I have a friend who lives high up in a building, and has a terrace, and likes to set off Chinese paper lanterns late at night. The aerodynamics are such that the wind flows up the side of the building and carries these lanterns directly upward. Watching a fleet of these soar is inspiring … it’s amazing to believe that such a fragile construction of paper and plywood, filled with flame, can actually fly.

I was with him once at a beach house owned by a friend of his, in the Dominican Republic. He thought that seeing these lanterns fly out above the ocean would be magnificent. The first one he lit flew directly sideways, actually hit a woman’s head 40 feet away, and then careened into the building. Thankfully no one caught on fire, but everyone was pissed. Turns out that when you are launching fragile and combustible objects, it really, really matters which way the wind is blowing.

That experience (seeing a woman nearly burn to death and multi-million dollar beach house nearly go up in flames) reminded me of our first fund. We raised a $43MM seed stage fund in 2000, and proceeded to invest relatively quickly in over 70 companies. Shockingly, that fund looks like it will actually make money, based on some outsized exits (Optasite, @Last, Glycofi, Pump Audio) and some unrealized winners (Everyday Health, Newforma, GetWell Networks). This compares to the median fund from the vintage, which is worth $0.83 on the dollar. That notwithstanding, like most seed stage investors, we were doing the equivalent of launching a fleet of Chinese lanterns. From 2000 through 2005, the wind was against us, and a lot of those lanterns were extinguished or went in bad directions.

If you are a seed stage investor, there are three categories of good outcomes. The first is that the company gets purchased without needing new capital, and you make a quick return. The second is that you raise a next round at an uptick, and then sell, and you make a quick return. The third is that you raise a series of follow on rounds, at accelerating upticks, and you sell the company (or go public) for a very meaningful return. All of these things depend on picking great companies who make real progress, but I would submit they depend more on the environment, ie, which way the wind is blowing.

Right now, and for the last few years, we have had ideal conditions in the consumer web sector for this kind of investing. A group of eager acquirers focused on talent and willing to pay up? Check. Tons of investor interest in the sector, willing to pay up for companies with traction? Check. A Cambrian period of innovation coupled with low cost company building and marketing tools so that early demonstrable momentum can be achieved on short dollars? Check.

How long will this go on? My friend and very talented investor Shana Fisher has a framework where she points out that from 1995-2000, anyone randomly investing in early stage made money, from 2000-2005 anyone randomly investing lost money, and from 2005-2010, anyone randomly investing made money. I don’t love the next step in that sequence.

My personal view is that these conditions will continue for a while at least. Some of the dynamics involved are secular, rather than cyclical. Further, there are some folks who have leaned into the seed stage model and made an art of it, in a way we never did. First Round Capital comes to mind. Actually, come to think of it, they are the only ones who come to mind…

For our part, we moved onto more traditional early stage investing. Our latest fund is $135MM in size, we typically lead Series A rounds with $2-3MM, and we are focused on building a manageable number of high impact companies where we own an average of slightly over 20%. That requires us to get in early, which is why we have a tight sector focus on financial service and media, areas where we can get comfortable on little data and where we can sell our way into competitive deals based on our ability to help. The wind will always play a role, but hopefully we are launching rockets, not paper lanterns.

Orthogonal Feedback

Matt Harris —  March 7, 2011 — 3 Comments

source: http://rmstar.blogspot.com

I was meeting with some entrepreneurs last week, a terrific young team with an interesting company, and we were discussing their business. About halfway in, I said “Okay, let’s assume that most of this works, and you get some traction. What far fetched ideas do you have to truly create a massive company here?” The team slyly looked at each other and came out with some really interesting stuff. I joined in and had some extremely random ideas that, if they pursued them, would send them in very different directions. Some of it was pointless, and maybe all of it will get thrown out once the excitement of the meeting wears off, but I hope not.

