An Alternate “Truth” About Jobs–Not Steve, but the rest of us working stiffs

A good friend recently sent me an email asking if I agreed with some conclusions reached by Scott Winship in a well-written piece in the Wilson Quarterly titled “The Truth about Jobs.”  Winship basically concludes that that the decline in labor force participation among men has been voluntary, aided by some changes in payments for disability and other factors, and that pay reduction relative to productivity improvements is merely a catch-up with overpayments from earlier decades prior to the ’80’s, and that, ultimately, this will come back into balance. Thus, not to worry. He makes some references to outsourcing, but concludes it has been a net benefit in terms of lower prices of goods. He ends with an important view, with which I fully agree, that skill levels are a problem for a growing segment of the population,  and we need to address that issue, specifically. This is a very brief and incomplete summary of Winship’s article, and I would suggest it is worth reading in its entirety.  I disagree with some of the conclusions which are drawn from a different view, or at least emphasis, on what has happened in the last 40+ years. I hope Winship is correct in his thoughtful and well-researched observations and his conclusions, but I am skeptical.

I think we do have a systemic jobs problem tied to demographics and the relative rise of other economies that are more easily participating in the global economy in terms of markets, intellectual contribution and the use of existing and rapidly changing technology.

Over the decades of change referred to in Winship’s analysis we have shifted into a much more global interconnected world where the movement of goods and services has been significantly enhanced via technological developments. Thus, the benefit of labor arbitrage between countries is real and possible as is labor/capital(technology) arbitrage everywhere.

For many years in the US, “outsourcing” has occurred within our borders, moving more production to suppliers which creates economies of scale and lower labor costs because the skill levels required are different.  And labor cost arbitrage still exists between geographies within the US.

As an example, while I don’t have the precise numbers, I would posit that global employment in the auto industry is up. However, required skill levels are down and, for some time, global geographical arbitrage on labor costs has existed with there being little, if any,  technological arbitrage among countries today–similar technologies are available to almost all. The last time I was in China visiting auto plants the difference in labor content between a Toyota plant in Japan and China reflected the labor cost differential with more workers and less automation on the lines in China.  As relative wages rise, the lines in China have become more automated substituting capital(technology) for labor within a framework of a newer, more efficient production system than might be found in the developed world. This is real and cannot be glossed over as having an effect on the US and other developed economies.

Winship’s dataset of men only and their wage and labor force participation numbers is also a problem. The impact on wages (for men and the total work force) has been, in part, the gender wage arbitrage that has existed, and in some cases continues to exist, between men and women, even though the skill levels are not different–some would say higher among the women. Winship mentions the wage differentials but he doesn’t explicitly incorporate it as a cause for the slower rise in men’s wages.

He points out that more men over 55 are staying in the work force. I agree with much of his analysis here which emphasizes the education levels and the desire to work, not the need. Although, I do believe there is an element of need that comes into play–the need to think about sustaining oneself and a lifestyle for a much longer period than historically has been the case. My personal anecdote is noting that my father lived to 100 and was quite active for almost all of that period. I always said to him that I would take his bad genes as long as I got the good ones. It appears that I did get both…  I have to think about what kind of life I want to lead over the next few decades both financially and actively with my mind and body. It is hard to move away from the stimulus of work (and the reward) as long as I have that opportunity.  And the opportunities appear to be there for me and others.

I think this does have a lot to do with availability of skills in that age bracket, the adaptation of that group, in general, to the new world of communication and technology,  and the recognition that productivity levels remain high, particularly among the better educated, more of whom are maintaining their health. It isn’t as automatic that as an employee ages he or she becomes less productive or less adaptable to the demands of the workplace. It helps that labor laws make it more difficult to end employment for age reasons alone.

On a separate point, as one works one’s way down the age brackets I think we are finding fewer individuals wanting to work within a formal structured work place–they are less available–, thus only the over 55 are available for those jobs. This is a big overstatement, but on the margin it is certainly the case. The use of the internet, the infrastructure in city-states and even within smaller communities leads to the availability of a more entrepreneurial approach to work and provision of services than has been the case historically—and more of this is in the cash (or grey) economy.

