Secondhand Flowers

Old O’Malley used to dispense sage advice from his stoop in Brooklyn. The smoke of cheap cigars and the cracking of the Yankee game on the transistor radio hung heavy in the humid night as O’Malley meted out wisdom like Aristotle under an olive tree. And one nugget that stuck with me through the years goes as follows: “never buy a girl secondhand flowers. The last girl may have enjoyed them, but your girl will just think of them as used up.”

So what does this have to do with investing? Recently, I was talking to someone about a company that was about to go public and they were lamenting the large discount to public comps implied by the bankers’ pricing guidance. Of course, IPO investors crave a first day pop, but the discount seemed to be bigger than they had seen lately. We wondered aloud why that might be? Lackluster aftermarket performance of last year’s IPOs? Higher perceived risk in the economy? Idiosyncratic risks of this company? And so on. This person also talked about how the bankers remarked that some private companies were pretty close to being overvalued relative to public companies, creating an inversion that would make any liquidity efforts tough.

But then it hit me: maybe it’s because we’re asking public market investors to buy secondhand flowers? Stick with me here: in the heyday of the IPO market, there was a lot of meat left on the bone for public market investors. Josh Kopelman wrote a great blog post a while back that analyzed the returns available to public market investors in private tech bellwethers of yore, a group that included the likes of Apple, Google, Netflix, Salesforce, and Yahoo. He surmised that 97% of the upside in these companies was eventually captured by public market investors. Now, imagine today’s unicorns and decacorns. How fully priced are these companies in the private markets? How long will it take for their market caps to grow by a factor of 20? How much bloom is left on those roses?

Of course, the late stage private market is today’s equivalent of the emerging growth public market of old and the highfliers in my portfolio look like they’re refugees from the S&P Midcap 400. It makes sense, after all: in the wake of the well-documented changes in public market structure, private companies found it harder to go public and money seeking the returns historically associated with emerging growth public companies flooded into venture capital. It also makes sense from a theoretical standpoint: if you believe in Modern Portfolio Theory, you seek to invest in the fabled World Wealth Portfolio which contains all the world’s assets. As public markets got less hospitable to small, fast growing companies, they became less representative of the economy and money seeking “market completeness” found its way to venture.

But VC can’t be the old Roach Motel (“roaches check in but they don’t check out”). Companies need to get liquid so that LPs get cash back to redeploy into the next cohort of funds that will back the next generation of startups. The past half-decade has been a little funky, as we’ve been of pricing private companies seemingly for perfection (and, of course, the VCs are happy to take big mark-ups — just in time for their next fundraise; quite the coincidence!) Let’s always be cognizant that public market investors heed Buffett’s Equation: Opportunity = Value – Perception. And of course, perception (or hype) is articulated in valuation.

The slowdown that we’re starting to feel should be taken as a good sign: good companies should still be rewarded, but valuations may better reflect experience not hope. And with any luck, the public markets will again think of our flowers as fresh and perhaps we’ll get a laxative for the capital constipation that’s keeping capital locked up in mature companies and money out of our hands.

SuperLP Classics: DC-8s and Tigers and GPs! Oh my!

ShigaAs I crank up some posts (and other cool content) over the coming weeks, I thought I’d take the dog days of summer to repost some of my favorite stuff from years past.

I was inspired to look back to the story of Captain Asoh by Bessemer’s recent updates to its anti-portfolio.  I’ve always loved the honesty of BVP’s reflections and admire them for being so vulnerable in what can be such an ego-driven business.  Warren Buffett often says that there are no called strikes in investing, referring to the practice of a batter letting an unpalatable and often inconsequential pitch go by.  But in VC, our called strikes can feel like a called third strike.  With the bases loaded.  In the last inning.  Of the World Series.

But I digress.  I spend a lot of time thinking about choices . . . the choices I make and the choices that entrepreneurs and VCs make.  Of course, not making a choice is a choice in itself.  What sometimes surprises me is how un-intentional people are about their choicefulness and how little ownership they take of choices (and outcomes) as a result.

 

December 10, 2009: DC-8s and Tigers and GPs! Oh my!