I wish I did this kind of thing more, and I wish more investors did also. Obviously most entrepreneurs come to meet with VCs to get money, but most VC/entrepreneur meetings don’t end up with a check being written … as an example, we invest in far less than 1% of the companies we meet with (most of reasons have to do with our strategy, not the quality of the company). Given that, entrepreneurs should get something, at least. Most often what they get is a sense for what the market is looking for, eg, “mobile payments are really hot right now.” Hearing that once is modestly useful; hearing it a dozen times is distracting and annoying.

I think most VCs focus on sharing that kind of market feedback because they think that’s what’s expected. VCs are not necessarily supposed to have ideas, after all. In my experience, though, most VCs do have interesting ideas, if only as a function of sitting in meetings with smart, hyper-creative entrepreneurs all day long. If you live in a tinder box, you can’t help but have a few sparks once in a while.

[As an aside, if you’re wondering why VCs don’t typically start companies given my claim that they have good ideas, I think there are two reasons, if you’ll allow me some vast generalizations. First, VC ideas are often riffs on an existing play, albeit hopefully novel and not incremental (in my lexicon, orthogonal in some way). Second, the real difference between VCs and entrepreneurs is that entrepreneurs are execution machines, and VCs … not so much. And finally, there are some former VCs who’ve done well, most famously Mark Pincus, but I’m also bullish on Matt Warta, Dan Allen and others.]

So this is my new resolution: that each entrepreneur I meet with walks away with one or two new ideas that at least serve to stretch her thinking a bit. If they get that much from each of the investors they meet with, I’m certain the fundraising process will eventually lose its bad name.

The first task of a revolutionary is figuring out which buildings to burn down.

In that same sense, the first task of an entrepreneurial firm is to figure out what of the existing order to keep, and what to challenge. This is first in a long series of posts (possibly as many as two) riffing on the analogy of entrepreneur as insurgent and traditional big company as the corrupt regime in power. This will eventually be turned into a book, which you can pre-pre-order by sending me $100 right now. i take Paypal, Facebook credits, Zipmark, Dwolla, Venmo, Waspit, etc.

In the event that anyone is offended by the analogy or glib tone of this essay, and feels inclined to point out that it is an insult to liken an entrepreneur, who risks merely her time and treasure, to an Egyptian, Tunisian or Libyan revolutionary, who risks everything … mea culpa. As to tone, I am a dealer in snark, and when all you have is a hammer, the whole world looks like a nail. As to the analogy, I am gobsmacked by the courage of these young iconoclasts in the middle east, and thrilled by the way they take courage from each other; I can’t help but be reminded of the daring entrepreneurs I am lucky enough to work with.

The essential triumvirate in any insurgency includes the insurgent (entrepreneur), the regime (incumbent big company competitor) and the people (customers/users). The goal of the insurgent is build a movement that leverages his own strength against the regime’s weakness, all in the context of the hopes, dreams, wants and needs of the people. There are many stages to this thing, but the first stage involves getting into the fray and becoming relevant. that inevitably entails some mayhem, and hence this post: if you’re a revolutionary, out on the streets in the early days of an insurgency, which buildings do you burn down?

The initial temptation is to tear it all down, and build a utopia unconstrained by the baggage of the past. This is almost always a mistake. In particular, it’s a mistake not to at least dig deep into the current structure of how things are done, and then when rejecting elements of it, do so from an informed perspective. Even companies that represent radical new ideas leverage existing behaviors and habits. Think of twitter, a company i think we can all agree asked users to engage in a brand new human activity. What are the options you have when you “receive” a tweet? Basically, you can reply, reply all, forward, ignore or delete. Twitter uses its own vernacular, and certainly the fact that it is semi-public is a departure, but it fundamentally builds on heuristics that are deeply familiar from email (and, before that, corporate voicemail). Where possible, don’t destroy or take on those conventions and institutions that you can co-opt and leverage. You may damage the regime, but you’ll also damage yourself, in that you will certainly not delight the people. You don’t burn down the hospitals.