There has been much research trying to estimate the dollars floating around the rest of the world in an undocumented economy. There has been some recent work (U of Wisconsin– http://www.ssc.wisc.edu/econ/archive/wp2011-1.pdf) which may indicate a growing amount of that cash, more than previously estimated, resides within the US.  And, by the way, taxing that income could add $500 Billion to US governments’ revenues. More people are working than the BLS statistics pick up. Do we really believe that all the number of  long term unemployed are actually not working? But, instead,  aren’t they producing some income–maybe sufficient to sustain or even thrive?  Here’s an anecdote for you: We have all heard about companies pushing more people to part-time employment to avoid ACA rules and, ultimately reduce their costs. One of my fellow directors at a company told me that one of her clients–a national retailer–is having employees in certain states with insurance exchanges ask to be moved to part-time because the cost of insurance on the exchange will be lower than or no worse than their current costs. It makes them untethered to a company for the benefits, more mobile and flexible, and with the possibility of making up for the income at another job either on or off the books. One could make the case that the younger generations don’t view the government as doing much for them so why should they pay taxes. That is happening at a time when the ability to work off the books has risen and continues to. Just think what 3-D printing could do to that ability once it is truly operable. I attended a meeting with one of the founders of MakerBot where this was made apparent. The real discussion with him was about the grey economy.

Winship’s final paragraph re the importance of education is particularly valid and critical: People, for the most part, figure out how to survive and thrive under any reasonably open system. Their ability to maximize the thriving part does depend on skill levels, educational attainment and overcoming the systemic inequalities that exist. That does need to be a focus. The developed world has a more severe problem than the developing world as it is more difficult for good things to happen in a replacement economy vs. a growth economy. But we must do significantly better.

There is much more to be written on this topic but I do have other tasks to perform–mostly on the books :-).

What to Expect in 2013 (and Beyond)–An Optimistic View

This year in early January I posted “What to Expect in 2012 (and Beyond).”  Some of what I expected last year has rolled over into 2013. With more than a month to go before we step into 2013 it is a little risky to make predictions, particularly when much of what is predicted depends on the resolution (or not) of the fiscal cliff. I believe we will reach a resolution and actually take some steps toward overall fiscal reform. That may be the biggest and most important expectation which sets the course for much of what else could occur. Hopefully, op-ed pieces like Steve Rattner’s in the 11/25 Sunday NYTimes will become part of the dialogue in Washington. Keep in mind that the expectations below follow the Byron Wien approach, i.e., my view is a greater than 50% chance of these expectations coming to pass while the conventional wisdom is less than that. Let’s plunge in.

  1. With the resolution of the fiscal cliff and some steps toward overall fiscal reform, big corporations and small businesses step up their plans for 2013 and beyond, affecting hiring and capital spending.  The rest of the US economy joins the housing recovery, producing growth in the US exceeding 3.5% for the year with at least one quarter printing over 4% in spite of the trade deficit expanding.
  2. The US experiences double digit growth in capital spending as delayed plans are finally implemented with resolution of the fiscal cliff.
  3. Unemployment works its way lower by a percentage point. Unfortunately, the number of jobs unfilled increases substantially as the mismatch between skills and needs comes into stark relief.
  4. The new leadership in China, while taking a conservative social stance, takes additional steps to insure a decent recovery in economic growth. The strength of the US economy aids China’s recovery.
  5. While the noise about Greece grows and is joined by more concerns about Spain, Italy and France, Europe continues to muddle through with interesting support from the Middle East and some support from China.
  6. As Moore’s Law marches on, Samsung and others introduce advances in tablets and communications devices which puts pressure on Apple that reflects itself in relative stock performance. Apple does an interesting pivot which changes the landscape for even more robust consumer devices.
  7. The Argentine situation is not contained and has an impact on politics, growth rates and inflation for its neighbors, requiring more attention to South America from the US than we have been willing to give thus far.
  8. As we enter the year end 2013, because of the surprising global growth, there are some unsettling signs of inflation. QE is reduced and expectations for a rise in rates increase.
  9. The US stock market has a good rise in the first half of 2013, but inflation concerns and a possible Fed reaction push markets down in the latter part of the year reversing  some but not all of the earlier gains. Analysts find themselves chasing earnings for much of the year.

