lwsp

Apologies for the inactivity, but I have a very good, 7 lbs 10oz. reason! Megan is our first baby, and so it’s taken a little getting used to! This is an uber late posting of a December lunch with the always-brilliant Kelly Graves. Kelly is one of Ph03nix New Media’s advisors. His wins include the sale of Net Effect Systems, of which Kelly was a co-founder, to Ask Jeeves. Currently, Kelly is acting as CTO at Loa Power Tools.

Original Joe’s Kensington, Calgary

JL: So what should we be focused on January?

KG: You mean, you specifically as a company?

JL: Yes

KG: Well, the message hasn’t changed. The conversation you and I had three months ago and the conversation you and I had a year ago is still the same. Only I think the wisdom of the strategy is the more evident now. And that is that you need to behave like the money that you have is the last money that you’re ever going to get. Nowadays, you always see a paragraph that starts out with “in these economic times”… Well, in these economics times, money is going to be very hard to raise. So, businesses that can’t see their way to profitability using the resources that they have …whatever those might be… its going to be very tough. And I don’t think its any surprise for you and your company. I think that you’ve behaved like that all along which why you’re seeing some success. The companies around town that have these business plans which have a paragraph about 2/3 of the way through that essentially translates into: “and magic happens”: Google shows up or eBay shows up, those are the businesses that are in trouble, because Google and eBay are not going to show up. I always liken that strategy to one of the James Bond movies with Pierce Brosnan where 007 and an evil guy are fighting for the airplane.  James bond gets knocked out of the airplane while it takes off, and he runs and grabs the motorcycle and drives off the cliff after the airplane, catches the airplane midair, and jumps from the motorcycle into the plane.

And that’s kind of like the strategy for some companies right now… it’s how you should view the strategy of the companies that are going to need financing to be able to continue operating. That financing is very, very hard to get. When you launch a company based on a presumption that there is further financing, and not based on the presumption that you can generate the money that you need to stay alive through your own operations, it’s very much like jumping off a cliff from a motorcycle hoping to catch the airplane. You’ve got one shot and if you miss, that’s it.

JL: And that’s why from the beginning we wanted to avoid that scenario. Which is why we always tried to stay in a position of not needing the money. And one of the things that we’re starting to see is pretty significant down rounds for anybody that is in the market trying to raise money.

KG: Who needs money.

JL: Yeah, because people are taking advantage of that fact and getting deals. So how long do you think that these Economic times will last?

KG: It depends on how greedily opportunistic people are. This is very much a phenomenon of human behavior. The crash didn’t really have very much to do with changing values in things. It was precipitated by the sub prime mortgage crisis, which was almost exclusively a phenomenon of human behavior. It was legal, but very close to a ponzi scheme. So it’s not that the values of assets is changing as much as it is the behavior of people creating a situation that is revealed to be untenable. If people would behave in a rational fashion and decide they are simply going to sit back, and stop doing opportunistic things, or panicky things, this wouldn’t last very long. But the more companies that put up their hand, and say ‘we need a bailout to;.’ and the more people who sell their stocks too early in order to salvage their RRSPs…basically the more panic that goes on, the longer this is going to last.

JL: So, when you sold Net Effect Systems, that was on an upswing. So looking ahead, and trying to plan years and years in advance for an upswing that should occur…   what do we have to do to best position ourselves to best take advantage of that?

KG: It was general Patton, I believe, who said “if you want to get rich, find out where people will be in 5 years, and go by land.” That’s what I’ve tried to do with respect to investing for years and years and years. Since long before now. So for me, the two things that are necessary for anybody:  One is to find something that generates resources for you, whether it’s the sale of a company or ongoing sale of games like you have…..and to build it and grow it in a rational and linear fashion so that it gets bigger and well managed. But recognize that because all things are cyclical …. Whatever you are doing that is successful will disappear. It’s guaranteed. And the trick for you… it’s just like Dating. If you want to leave a relationship you always leave when things are really really good, because in your reputation is high. If you leave when things are dirt, then your reputation is dirt. So two components, first is some sort of venture that generates good revenue for you, and gives you the resources you need. And the other is some sort forward looking investment that anticipates where people will be. So for you it could be causal gaming related to curriculum now, and your five year project might be virtual worlds related to education. So you see that they are adjacent to each other. But you are betting on the fact that in 5 years people will be there.

…continued next week.