The second category of institution that you can choose to destroy are those that do represent a chance to win favor with the users, but will engender negative consequences from outside the immediate ecosystem. One of the portfolio companies we are very excited about is BankSimple. This is a company that operates in a heavily regulated industry, and is therefore properly cautious to remain within the bounds of what is considered kosher by the regulators. It would be enormously liberating to ignore these constraints, and in fact you could build a retail banking experience that would be absolutely kick-ass if you dispensed with things like Know Your Customer, fraud management and NACHA compliance (I won’t go into it but it’s not something you want at a Superbowl party). You can’t, and shouldn’t. You would hurt the incumbent competitors in the short term, and the customers would be wildly in favor, but forces larger than you would come down hard. You don’t burn down the US Embassy.

Next come the special interests, which exist any society … the privileged classes, the industrialists and landed families who own the factories and the real estate. These are people who have done well by the old regime, and will probably root against you, but who you need, as they control the means of production and have legitimacy (at least some) in the eyes of the people. The answer here depends how radical you want to be. One of our companies, Quirky.com, is clearly revolutionary. Quirky permits designers and investors to collaborate to create products, which Quirky then manufactures and sells. This type of crowdsourced innovation is new to the world and incredibly exciting, and is destined to disrupt the traditional relationships between consumer goods manufacturers and their distribution channels. Why, then, is Quirky also working with traditional retailers like Bed, Bath & Beyond? There is some good analysis here, but the basic answer is that it doesn’t usually make sense to try to innovate all the way up and down the chain when you can leverage some parts of the existing infrastructure. Quirky, at least, has decided not to burn down the office buildings.

Then you have the hard choice regarding the existing justice system. Do you set everybody free? “Free” is kind of a magic word these days, in entrepreneurial circles. The prevailing wisdom is to charge nothing, build a user base, and then “monetize” them. Similarly, when a society’s jails contain both real criminals and good people deemed enemies of the state, it is tempting to let them all free, and figure you can sort out the criminals later. But both of these things are very dangerous to the market dynamics. “Free” is a tough genie to put back in the bottle (also works if you substitute “hardened criminal” for “free” and “jail” for “bottle”.) One of our most exciting companies is called Extreme Reach, which is taking on a dominant incumbent in the video distribution business. It was tempting, at the outset, to compete on price. Instead, Extreme Reach built a technology that let them compete on quality, service and flexibility, maintaining the prevailing price structure. As they now rapidly take share, I can tell you that it’s awfully nice to be getting paid while doing so. There are many, many compelling counter-examples on the consumer side, all of which have built massive audiences by starting out, and largely staying, free. I would say, in general, that revolutionaries do burn down the prisons.

What do you do about the state controlled media? This, after all, is where the people have been getting their information for decades. Can you afford to destroy it, rather than co-opt it and use it for your own purposes? I think this one is increasingly clear. New movements demand new media, and can leverage the hell out of it. Examples here are too numerous to name, both in the insurgency world and the entrepreneurial world, but suffice it to say that getting a seat on Oprah’s couch is now less valuable, for most companies, than a retweet by Chris Sacca. Definitely burn down that state-run TV station.

Finally, there are those elements of the ideology that aren’t just wrong, they are representative of all that is wrong, the root of all evil. They may be lovely, or useful, or valuable, but they just must go, if the revolution is to have any legitimacy. One of our companies, On Deck Capital, has built a platform to enable lending to small businesses. In the last 3 years, they have lent over $100MM to Main St small businesses, with exceptional credit performance. The thing I love most about their model is that they basically ignore the FICO score, that antiquated and creaky credit scoring methodology that was one of the prime causes of the credit crisis. Both in reality, and in the realm of perception, you can’t build a “new” system that relies on emblematic elements of the old. Down with FICO; Up with On Deck! You burn down the secret police building, you burn down the torture chambers, and you burn down the presidential palaces!