The next few expectations are holdovers, with some modifications, from 2012. They may not all come to pass in 2013. None of them were complete in 2012.  But as we move further into the decade, in my view, they will likely happen, and will have an impact on how our future unfolds.

  1. Contrary to a normally quiet year during a transition of leadership, to some extent in reaction to some elements of an “Asian Spring” in the region, China takes several steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress. Externally, this includes significant acquisitions in other countries as well as the opening of manufacturing and service facilities where there is a receptive government. At home, R&D is accelerated, particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced and an explicit carbon tax is put in place.
  2. As the US economy grows, corporations find qualified hires difficult to come by.  Enlightened corporations become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems. Corporations become much more vocal about creating paths to bring illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the domestic pool. The tide shifts significantly on immigration issues. The skill match is aggravated by decisions on the part of some US corporations to bring business operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity, available feedstock and relative safety lead to better economics for manufacturing and service locally.
  3. Aside from the continuing concerns about Europe and the ripple effect of the Argentine situation on South America, India becomes a focal point. With the economy not growing adequately to provide jobs, upward mobility and political stability, the leadership looks for diversions and points to its neighbors, China and Pakistan as problems. There are internal confrontations as well. While there is limited impact on the global economy, the uncertainty affects foreign investment and India’s outsourcing businesses.

On balance, this is a set of optimistic expectations with some trouble spots, as always, diverting our attention. I am optimistic about what can happen, certainly within the US, as long as the crazies in Washington get a bit rational. If not, I will need to spell out a whole new set of expectations. It will be an interesting year.

What to Expect in 2013 (and Beyond)–An Optimistic View

Last year in early January I posted “What to Expect in 2012 (and Beyond).”  Some of what I expected last year has rolled over into 2013. With more than a month to go before we step into 2013 it is a little risky to make predictions, particularly when much of what is predicted depends on the resolution (or not) of the fiscal cliff. I believe we will reach a resolution and actually take some steps toward overall fiscal reform. That may be the biggest and most important expectation which sets the course for much of what else could occur. Hopefully, op-ed pieces like Steve Rattner’s in the 11/25 Sunday NYTimes will become part of the dialogue in Washington. Keep in mind that the expectations below follow the Byron Wien approach, i.e., my view is a greater than 50% chance of these expectations coming to pass while the conventional wisdom is less than that. Let’s plunge in.

  1. With the resolution of the fiscal cliff and some steps toward overall fiscal reform, big corporations and small businesses step up their plans for 2013 and beyond, affecting hiring and capital spending.  The rest of the US economy joins the housing recovery, producing growth in the US exceeding 3.5% for the year with at least one quarter printing over 4% in spite of the trade deficit expanding.
  2. The US experiences double digit growth in capital spending as delayed plans are finally implemented with resolution of the fiscal cliff.
  3. Unemployment works its way lower by a percentage point. Unfortunately, the number of jobs unfilled increases substantially as the mismatch between skills and needs comes into stark relief.
  4. The new leadership in China, while taking a conservative social stance, takes additional steps to insure a decent recovery in economic growth. The strength of the US economy aids China’s recovery.
  5. While the noise about Greece grows and is joined by more concerns about Spain, Italy and France, Europe continues to muddle through with interesting support from the Middle East and some support from China.
  6. As Moore’s Law marches on, Samsung and others introduce advances in tablets and communications devices which puts pressure on Apple that reflects itself in relative stock performance. Apple does an interesting pivot which changes the landscape for even more robust consumer devices.
  7. The Argentine situation is not contained and has an impact on politics, growth rates and inflation for its neighbors, requiring more attention to South America from the US than we have been willing to give thus far.
  8. As we enter the year end 2013, because of the surprising global growth, there are some unsettling signs of inflation. QE is reduced and expectations for a rise in rates increase.
  9. The US stock market has a good rise in the first half of 2013, but inflation concerns and a possible Fed reaction push markets down in the latter part of the year reversing  some but not all of the earlier gains. Analysts find themselves chasing earnings for much of the year.

