November 19, 2009

[Off topic] Road Rants

[Beware; there's absolutely no investment content below.  If you're looking for something thought-provoking, look elsewhere . . .]

So here we are in the thick of the fall annual meeting season, which means I’ve got Seat 22E Palsy – again.  I’ve often said that I accomplish 105% of my annual productivity while on the road, but it’s really hard to bang out an investment memo or board book report (or a blog post) from a middle seat on a tightly packed Southwest Seven-Three-Gee.  The amount of sustained contortion necessary to do anything more than one-finger-peck a laptop would stress out even a seasoned Chinese acrobat; I sometimes wonder if I could expense the massage I invariably need after a long flight in a middle seat . . . it’s either that or some kind of workman’s comp claim (just kidding . . . anyhow, the workman’s comp cats probably would have a hoot about a milquetoast investor like me bellyaching about sore shoulders; the country has bigger problems). 

But seriously, I find that the most effective way to tap-tap away is to scrunch up one’s shoulders, rotate the torso about 25 degrees and go cross-handed, with one hand taking the top half of the keyboard and the other the lower.  Every now and again, you gotta switch it up and go southpaw, or else you can cramp up.  I used to hate connecting flights, but now I relish the computer free climb-outs and descents offered by each stopover that give my aching back a break.  It’s a hard knock life (said sarcastically . . .  there are a million worse things I could be doing with my days and nights).

But if you’ll indulge me for a moment, dear reader, I’ve got a gripe that I need to get off my chest:

I've noticed that security lines now ask travelers to self-select into cohorts by traveling skill; there’s even a ski slope-like rating system.  I fancy myself an expert traveler, so I look for the black diamond.  I bet there’s even a double-black hidden away in a known-only-to-locals corner at Hartsfield-Atlanta or Orchard Field (that’s the old-school name for O’Hare, hence airport code ORD; I got your useless knowledge right here, pal!) 

Anyhow, I really think there should be some sort of sanction if you screw up in an expert traveler line.  Walking through the metal detector with your six-pound, all-steel “Don’t Mess with Texas” belt buckle?  Three months probation.  Left your boarding pass in your duffel bag that just went through the metal detector?  Two hours community service.  Forgot to remove your laptop?  $1000 fine and five days in jail.  Seriously.  You’re in the expert traveler line and you don’t remove a laptop?!? 

And I've noticed that Midway Airport is the worst . . . it’s as if people's brains are addled from having endured another Sisyphean season by their beloved Cubbies.  But in the Southwest terminal, there's a Kafka-esque twist: the expert traveler line snakes around out of sight, so you have to commit to what might e a 30 minute wait while the rookies are breezing through.  Sometimes you realize just as you've turned the corner that the posse from the senior center is taking its annual trip to Reno or the girls of I Tappa Kegga are spring breaking (Like Omigod! Like what do you mean I can’t like bring my like 48 ounce bottle of like aloe acai essence conditioner on the plane with me?!?  Like Oh! My! Gawd!)  Sorry, girls, you gotta remember the 3-1-1 rules.  After all, violators will be prosecuted.  Now, if you'll excuse me, I've got to sign off . . . my shoulders are starting to cramp up again.

November 4, 2009

The Suburban in the Garage, Or Big Investors and Their Funds

About 15 years ago, I learned a lesson I’ve carried around ever since: when I was a rookie consultant visiting an industrial firm in the Midwest I got in a discussion with our client-side project leader about why people sometimes buy things that don’t make obvious sense.  “For instance,” my client asked rhetorically, “why do you think the Chevy Suburban [the only extra-large SUV at the time] annually tops the owner loyalty and re-purchase rankings when there are so many great cars out there?  You'd think every once in a while some other car would topple the 'Burban, no?  And who wants to drive such a behemoth, anyhow?"  Before I could whip up a smart-sounding, yet hollow textbook answer about key buyer purchase criteria or some such noise, he answered his own question, “what the heck else are they going to buy, though?  If you've got four kids or three dogs or a snowmobile you have to tow, there's just no other choice.  What’s the alternative?  Buy two cars and split up the family when you go out?"  

I’ve thought a lot about that story lately, as it offers an important metaphor for investors.  After all, like large SUVs, big venture and private equity funds have been getting kicked around a lot lately.  (And I think I can credibly say that I’d been an early and consistent (and sometimes unfair?) fist-shaker in the direction of some large funds.  Sure, there are some big funds out there that will be successful — and to be clear, I don’t root against anyone; that’s bad karma — but the arithmetic facing sizable funds is daunting.)  Yet, despite my ever-mounting cynicism and some good research and analysis that bolsters the small-fund argument, I’ve actually started to feel some sympathy for big funds and their investors and I’ll (not-so) secretly express a hope that larger investors stay focused on bigger funds.  After all, they’re like the Suburban buyers of the story: if they must go out for a spin, it just makes sense for them to find larger vehicles.