Tired of Self-Hating VCs

Matt Harris —  February 22, 2011 — 15 Comments

This post was stimulated by a tweet i read over the weekend, by a VC I won’t name because I don’t know him, and he has a very good reputation for being a nice guy. His tweet read: “I’m really not sure I like VC’s”. My reaction to this missive went from, at first, a knowing smile, then to mild irritation and finally to downright anger. Anger, not at him, but at myself. Anger at the fact that this kind of radical and broad based self-deprecation (and by “self” I mean all of us) was amusing, old hat and totally unexceptional to me, and to all the rest of us who practice venture capital.

I have a clear sense of why this is. The origin story of the VC as black hat is based around the archetype of the entrepreneur as philosopher king, and the VC as necessary evil. It is a story that is perpetuated by every entrepreneur who was told “no” by a blue-shirt-and-khakis-wearing weenie like me, and by every angel investor looking to build a brand. It is a story that is fueled every time a VC checks his/her blackberry in a meeting, or says something inane or just fails to return an email. I get it, and I’m sure I share in the blame for the lasting power of this narrative by my lack of social skills or by the response time implications of my clogged inbox.

But the biggest way in which I contribute to the persistence of the “VC as evil” meme is by nodding knowingly when it is mentioned in my presence. There is a way in which, by agreeing that the phenomenon is real, I implicitly place myself outside of it … “yeah, VCs are jerks, but I’m obviously one of the good guys.” Just the other day, I was speaking with a successful angel who is considering raising a fund (I know, you’re *shocked* to hear that), who characterized that decision as “going over to the dark side”. I laughed. Here’s what I should have said: “Screw that.”

And that’s my take on this notion from here on out: Screw that. The worst VC in the world spends his or her entire working life providing jet fuel to the entrepreneurial economy. That’s what we do, even in our darkest hour … that is literally the only tool in our tool chest. Remind me what’s so bad about that? Of all the professions in the economy, what is so “dark” or “evil” about injecting cash into high growth companies? I’m clearly missing something. Every venture capitalists I know does three things all day long: figure out which entrepreneurs to back and wire money to those entrepreneurs; work like hell to help those companies; and pitch limited partners that they should give him/her more money to rinse and repeat that process. Again, personal foibles and the occasional jackass aside, I think we can agree that these are activities that are massively net positive to the world.

Now, like any insider in any field, I could talk at length about how far short of the ideal I and my compatriots fall. But how unusual is that? If you want to hear something chilling, you should go out for drinks with some medical residents, and hear them talk about the foibles and failings of overworked young doctors. Or discuss food hygiene with a chef in an honest mood. Or watch “Waiting For Superman” to learn about the delta between the perfect and the real in the teaching profession. Here’s a quick newsflash: human beings are deeply flawed. The bottom 20% of any field is depressingly pathetic. That fact does not make medicine, cuisine or teaching worthy of wholesale mudslinging, and the same should be true of venture capital.

The other day, my 2.5 year old daughter asked me what I did for work. I said that Daddy helps people start companies. I’m pretty sure she didn’t understand what I meant, but it felt good to say it. I’m proud of what I do, and I think she’ll be proud of me, too, someday (though I’m pretty sure she’ll always be willing to swap me for Dr Seuss.)

First, read this post.

A couple of my close friends, Mark Solon and Roger Ehrenberg, have tweeted this article with the endorsement MUST READ. I’m as much (or more) of a fanboy of Steve Blank as anyone, and I think the world needs more straight talk and demystification of the VC/entrepreneur relationship. Having said that, this seems like such an obvious point that to make it feels more like sloppy demonization than analysis. By these lights, customers are not your friends, partners are not your friends, employees are not your friends and your lawyer isn’t your friend (even if it’s Ed Zimmerman and he’s gotten you drunk on $350 bottles of wine.) If you are expecting someone, in a business context, to do something against their own fiduciary duty and self-interest, then you are in for a rough ride in this world, whether you raise venture capital or not.

Mark and Roger, you are both colleagues and friends. If I have a company in trouble (which I never do, of course), can I count on you to lead their next round at an uptick, based on our friendship? NO? Well, hot damn, I thought we were friends.