The next few expectations are holdovers, with some modifications, from 2012. They may not all come to pass in 2013. None of them were complete in 2012.  But as we move further into the decade, in my view, they will likely happen, and will have an impact on how our future unfolds.

  1. Contrary to a normally quiet year during a transition of leadership, to some extent in reaction to some elements of an “Asian Spring” in the region, China takes several steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress. Externally, this includes significant acquisitions in other countries as well as the opening of manufacturing and service facilities where there is a receptive government. At home, R&D is accelerated, particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced and an explicit carbon tax is put in place.
  2. As the US economy grows, corporations find qualified hires difficult to come by.  Enlightened corporations become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems. Corporations become much more vocal about creating paths to bring illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the domestic pool. The tide shifts significantly on immigration issues. The skill match is aggravated by decisions on the part of some US corporations to bring business operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity, available feedstock and relative safety lead to better economics for manufacturing and service locally.
  3. Aside from the continuing concerns about Europe and the ripple effect of the Argentine situation on South America, India becomes a focal point. With the economy not growing adequately to provide jobs, upward mobility and political stability, the leadership looks for diversions and points to its neighbors, China and Pakistan as problems. There are internal confrontations as well. While there is limited impact on the global economy, the uncertainty affects foreign investment and India’s outsourcing businesses.

On balance, this is a set of optimistic expectations with some trouble spots, as always, diverting our attention. I am optimistic about what can happen, certainly within the US, as long as the crazies in Washington get a bit rational. If not, I will need to spell out a whole new set of expectations. It will be an interesting year.

Could the Labor Statistics be Rigged?

I just posted at comment at Marketplace.org in response to an article written earlier this year regarding data rigging. The conclusion of the article was that data are noisy, but rigging is not the issue. This, of course is all relevant given the Tweeter, Jack Welch‘s comment accusing the “Chicago boys” of manipulating the data. As Joe Nocera points out in his column today, the last accusation of employment data manipulation was by Richard Nixon of the BLS under his own administration when the numbers were more negative than he would have liked. I am not surprised that a former corporate CEO, particularly Jack Welch, would have so quickly jumped to a data manipulation accusation. Most public company CEOs are quite used to data massaging at least once a quarter to satisfy the stock market. I guess they must assume that everyone else does the same to meet objectives other than accuracy. Below is the posted comment to the Marketplace article.

If one looks at the history of revisions of economic data ranging from GDP to Labor Stats there is a pretty consistent picture. When the economy is declining the revisions tend to be negative. At turning points the revisions are noisy. And, in improving economies the revisions are usually positive. This is not always the case, but usually. We are in a slowly improving economy. The ADP employment reports which even Jack Welch, the tweeter, wouldn’t accuse of being rigged, have been better than the numbers from the labor department prior to revisions. The labor situation is quite dynamic—4 million people leave jobs and take jobs every month. The difference between those two represents the increase or decrease in jobs “created.” Take a look at http://bit.ly/NXCmxF, to get some more info on this. Whoever is president for the next four years will get credit for the continued improvement unless the crazies in Washington don’t deal with the Fiscal Cliff. I am optimistic.

The Economy, The Environment, Lessons Learned, Opportunities Today

A speech given to venture capitalists & entrepreneurs in India in December 2011

I am very pleased to be here today.  I come to India regularly for pleasure and for business although it is always a pleasure. What I plan to do is provide an economic and market context on what has happened in the United States trying to draw some parallels and contrasts to Asia – India specifically – and Europe. I will start with some history, review where we are today and then venture some guesses about where we may be going. I will relate that to what happened in the venture world historically, again to compare and contrast with what is happening here in India. I will then turn to the opportunities this presents. Several of you here today are investors, and your allocation to potential investments is made in an economic context regarding returns relative to risks. So lets start with economics.

