Shake, rattle and roll with it

3/3/2009 - It’s not all bad news for aspiring venture capitalists, especially those savvy enough to “follow the money,” David Chen ’84 told a packed classroom of students at the Kellogg School on Feb 26.

“Over the next four to five years, government [spending] is going to play a huge role in our lives,” said Chen, CEO of Equilibrium Capital Group. “Where that money lands, there will be huge growth opportunities.”

Chen serves on the board of the Federal Reserve Bank of San Francisco’s Portland Branch. He was invited to give his perspectives on the direction of the economy over the next 24 months, with respect to the role of the Federal Reserve and the evolution of private equity.

This recession is systemic, deep and different from any downturns in recent history, Chen said, citing a national unemployment rate of 8 percent, plummeting auto and home sales, and the psychological tendency of Americans to link their wealth to their home values.

Chen compared the Federal Reserve’s current buying spree to the Apollo Program, when NASA often found itself improvising during lunar space missions. One could call it making it up as one goes along, he said. “Another way of saying it is ‘innovation.’”

“In the last 90 days the Fed has become the largest hedge fund in the world,” Chen said. “The joke is that Washington is the new Wall Street.”

The banking industry is also finding itself in a highly schizophrenic scenario: “It’s a really hard time to be a banker,” he said. “You’ve got Congress coming down on you, saying, ‘It’s your moral obligation to lend money — be patriotic.”

At the same time, “You need to jack up your cash reserves.”

Initial forecasts that pegged the timeframe for the recovery at one year are already being scrapped, he said. “Everyone wants to know when the pain will stop. The recovery cycle could be four, five or six years.”

The new reality is that venture capitalists shouldn’t expect to get rich quick, or expect to do it in Silicon Valley, Chen said. If someone wants to score in venture capital, “you’ve got to move to India or China...there are no free rides,” he said. Only in markets where inefficiencies of capital and information co-exist with underlying growth can someone expect to make above-market returns, he said.

More than ever, Chen urged students to “have the courage to act on your own conclusions,” and to take educated risks when it comes to business opportunities. Wise investments might include those that stand to gain under President Barack Obama’s stimulus plan, such as sustainability-focused ventures like green energy.

Chen co-founded Equilibrium in 2007 with the intention of investing in just those sorts of companies. The firm did its first closing of funding in July, investing in what it considers to be a leader in the green building sector.

The social sustainability investment arena is a field with a 20-year legacy, he added. “It’s going through a phase shift right now,” Chen said. “There’s a massive amount of innovation taking place. The old rules are being rewritten and the new players don’t know what the rules are yet. Right now it’s a great place to be.”