My wife and I were in Cairo about 8 months ago, serving on an Endeavor international selection panel. For those who don’t know about Endeavor, you should, it’s a fantastic organization. They work in developing economies to identify and provide services to high impact entrepreneurs. As a result of being there with Endeavor, we were surrounded by the most talented business people in Egypt, most particularly those who are breaking with convention to start high growth businesses. After nearly a week of this, I was very charged up about Egypt’s future and was basically ready to plant the Village Ventures flag and start doing deal right then and there.

My wife Jess, who is even more entrepreneurship-obsessed than I am (hence her NPR show From Scratch), was in this case far less sanguine, for an interesting reason. The photo at the top begins to capture some of her concern. Put simply, Cairo has the worst traffic in the world. You can look at various surveys that will disagree with that claim, and I’m sure there are cities with quantitatively more cars per square foot or whatever, but trust me, Cairo is qualitatively worse, for two reasons. The first is that the infrastructure is pathetic. Roads are pitted with potholes, bridges are rickety, lanes are routinely closed for repairs that never happen, etc. The second, and worse, factor is that the rule of law is entirely absent. Lanes are merely abstract concepts, accidents not involving fatalities are barely worth slowing down for and there are no policeman to be found anywhere. This kind of disregard for the traffic system shows how little organization and respect the government has for its people.

Jess’s take was that a country whose social contract was this broken would have a hard time ever getting its act together. And she was right. My own view is that this revolution, though it will be as messy as revolutions always are, will lay the groundwork for building a society where entrepreneurs can in fact do their thing. Let’s hope that this turmoil doesn’t drive away the talent and capital required for real growth.

In a World With No Sevens…

Matt Harris —  January 14, 2011 — 1 Comment

The Judgment of Paris

As the anecdote goes, a group of women is sitting around discussing recent conquests. One turns to another and asks her to characterize her latest flame on a scale of 1 to 10, but adds “now remember, we’re in a world with no 7s.”

Think how elegantly that puts the answerer on the spot. In my experience, anything reasonably good is always a rated a 7. Forcing yourself to go with either a 6 or an 8 is hard to do … on one side is wheat, and the other, most assuredly chaff. A 6 is only 20% better than average, while an 8 is only 20% away from perfection.

[As an aside, the other ridiculous human tendency in these matters is to add a .5 to whatever scale is offered. 1-5? You will definitely get a 3.5 in the mix of answers (of course, that is the equivalent of a 7). Even 1-10 will produce some 4.5s and 8.5s. People, if we wanted .5s, we would double the scale. We get it … 8.5 out of 10 is 17 out of 20. That wasn’t the question.]

I was thinking about this recently as we analyzed our portfolio companies. We haven’t ever really put it in these terms, but we have a good “no sevens” culture at our firm, thankfully. The temptation is to conclude that most all of your companies are doing well, are “largely on plan” and “our initial investment thesis holds, despite some bumps in the road”. The fact is, some companies are continually raising your eyebrows in a good way, and others in a not so good way, and deep down you usually know it. Having said that, things change quickly in our business, and you really do not want to go negative too early. But there are important issues on the table and decisions to be made, about where you invest your follow-on capital and your time, and “sevens across the board” doesn’t help you to do that. Some firms force rank their portfolios, or have each partner force rank his or her companies; we don’t do either, we just push each other to avoid the banal 7.

This is important for entrepreneurs as well. The most obvious application is in evaluating or hiring your team. GE famously force ranked and fired their bottom 10%. If I thought the evaluation techniques were good enough, I could endorse that; inevitably, they are not. But some flavor of that kind of rigor is vital, to avoid the gentleman’s 7, as it were. I think this can be applied to a company’s pipeline of customers, its funding options, partnership opportunities, etc. Anywhere there are prioritization questions, force yourself to truly separate … it is too easy, and all too human, not to.

All ur commentz are belong to uz

Like most professionals who give some thought to their online profile, I’ve spent some time on Quora in my fields of interest. I’m not a ninja at it, like Suster and increasingly Ehrenberg, but a man’s got to sleep sometime. In response to a question I thought was hilarious [Would it be terrible to pitch a VC with a preso done in all lolcats?], I posted a facetious but well-meaning and not totally ridiculous answer [“just make sure you bring a pen to sign the term sheet. done.”].