Some history:  I am not sure that recent history provides one with the right context, so it may be helpful to look at a longer time span, which could provide a better perspective. I will give a caveat that “perspective” is an overused word. (As is “caveat” for that matter.) Jane Smiley, a great writer, may have been right when she had one of her protagonists define perspective as actually believing that two parallel lines meet.  Maybe you have to be an engineer to appreciate that. At any rate, this is my point of view and my sorting of the data and my perspective—one that is US centric, partly because it would be presumptuous for me to tell you about your own country, and partly because it represents a model that may be useful to understand.

I am not going to present a comprehensive picture of the economy and the markets. Instead, I will highlight a few points that I think have some relevance to investing today. Let’s start with GDP growth in the United States since World War II.

The US has had 12 recessions since the Second World War.  What is most interesting to me about this recession are 1) the year over year decline has been greater than any of the post-War recessions, 2) the rate of recovery compared to earlier recessions has not been as high, and 3) the official recession exceeded both the 81-82 and 73-75 recessions by a few months. In addition, we haven’t seen a 5% year-over-year GDP gain since late 1999.  High oil prices and Central Bank tightening were the primary causes of the other two lengthy recessions.  This latest one is much more of a financial crisis like a quarter of the 47 recessions the US has had in the last 220 years. Several of those financial recessions were substantially longer and in many cases deeper than what we have experienced thus far. In almost all cases the crises extended globally or even originated elsewhere in the world, primarily England. This crisis is certainly global. And has manifested itself serially from the US to Europe and is now affecting Asia, including India.

However, in the US, which was first to see the downturn, away from the construction market and its impact on economic activity, the rest of the US economy is actually doing well and is growing. And importantly, in my view, it may be approaching self-sustainability.  Profits have more than doubled from their lows in 08 and are 20% above their peak in 06.  In some ways the US securities market reflects this off of its lows generated by the fallout from the Lehman bankruptcy.

I am referring to the S&P Technology Sector, which while still way below its peak in the dotcom bubble is at levels seen in 1998 before the 18-month blow-off produced that final peak in March 2000.

This index is a reasonably good proxy for what has happened to overall values in the venture capital world in the US.  A caveat I would add though, is that while values have tracked one still has to be somewhat concerned about valuations.

The overall valuation in the US, while down, is still above the lowest Price/Earnings ratios that have been hit in the longer cycles of valuation in the market. One can come up with a variety of reasons why valuations may not go to previous lows experienced, but I have to say there were always a set of reasons why valuations could not go lower.   I think it is useful to look at valuations in the public markets, as history shows that private equity valuations tend to track public market valuations overall and by sector going in and coming out.

Valuations in India are not low by historical standards. This does translate into private equity valuations and does raise some points of caution.  It goes without saying, but I would make the point that the valuation one gets going into an investment may be one of the best determinants of the ultimate return.

Historically, the US is bouncing closer to the bottom of a price channel waiting for earnings growth or possibly further market declines to bring down the multiples a bit more. We can review how the US got to this point and where we are likely to go from here. This pattern does relate to what is happening globally.

It is a fairly simple picture. We overleveraged the economy to support consumption, which in turn has led to a very significant trade deficit, about half from overconsumption and about half from dependence on others for our hydrocarbons.  This is a US and European problem for the most part, but to some degree it exists here and in other parts of Asia as well. As we work our way out of this problem it will likely result in lower overall growth in the Western world for a number of years. Europe is likely to show negative numbers next year—maybe even this quarter.  I would point out though, that in the US, there are some positive indications. If one looks at total debt outstanding, the number has actually flattened, with government debt replacing private debt. The ratio of debt to GDP has fallen as well-still high but falling. US corporations have significant enterprise capacity if they only had the confidence and the opportunities for investment. They ultimately have to do something with their cash.  I would also make the point that US banks, in contrast to other banks around the world, are accumulating cash. Deposits are up. The Federal Reserve has bought paper from the banks, and the Europeans, South Americans and others believe that their liquid assets may be safer in US banks than their own. In addition, if the dollar stays where it is or weakens particularly against the Asian currencies we would move closer to values we saw during the 90’s.  A point I am making is that part of the growth in the 90’s in the US was fueled by a lower dollar than we have today.  From its low in 1988 the dollar marched up doubling in value over the next ten years and today is still 50% above that trough but in a recent decline.

