grown up.”
“The naysayers missed how fundamental the technology sector of the economy has become to the operation of society,” Roux said.