If there was any point to my response, and I’d like to think there was, it was a form of applause for a question that gently exposed the ridiculousness of the form of the “pitch”, and encouraged entrepreneurs to laugh at VCs and themselves a little bit. My response got voted up and received a couple of positive comments, but was then deemed “not helpful” and thrown into the oubliette. With some mild chagrin (the stakes here are very, very low), I looked into this and found that it was a Quora staffer who stuffed my answer in the memory hole.

It was with some self-righteous pleasure then that I found the following piece, criticizing Quora for this very practice. It was with much greater pleasure that I noted the killer quote from Molly Ivans, which goes into my bag for later: “The strongest human emotion is neither love nor hate. It is one person’s desire to f#ck with another person’s copy”.

Now, on the merits of this question, I think Quora is wrong, or at least a little off, and will probably tack back to letting the community judge the strength of answers, and letting a little humor creep into things. But that’s actually not the point of this tempest in a teapot. The point is this: if I’m sitting at Benchmark, wondering how my Quora investment is performing, I’m now thinking “Finally, we have some controversy over there! Maybe now the normals will start paying attention.”

We’ve all seen this movie before. It happened with Zynga and Scamville, with Groupon and that retailer who went out of business from an over-abundance of customers (I swear they actually planted that story), with Twitter and their downtime (and more recently Tumblr), and so on. Each of these minor crises, at the time, is touted as the moment each company “jumped the shark”. (The reference, of course, is from an infamous Happy Days episode.) And after each stumble, these companies emerged stronger and kept growing. Arguably, the press and buzz that resulted from each incident actually improved each company’s trajectory.

Here is a chart that helps to illustrate my point:

This is the Google Trends data showing the incidence of search and news relevance of: “Facebook”, “Jump” and “Shark”. During the period which this company has gone from zero to global domination, at an increasing pace, vocal segments of our society and the media have been clamoring for our attention with news of its demise. Whether it’s transmission of personal data, or a failure to penetrate China, or failure to crush Foursquare, or whatever the shank du jour happens to be, there is always someone there to claim that it signals Facebook’s downfall. Of course, there are valid critiques of Facebook and its business model, but the company is not going away, and all of the hysterical predictions to the contrary merely point to its ongoing prominence.

What does this mean for entrepreneurs? As a noted hip hop artist cum super angel once said, “those who have a propensity to hate [for any reason, or no reason], are going to exercise that propensity [regardless of what you do to either draw or defuse their wrath].” (NB: I paraphrase slightly). It seems trite, but it is no less true, to say that it is your success that draws these critiques and therefore it is truly a good sign. Nonetheless, it is sometimes disconcerting to your investors, board members, employees, partners and customers, and you will have to react … just don’t over-react. Make sure what you are doing is 100% clean as a whistle and makes good business sense. If it isn’t, or doesn’t, fix it quickly and with no embarrassment. If you’re confident, just keep keeping on. Your growth will continue, your critics will find more and more casus belli, and your customers will be as happy as ever.

Power vs. Influence

Matt Harris —  November 19, 2010 — 2 Comments

Earlier in my career I worked at a large private equity firm (in my view, one of the great ones: Bain Capital), and for the last 13+ years I’ve worked in early stage venture capital. Those two ways of investing, ie buyouts vs. early stage venture, have lodged in my mind the subtle distinction between power and influence.

As a general matter, private equity or buyout firms purchase 100% of their portfolio companies, while venture firms purchase minority positions (though over time and across syndicates, venture capital ownership in aggregate often exceeds 50%). In one sense, the difference between 25% ownership and 100% ownership is just a math difference, particularly when you consider the various “control provisions” many VCs put into their terms, in practice the difference in governance style is (or at least should be) radically different.