However, China’s currency has been rising. On balance, I believe other Asian currencies will track China’s over the long run.

India’s currency tracked China’s earlier this decade but I think internal issues and some concern about the impact of the European problems have affected values more recently. I do believe in the long run, based on economics, the Rupee is likely to strengthen against the dollar. Internal issues, for example allowing for Foreign Direct Investment, could affect the timing and degree of strengthening as trade balances shift.

Looking at High Tech trade, which is a good proxy for some of the venture activity, aided to a measurable extent by the lower dollar and Moore’s law, the US had a positive trade balance annually in High Technology Products through the 90’s. Lots of factors have affected the numbers over time, but the net of it is the US went from roughly a $24 Billion annual surplus at the end of that decade to a $96 Billion annual deficit in 2010. I think the dollar has been an important factor. Looking at India specifically, overall, this year you will have about a $15 Billion annual trade surplus with the US. Actual exports have doubled in the last 5 years and will likely be $36 Billion this year. Venture-backed companies should be getting their piece of that.

I do believe in the long run, currency adjustment may be the most important factor in job growth in the US, and possibly Europe, reducing the labor arbitrage that now exists between the developing world and the developed world. This will require significant productivity improvement in the developing world to offset higher currency values.

It is unlikely the dollar gets back to the lower end of the 90’s level in a straight line any time soon, because, right now, given our relative growth and safety, we see capital continuing to flow in our direction adding some strength to the dollar. However, over the next decade or more, the dollar is likely to weaken, particularly against the Asian currencies.  As the dollar adjusts and the economy does show modest growth, the capital is there in the private sector to finance growth once there is some certainty about where it will come from and if the Europeans can deal with their deficits. Many of those dollars will make their way overseas seeking that growth and creating jobs, if local policies are supportive. Let’s also remember that while the US may be running a trade deficit in high tech products, it is exporting at a $288 Billion annual rate and importing at a $192 Billion rate.

And, in spite of its overall trade deficit with almost every country on the planet, the US still exported over $1.4 Trillion of goods. And not counting oil imports the US bought $1.8 Trillion of goods from the rest of the world. Indian corporations big and small, startups or established companies, can certainly take advantage of the demand that continues to exist in the US for products–and services as well.

While there is a risk that, given the political rhetoric, we could find ourselves aborting the recovery that is starting in the US and is likely to spread, logic or sanity should lead us to a different set of conclusions. This could set the stage for a very interesting investment environment. Globally, particularly in the faster growing developing world which I define as the BAICs not the BRICS—Brazil, Africa, India and China, infrastructure spend and total investment will continue to rise to meet the demands of the populace and the demands of the global marketplace for their products—both natural resources and manufactured goods and some services.  This is continuing to bring more individuals into the middle classes with their own set of demands and needs.

Brazil, India and China, as well as most of Africa have a long way to go before the mix of their economies comes anywhere close to the more mature world. But look at what is ahead.

If we look at a breakdown of GDP and employment by major sector—agriculture, industry, and services, for two developed world countries and three of the BAICs—I don’t have stats for all of Africa–, we will see that India, Brazil and china have a much higher percentage of GDP and employment in Agriculture. To make this a little clearer, let’s take Agriculture and compare the US, Germany and India. US agricultural output represents about 1.6% of GDP and employs 1% of the work force. Germany is at 1% of GDP and 2% of the workforce. India is at 18% of GDP but over 50% of the workforce is still employed in agriculture.  Today’s mix has some similarities to where the US was earlier in the 20th century, although with higher manufacturing and lower services.  China looks even more like the US at that time.  We are talking about large populations shifting from the agricultural sector to manufacturing and services over the next few decades. This carries with it some political risk and not necessarily a smooth transition. But, this also means on balance, growth. And I would make an important point: It is easier to innovate into growth than it is into replacement.