A few weeks ago, a local TV station aired a news story about a mostly-forgotten plane crash, the May, 1968 unintentional ditching of JAL Flight 2 in San Francisco Bay.  After an uneventful flight from Tokyo, the nearly-new DC-8, nicknamed “Shiga,” was on final approach to an overcast SFO.  Captain Kohei Asoh, a veteran pilot, guided Shiga’s descent through the low-hanging clouds.  But planning errors, equipment unfamiliarity, and miscalculations conspired against the crew.  Dropping out of the fog, Shiga was lower than expected and about to crash into the foam-flecked bay just below.  By the time the First Officer cried out, “pull up!” and Captain Asoh applied throttle, it was too late.  The landing gear had struck the brackish water and the plane lurched to a halt, the wheels coming to rest in the muck seven feet below — two and a half miles short of the threshold of Runway 28 left.

Remarkably, no one was hurt and some passengers had no idea that they had landed in the water until the evacuation began.  And even then, the de-planing was so uneventful that most folks didn’t even get their feet wet.  But for me, the best part of the story was popularized by management guru, Jerry Harvey (author of the Abilene Paradox): when Captain Asoh was called before the Transportation Safety Board, the inquisitors opened by asking how an experienced pilot flying a sound airplane on a straight line to an unobstructed runway in generally benign conditions could land in the water miles short of the field?  Offering an answer that resounds across the ages in its clarity and honesty, the Captain replied, “as you Americans say, ‘Asoh f@#%ed up.’ ”

Fast forward 40 years and compare Captain Asoh to the bellyaching finger-pointers that were in the cockpit of the Northwest flight that overflew Minneapolis.  And the public nature of Captain Asoh’s taking of responsibility stands in stark contrast to the recent (ahem) screw-ups of Tiger Woods.  Look, I’m not a moralizer or a scold — I grew up in the anti-role model era heralded by Charles Barkley and Ice Cube — but Tiger, dude, you make your living by having people look at you; you get paid because people watch what you do.  I’m not sure you get to flick that switch off by pleading for privacy.  Even if you ask, “pretty please.”

And what does this have to do with investing?  Recently, I was talking to a buddy who’s a GP at an LBO shop (this conversation was explicitly cleared for the blog on the condition of vagueness — I should note that it’s not a group in which I’m an investor).  This GP bemoaned the fact that his LPs had seemingly thrown in the towel on his troubled fund; turnout had been sparse at this year’s annual meeting and some investors had stopped returning phone calls.  He insisted that they had Great Stories of Progress to tell for each of their troubled portfolio companies and that if they could just convey these stories to LPs, all would be well.  How, he asked, could he communicate the exciting stuff afoot?

So I asked him to test drive some of the rap on me.  After a few tales larded with lament over difficult (but improving!) end markets, missteps by (recently replaced!) management teams, and (impossible to please!) crabby lenders, I asked him how many times they’d screwed up in the fund?  Now I don’t mean to be harsh, but here’s what I heard for the next 90 seconds: “excuse excuse excuse blah blah blah excuse excuse excuse blah blah blah.”  No wonder his LPs have tuned out his firm’s fund, I told him; I’d just been handed a bagful of excuses devoid of any corresponding accountability or responsibility.  It was the first time I’d heard the fund’s story and I was already tired of it.

Look, LPs understand that business has been tough and even the tightest investment theses have been severely tested over the last 18 months.  We get that.  And we also know that investors are fallible.  It’s OK to make mistakes sometimes.  Really it is.  Sometimes even good decisions have bad outcomes and vice-versa (more on that next week).  Sometimes people are just unlucky or in the right place at the wrong time.  But when things head south, please be honest and straightforward.  (There’s no need to take things to an extreme and self-flagellate, like some GPs do.  There’s no joy in that for anyone.)  As GPs and LPs, we’re in a long term relationship — one that’s longer than many marriages.  An open, honest, transparent dialogue pays dividends in the long term.

So my GP buddy asked me for some advice once I climbed down off of my soap box.  The best I could come up with was, “just remember, it’s not the break-in that brings down the presidency, it’s the cover up.”  Sometimes, like Captain Asoh, you’ve just gotta say, “I f@#%ed up.”

The Worst Meeting Ever

Head in HandsBrad Feld just gave me a shout out in his fine blog and I was touched because he has always been an inspiration to me. In the early days, there were a handful of folks who got me really excited about blogging to bring transparency to the voodoo that we do. There are too many people to acknowledge, but a few stand out: Josh Kopelman with his razor sharp insights was my first inspiration, David Hornik was saying some really thoughtful stuff with a really distinctive voice, Paul Kedrosky was using data in some really interesting ways, and Brad was bringing a real authenticity, in addition to intelligence, to his writing.