I was reminded of this distinction twice yesterday. The first was in a conversation with a search and HR consulting firm, whom I greatly respect. This particular firm works nearly exclusively with private equity funds, but in this case was interested in working with one of our portfolio companies. It slowly became obvious to me that the firm thought they were in my office to make the sale, ie, that I was positioned to decide to use them for a search at one of our portfolio companies. I hastened to make it clear to them that they were in the wrong office, and that the team at the company would make the decision, and at most I would have input, or influence. The second conversation was with an outside director candidate, where similarly I had to make it clear that while my opinion mattered, ultimately we were looking to the management team to lay out a strategy for building an effective board, with our guidance.

I would contrast this with the typical process at a private equity firm, where quite literally the management teams at the portfolio companies work for the private equity folks. That’s a fine arrangement, and probably appropriate for more mature companies, but that would be a terrible outcome for an entrepreneurial, venture-backed company. Any entrepreneur who wants a “boss”, in that sense, is probably not the right person to execute the kind of high risk, high growth innovation that is the underpinning of a successful venture.

The fact is, there is really no sense in which any of my CEOs work for me. From a user experience perspective, most of the time it presents as though I work for them … most of my job consists of helping them meet their objectives, rather than the other way around. (Though, of course, by helping them meet their objectives I sneakily achieve mine, which is to own good-sized chunks of valuable companies.)

While proudly acknowledging that I don’t have any real power, I do think in most cases I have a reasonably amount of influence. I guess, to paraphrase WHEN HARRY MET SALLY, I am the dog in the scenario above. Management teams clearly have the prerogative to go against any opinions I may have, and all of my good ones commonly do that. But it is the case that the stakes of doing so and consistently being wrong about it grow higher over time. Hopefully, in addition, I’ve gained some level of influence just by having a degree of credibility with regard to certain aspects of building companies in my lane (financial services industries).

Lest anyone read this as a venture capitalists currying favor with entrepreneurs (not that I’m above that…), I should admit that my strategy here isn’t just about being a good guy and empowering management teams as a value in and of itself. I do it because I think it’s more likely to make money. Ultimately, my view is that power and accountability go hand in hand. To the extent to which I, as a director and venture capital investor, am making decisions at or for one of my portfolio companies, I am taking on accountability for the outcomes. To the extent to which I take on accountability, I am removing it from the management team. My view is that accountability shared is accountability lost, and a lack of accountability is the first step on the road to ruin.

Predictions

Matt Harris —  October 20, 2010 — 8 Comments

I think that, sometime soon, people are going to stop making predictions.

Actually, tragically, that isn’t likely to happen. Human beings are seemingly irrepressible predicting machines, in that it is a way to sound intelligent without anyone being able to immediately call bullshit. By the time the future arrives, most people don’t care enough to back-test you. I was jolted into reconsidering this issue by the recent news from England, that they are going to go into austerity mode in order to reduce their national debt. Personally, this feels smart to me, in a “I’m no expert but isn’t balancing your books a good idea?” kind of way, but you can definitely find any number of economists violently committed to either side of the debate.

This is an old story, but it bear repeating: At the start of the year, a stockbroker sends a letter to 1,000 prospective clients, each containing his recommended “best pick” for the coming month. He sends a different ticker symbol to each of 10 groups of 100 prospects. In February, after 5 of the 10 stocks perform above average, he targets those 500 remaining prospective clients, further dividing them into 5 groups and repeating the trick. By June, assuming the same level of performance (ie, 5 of 10 picks perform above average), he has 30-odd prospective clients who think he’s a genius. Rinse and repeat, and you’re in business.

How different is that from Roubini and the rest of the economists out there? The bulls were right for the better part of a decade, until they were horrifically wrong, and the bears have famously predicted 7 of the last 2 recessions. Maybe it was always thus, or maybe it’s newly true, but I think at this point we can conclusively say this: the world is too complicated to predict. There are too many variables to fit in any one model. Just focus on what you know, do a good job, try to add value, say/do something novel, don’t listen to the experts, and you’ll be fine.