Growth requires a sense of urgency. Everything speeds up. One does not want to get left behind. There is also an opportunity to experiment and, of course, to fail. But growth covers up many sins and extends the runway to get it right. And, it usually results in multiple approaches to opportunities and problems. Let me elaborate further on this point–that it is easier to innovate into growth than replacement. The economics are different if, instead of simply taking away share from an established player, one is participating in an expanding market. Particularly, when it comes to plant and equipment, customers are making a different calculation if it is an expansion cost vs. a replacement cost. In any instance, replacement or expansion, I believe that most innovations relate to some form of productivity improvement. It is worth thinking about any venture investment in terms of productivity–whether in Social Media or cell phones where the productivity of connecting with others has been enhanced, diagnostics, medical outcomes, energy, agritech, measurement itself, or infrastructure.  When growth is uncertain or out on too far a horizon it becomes more difficult than it already is.  I think the best venture capitalists understand that, to some extent adding a vision that may see growth potential where others don’t. And, many of the best VC firms are on multiple continents having extended their reach to one or more of the BAICs, in particular, to take advantage of changing income levels and a growing consumer class; in other words investing into growth. Some would even say that innovation requires consumption growth. Successful innovation also requires the VC experience and a VC infrastructure as foundations.  I don’t totally accept what some are characterizing as the US exceptionalism, is that exceptional. And that other systems are not producing innovators. Not every engineering or science graduate–or dropout for that matter–in the US is an innovator. I have to believe that the distribution of potential innovators in any country is the same, and ultimately the infrastructure that permits that innovation will exist there as well. In some instances, it is already happening.

Asia and Europe combined are putting more venture capital to work than the US and have been since 2006. India and China are putting Rupees and Yuan to work at about 40% of the US rate. And the rest of Asia is quite vibrant as well.  What is lacking is both a long enough history of repeatable success, and the Tim Harford observation—Harford of the Financial Times–of the Galapagan Isolation vs. Corpocracy, as represented by Silicon Valley, Silicon Alley, the Silicon Wadi of Israel or the other pockets within the US and elsewhere that include investors with reach, experience and staying power; innovators with access; and flexible resources to execute. Harford’s analogy is that in the Galapagos, an ecosystem isolated from the rest of the world, different flora and fauna developed. He equates the ecosystems in parts of the venture world to this phenomenon.  You can go to the World Policy Institute website, www.worldpolicy.org, and look for the Journal issue entitled “Innovation,” to read more about this. This topic is included in an essay by Neal Stephenson, a great Science-Fiction writer and an unusual contributor to this kind of publication. He lays out some challenges for those of us who exist on the portal between the real world and those imagined. A fun and stimulating read.

Well, while Europe and Asia are increasing their venture investing, in the US the VC industry is going through a contraction, which is a good thing for returns—maybe not for the planet.

The number of funds raising capital is down and the number of investments being made is down. By the way, I want to thank my friends at Knightsbridge Advisers for several of the next slides. Knightsbridge is a fund of Venture Funds with a specific and very successful focus developed over a long period of time on the top quartile venture funds in the US, many of whom now reach into Asia specifically.

Historically, stronger returns have followed these contractions. Fund Raising is down to its historically low percentage of stock market capitalization and there is not a great inventory of what has been historically defined as early stage capital.  These are metrics that should be tracked in any market.

And, the top quartile, which has consisted of the same VC funds for many years with only few exceptions, has substantially outperformed the rest of the industry.  These firms are their own Galapagos.  There isn’t enough history here, in India, to determine all the entrants into that top quartile. Some firms are beginning to stand out, but we need a couple more cycles to really tell who has staying power. We may be hitting one of those cycles here right now.

This is an important point. As I said, growth can cover up many sins. To paraphrase Warren Buffet or Mark Twain–“you have to wait until the tide goes out to see who is not wearing a bathing suit.”

Having said that, this takes nothing away from the opportunity here in India, fueled by significant growth.