Indeed, authenticity became one of my critical evaluation factors during those heady days a decade ago.   After all, entrepreneurs were changing and so were venture capitalists.   Coming out of the Great Internet Bubble, founders and VCs were demanding a different level of accountability of each other.   Groups like First Round were talking about venture capital as a product with the entrepreneur as customer and the phrase “founder friendly” became almost cliché because every VC firm had adopted this catchphrase as part of their values. Underlying it all, however, was a tacit acknowledgment that venture capital is a multi-period interaction; in Silicon Valley, “you’re never on your way up or down, you’re always coming around.” In a world like that, inauthenticity can be an albatross, imposing costs that can be significant.

As a result, in my first meetings with new folks I typically ask a lot of questions that might seem odd. People are itching to flip through their slide deck and I might ask them instead, ”tell me about your best self?” or, “what’s the biggest debate that simmers without end at your firm?” There’s no right answer; every question is a Rorschach designed to start a dialogue and give insight into the people across the table.

Most of the time folks are great sports and the discussion can really flow; this kind of chat can generate lots of insights (it is a mutually selective process, after all) and a welcome break from routine for both sides. Every now and again, though, things go awry and I’ve been hesitant for some time to write about my worst meeting ever, as I never want to break confidentiality. But I think there are timely lessons and insights about authenticity so I’ll keep it as vague as possible to obscure and protect the identity of those involved.

 

So, there I was, sitting with a group of hotshots. They seemed to have all the answers and came across as top-decile cocky, but the meeting seemed unremarkable otherwise . . . a bit stilted, perhaps but run-of-the-mill despite that. Naturally, I worried how their hauteur would play with entrepreneurs so I asked a question that calls for a bit of introspection and humility: “what’s the best piece of personal or professional feedback or criticism you’ve ever gotten from your partners and how have you put the lessons learned into practice?”

“I prefer not to answer,” snapped one of the partners.

“Really?” I replied.

He went on: “I believe what I say to my partners should stay between the partners.”

“Well, you’re asking me to be a partner, perhaps a limited partner, but a partner nonetheless.” I retorted.

“I believe in praising publicly and criticizing privately,” he shot back.

Starting to feel my Brooklyn rising, I said, “as far as I can tell, it’s just us in this room; that’s about as private as it gets, no?” And with my interest piqued I followed up by asking what they would do if an entrepreneur refused to answer their questions.

“We would never ask such impertinent questions,” he glared back. (and yes, I wrote that word down because I was so taken aback . . . also, my $5 brain likes $10 words.)

“I guess if you won’t answer, I’ll have to wrap this up,” I said, almost as a dare.

“Thanks for coming,” he tossed back. So I packed up my notebook and showed myself out.

 

I tell the story not to look like some interrogatory bad-ass or to call out these cats (and please don’t ask me who they are, as I’ll never tell!) Rather, it’s a reminder that investing is a people business and whether you’re investing in funds or start-ups, understanding the behavioral footprints of the individuals involved is critical. We are investing in long-dated way-out-of-the-money options. As I’ve said many times, investments in start-ups or the funds that back them can last longer than the average marriage. It’s also a good reminder that we’re almost exclusively dealing with Other Peoples’ Money. As such, we have a responsibility to make sure that were being rigorous. We shouldn’t be shy about asking tough questions and can’t be afraid to walk away if those questions don’t get answered.  Sometimes it feels like capital is cheap and thrown around too liberally, but I try to never forget the words that Greylock’s legendary Henry McCance uttered to me years ago: “venture works best went time is cheap and capital expensive.  When that relationship gets reversed, watch out!”

 

 

 

 

 

 

 

 

 

 

Deliberate Speed

Here’s a fundraising tip: “you’ll be sorry you missed this” has never once worked as a tactic to get me – or most LPs for that matter – interested in a fund. Neither has telling me, “if you miss this fund you’ll never be able to get into future funds.”

Such bluster usually earns one-way ticket to my “managers” folder, a place that is alphabetically and existentially distinct from my “interesting managers” folder. After all, if you throw around the bombast with me, it makes me wonder: how do you treat entrepreneurs? I’m your shareholder; they’re your customers.

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