See, if you have a gazillion dollars to put to work, it’s actually pretty hard to execute a smaller fund-oriented program, even though many large investors are currently fetishizing such a strategy.  And to those investors thinking about jumping on the small fund bandwagon, I’ll note that such funds tend to be hard to find, challenging to diligence, difficult to “sell” internally, expensive to monitor (at least in terms of time), and catalytic of insomnia.  Indeed, I love my managers like I love my children — all equally but differently — yet the younger ones tend to keep me up more at night.  For sure, the rewards can be great and I’ve got high hopes for all the kiddies, but people never let me forget that I’ve taken a lot of career risk . . .

And then you get to the practical challenge: if an institution is deploying a ba-jillion bucks a year, it’s hard to do it in $10 million chunks.  Even if one could write a bigger check to a smaller (sub-$200M?) fund how much more would you want to do?  Would you want to be 25% of the fund?  40%?  Would the GP want you to be that big?  And if an institution is writing a bunch of $10 million checks, are they writing too many of them and seeding a whole bunch of competitors in a space?  Are they ruining the experiment by participating in it?  Stretching our tiring metaphor, if everyone’s trading in their Suburbans for a pair of roadsters and taking two cars out on family trips instead, all those incremental cars on the road will snarl traffic, no?

So let’s raise a glass to big funds with a toast of sincere best wishes for their success . . . of course, I’ll be explicit about my ulterior motive: keeping the small fund space the preserve of the nimbletons.  If big players continue to focus on big funds, it’ll be more beer for us.

October 20, 2009

The Gatsby Funds

In my younger and more vulnerable years, I must have read The Great Gatsby a dozen times.  Maybe more.  And I loved and identified with the humble narrator, Nick Carraway.  His thousand mile journey to New Haven from Minnesota was much further than my hundred mile one from Brooklyn, but we shared the same occasional outsider's bewilderment at the antics of the eastern elite.

And yesterday, as I sat out on the deck of the Rosewood Sand Hill gazing up at the thin wafer of the moon rising out of the verdant hills and ascending the sanguine sky I wondered what Nick would've thought of this place.  Because sometimes I wonder if Silicon Valley is the modern version of Fitzgerald's Jazz Age playground.  Call it East Egg 2.0.  

But there are days on which it feels like there's a hush about the place; the raucous energy is muted and the punchbowls seem to have gone missing.  Sure, the future's still under construction here; the quiet is punctuated by the staccato tap-tap of programmers and designers working on the new new thing as cooling fans whir in the distance.  But there's a whiff of introspective stillness like that to be found on crisp autumn evenings after the grand shore places have closed for the season.

And maybe that stillness is the melancholy realization that the receding tide will beach some of the dinghies in the harbor.  Some even suggest that the venture business should shrink by half.  But which half?  There's a pandemic of bellyaching about "the venture asset class" among LPs, but I suspect that most investors will keep coming back . . . remember, most Americans hate Congress, but love their Congressman.  I think the venture business is the same way.  

But I'm always asking myself, "what do I need to believe to believe that a particular fund will be successful?"  There are a lot of good investors out there with compelling stories; in fact, there are probably more than I could invest in if I had three lifetimes.  But there's a whole other swath of the business for whom heroic leaps of faith are necessary; the arithmetic of their funds doesn't quite work, or they need too many outcomes to come out just-so, or the IPO market needs to be bubble-icious once more.  Like Jay Gatsby's, their reality is an idealized and stylized rendition of a sloppy present; it's not necessarily a false rendition . . .  just a hopeful one.  And it occurred to me as I pondered the imponderable future that the last few paragraphs of the book capture the challenge facing these funds, The Gatsby Funds, better than I ever could:

And as I sat there brooding on the old,
unknown world, I thought of Gatsby's wonder when he first picked out
the green light at the end of Daisy's dock. He had come a long way to
this blue lawn, and his dream must have seemed so close that he could
hardly fail to grasp it. He did not know that it was already behind
him, somewhere back in that vast obscurity beyond the city, where the
dark fields of the republic rolled on under the night.

Gatsby believed in the green light, the
orgastic future that year by year recedes before us. It eluded us then,
but that's no matter – tomorrow we will run faster, stretch out our
arms further . . . And one fine morning – 

So we beat on, boats against the current, borne back ceaselessly into the past.