There is a very fertile environment here for Value Creation. I would highlight three sectors specifically for India. IT, Life Sciences and CleanTech, all in the context of infrastructure development and increasing awareness and demands from the populace for what they see elsewhere in the world.

It starts with the Internet and expands to mobile apps and cloud computing. And, it is driven by increasing processing speeds. We are still in early days regarding the ongoing impact of Moore’s Law. Three weeks ago I attended a three-day Intel Capital conference on the west coast. Duron, is in the Intel portfolio and I was fortunate enough to join our CEO, Ajay Awasthi, at the conference.  200 of Intel’s portfolio companies and 400 Intel managers and technologists attended the conference. Over half the companies were from outside the US. This was a very exciting and stimulating conference. Intel will invest in any company meeting its return criteria that will lead to more chips being sold—that covers the range from the technology around chips to social media.  The most important news though was when Paul Otellini, the CEO, stated that Intel has 10 years of clear visibility on Moore’s Law.  I think that means within 10 years, processing speeds on a single chip will be at least 64 times faster than they are today.  I am not sure we can imagine all the possibilities, but with a sense of certainty around that happening we get very close to Neal Stephenson’s and William Gibson’s worlds.

A big factor in India is bringing basic health care to a broader segment of the population. I think integrated delivery systems will be a part of the solution here. Ultimately, improving outcomes and taking advantage of the IT developments on the horizon will change the nature of health care and create real value for those who participate.

The need to drive both energy independence and cleaner renewable energy creates enormous opportunities. I don’t think India can wait for grid build-out to satisfy its needs. Much of the grid that does exist is aged and outmoded. A leap to models with distributed power and low power products offers many opportunities. This is my bias, but I truly believe that the need for innovation here is critical to the survival of the planet.

I think there are several other asset classes or sectors in which the venture community can participate that have growth characteristics.  Let me give you that broader characterization as we bring this to a close:

I start with Infrastructure. I think this could turn out to be a growth market in the US but will surely continue to be so here. And any innovation that contributes to the more productive movement of goods, services, people or information should find a market. Water also falls under infrastructure. There isn’t enough of it in the forms needed. Quality improvement and more efficient usage are two big opportunities. That leads us to Energy where there are enormous opportunities relating to the technologies being used and the productivity and efficiency of use, some of which I discussed already.

For India, we should include Agriculture or Agritech as its own category. This ties back into infrastructure, energy, water and life sciences, but should be listed here as its own. IT and Health Care are the two other big categories already discussed. Education is a difficult sector because of all the stakeholders who want a say in how the structure evolves, but one where technology can play a significant role and is very important in India. In some ways this sector also ties back into Energy as available and dependable clean power may be one of the most important factors in improving and broadening the educational map in this country. I put Financial Services and Hard Assets here as well as selectively attractive classes. . I list Global as a separate Asset Class, although every class listed can be considered global as well as domestic. The point this emphasizes is that the true growth opportunities involve solutions that extend beyond any domestic borders and truly allow one to be innovating into growth.  None of this is easy.  Persistent performance requires much more than capital and some smart people. It requires the ecosystems that in many cases have taken years to create. Investing beyond just getting Beta to getting real Alpha in any investment class requires patience and the full use of all the resources one can bring to bear. We are at an interesting stage where the nature of the venture industry may be returning to its previous core. I think it is a very exciting time for venture investing–not that it isn’t always exciting.

There are multiple opportunities across multiple sectors globally. Innovation is occurring and the pace is likely to accelerate. India is clearly innovating into a growth market in spite of near term concerns. Experienced Venture Capitalists can make a significant contribution. Smart capital can and should be choosy in this volatile global environment.    But maybe, if one is careful, the next decade may turn out to be a period of great investments with a great benefit to all humankind. Let us hope so.

Neuberger Berman’s Rivkin Discusses India Investments (Audio)

Jack Rivkin, director of the Neuberger Berman Mutual Funds, discusses investment and growth in technology in India. Rivkin talks to Bloomberg’s Kathleen Hays on “The Hays Advantage” on Bloomberg Radio.

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