September 29, 2009

Founder Visas: A Good Idea

I
hate to admit it, but I'm not a fan of Indian food.  And it’s not just Indian food, it’s almost any ethnic cuisine.  You
see, my immigrant parents aimed to fully assimilate: I’m named Chris, because that was the most popular boychild
name at NY Hospital in 1972, I was encouraged to play baseball because it was the
National Pastime, and nobody likes apple pie as much as me.  Nobody. 
And since my parents emigrated from different countries – thrown together by fate in Bryant Park on a sunny afternoon in 1970 – there was no
"local cuisine" at home.  For better or worse, my tastes were more influenced by the cuisine of Oak Brook, or Northfield, Illinois than by the food of anyplace else.

But there I was, eating lunch at Saravana Bhavan in Sunnyvale (ahh, the things we endure on our spouses' birthdays!) when I started noticing the t-shirts from local start-ups and NASDAQ 100 companies that stood out like a dense chain of barren, monochromatic islands among a colorful, undulating sea of saris.  I wondered
how many of these foreign-born tech-sters would still be here in one year's time?  Three
years?  Five years?  Because in case you haven't noticed, America is
facing a brain drain
unlike any in our history. 

America?  With a brain drain?!?  Whoa!  Now, there are a ton of reasons for it, but a
key one of them is the byzantine complexity of our immigration
laws.  (Check out Manu Kumar's compelling success story to get an idea of the challenges faced by immigrant-entrepreneurs.)  But hey, immigration laws are complex because people bemoan the loss of jobs to immigrants; that's a debate that's been going on since the earliest days of the Republic and it's not one that I'll get into here.

But I will say that I'm a huge fan of Paul Graham's Founder Visa idea.  Why not allocate 10,000 of today's existing visas specifically to people who want to come here to start companies?  I get the whole H-1B controversy, but if someone's here to plant and nurture an entrepreneurial seed in the most fertile soil in the world, let's let them try before they go do it elsewhere and we find ourselves in a Dust Bowl.  Anyhow, if someone is trying to start a business, they won't be competing for jobs; the Founder Visa envisions prohibiting these cats from working for existing companies.

And indeed, the impact of these immigrant-founders on the economy is profound.  If entrepreneurship is as American as apple pie, then it's got a coconut burfi, a fortune cookie, some strudel, and a maybe a cappuccino or Tim Hortons double double on the side.  Some estimate that a quarter of all US start-ups are founded by people born elsewhere while over half of Silicon Valley's are launched by immigrants.  These companies aren't just creators of hundreds of thousands of jobs; they're part of the very idea of America, the America where anything is possible.

And that very idea of limitless possibility animated prior generations of immigrants as they helped forge a mighty nation.  Their memorial was the New Colossus that stands in New York Harbor.  And like those immigrants of yore, this generation of nation-building immigrants deserves a monument.  Wouldn't it be fitting for their symbol to be a virtual one, not a physical one?

So, you Twitter-heads among the readership: send a tweet using the #StartupVisa hashtag and include @2gov (or register on 2gov.org – see Eric Ries's post here for instructions).  Lend your voice to the clamor seeking to preserve one of the pillars of American entrepreneurship.

September 14, 2009

Keeping the Window Open

Most people seem to have a favorite Saturday Night Live skit.  One of my favorites is, "Ruining It For Everybody," a 1993 masterwork that features John Malkovich and some cast members discussing how they did something to ruin things for everyone else.  The Adam Sandler character, for example, explains why many restaurant bathrooms are now, ahem, "for customers only."

Of course, finance is full of people who ruin things for everybody, too (thanks for the SarbOx, Enron!)  But the most insidious wreckers are those companies that go public and then miss their numbers within a few quarters (what's up, Rosetta Stone?!?)  It's those flubs that have a chilling effect on the market for emerging growth companies. 

And as the IPO backlog builds, I hope the bankers take out only those companies that can keep the momentum going, not just those that will pay enough fees to help them get out of arrears at The Stanwich Club.

I say this because, as institutional investors, we've seen that movie before.  And I worry that the IPO market for IT companies could start to look like the market for biotechs: long stretches of desolation punctuated by sporadic frenzies of activity that end when public investors start to feel snookered. 

There are some good companies in the IPO pipeline right now and I wish them all well.  Their success should lead to more opportunity for other companies.  I just hope that the backers and bankers of some of the hundreds of other companies considering a public offering think long and hard about pushing a marginal or unprepared company into the arena.

Please don't be that guy; don't ruin it for everybody.