Posts from life lessons

Market Meltdowns

Today is a tough day in the financial markets. Who knows where we will end up at the end of the day, the week, or this month. We’ve already seen the major indexes give up around 20% of their value in a few weeks with today’s down moves at the opening.

I’ve seen this movie before. I had just started working in the venture capital business in 1987 when the stock market crashed 23% on “black monday.” There was the Internet stock meltdown in 2000 when the internet sector went down something like 80% over that bear market. And then there was the financial crisis in 2008.

I don’t know if we are in for another of those moments or something else.

But I do know that good companies can be bought at very attractive prices when markets meltdown. Back in 2008, I was blogging my purchases of Apple, Amazon, and Google during that crisis.

I went back and looked at those blog posts this morning to remind myself of what it was like back then. In this post, I mentioned buying Apple at $90, Google at $320, and Amazon at $40. Those turned out to be fantastic prices when the market bottomed and then started going up again. I eventually sold those positions which of course was a mistake. But even so, it was a great trade.

I was buying these three great companies at less than 10x projected annual cash flow. And they went on to increase their cash flow enormously over the next decade.

Capital markets sometimes put out the for sale sign and if you are patient and wait for bargains to emerge, they will do that.

We are a long way from being able to buy Google and Apple at 10x projected annual cash flow and I am not suggesting we will get to those levels.

But I do know that good companies with resilient businesses and strong balance sheets will survive these occasional crises and that they can be bought with confidence at the right time.

I also know that market meltdowns cause a lot of unwinding of risk and leverage. This is a painful process and the losses can be enormous for investors and financial institutions. That impacts all capital markets, including the private markets.

We may be in for a downturn in all markets and if you have a business that is dependent on the capital markets (ie you are losing money), then you need to be very mindful of that and make sure you are making the financial moves to preserve your cash. On the other hand, if you have a business that is not dependent on the capital markets because you are profitable and/or have a very strong balance sheet, then this environment could be an opportunity to play offense. But you really need to figure out which camp you are in and plan accordingly.

I hope that this crisis will end quickly and that things will return to normal soon. But hope is not a strategy. So we all need to be clear eyed and calmly assess our situation and develop a strategy that gives us the best chance of success.

#life lessons

The Venture Capital Math Problem Revisited (aka How Could You Be So Wrong?)

Back in 2009, I wrote a post called The Venture Capital Math Problem.

I was reminded of it yesterday when I saw this tweet:

In that post, I argued that the venture capital business could not sustain more than $20bn a year of new capital coming into it and continue to produce good returns to the investors in VC funds.

The venture capital business has been raising north of $50bn per year for much of the last decade and so far, the returns continue to look quite good.

So what did I get wrong in my attempt to solve the venture capital math problem?

I think it set the problem up correctly but I got one assumption very wrong and it was this:

And I assume that the biggest exit each year is $5bn. Yes, it is true that some venture investments turn into businesses like Apple, Google, Microsoft that are worth $100bn and more. But it is also true that most VCs are long gone from those deals before the valuations get to that level. So for the sake of solving this problem, I’d assume the largest exit each year is $5bn and then you have a power law distribution of another 999 deals.

……..

I’ll assume that the biggest deal, $5bn, represents 5% of the total value of all 1000 exits and that the total value of all exits is $100bn per year.

That was off by maybe an order of magnitude or more. Uber IPO’d at $70bn and still trades at north of $50bn. Zoom is now trading at $32bn. Out of the USV portfolio in the last decade we have Twitter at $26bn, Twilio at $16bn, and MongoDB at almost $10bn and a number of high quality public companies trading in the single digit billions.

I suspect that last paragraph that I quoted should read “the biggest deal, $50-100bn, represents 5% of the total value of all exits (likely north of 2000, possibly a lot more) and the total value of all exits is $1-2 trillion per year”

By that math, keeping all other assumptions, formulas, and math the same, the max that can be invested in VC is maybe as much as $100bn per year and we are still well below that level based on the numbers I am seeing.

So what did I learn from this mistake?

I learned that you can’t assume that the past is a predictor of the future. And I learned that it is helpful to ask yourself “what could go right?” instead of “what could go wrong?”

It is also true that the last decade has been one of incredibly low interest rates/cost of capital, and conversely very high PE and revenue multiples on growth stocks. And we have seen companies like Uber, Facebook, etc stay private much longer so the VCs have exited at much higher valuations than was once the case.

We cannot assume that will continue either and it may well be true that the $50bn-$100bn that is going into the venture capital business right now will not get the same returns that the $20bn that was going into the venture capital business in 2009 has gotten.

But regardless, I was dead wrong in that post back in 2009 and I have learned from it. As I have aged, I tend to underwrite to the upside not the downside. That has not been my nature but I have learned that it works better, particularly in the VC business.

Finally, I do not regret writing that post one bit. As I replied to Ben’s tweet when I saw it:

#economics#life lessons#VC & Technology

The Zoom Room

A year and a half ago, I converted my office at USV from a classic office with a desk to a small conference room with a couch, a chair, and a display for videoconferencing. I call it my “zoom room.”

It looks like this.

You can’t see the display because it is on the wall that the couch is facing. But that is my zoom room office at USV.

I like it so much that I have recreated it elsewhere and my friend Brad Feld gave me a tip that I am now using which is to have two displays on the wall, one for the people you are meeting with and one for the presentation material. That is a big improvement to version 1.0 which I have running at USV.

My day is usually all about meetings. I meet with people in conference rooms, I meet with people in my zoom room, and I meet with people on Zoom. So I don’t need a desk and I don’t need a traditional office anymore. The move to this new office model has been very positive for me.

#life lessons

Mass Transit In LA

This is the sixth winter we have spent in Los Angeles. One of the things I have had the hardest time getting used to about life in LA is all of the driving.

But starting last year, I found myself using the LA Metro system a bunch. The catalyst was going to Lakers and Clippers games at the Staples Center. I just could not stomach sitting for up to 90 minutes in traffic to attend a basketball game. Instead I would hop on the Expo line in Santa Monica and arrive at the Staples Center 35-40mins later. On the way home, I would grab a ride with a friend or Uber or some combination of both as traffic heading west at 10pm is almost non-existent.

But then I suggested to The Gotham Gal that we Metro it downtown for dinner and Uber it home. We did that once or twice.

This winter, I have already taken the Metro half a dozen times and I am writing this post on the Metro as I’m taking it to Pasadena from Santa Monica today.

The Metro is not as convenient as the NYC Subway. There are fewer lines, six in total, and I still need to drive to get to it from our house.

But being able to read, work, text with my children, and whatever else I might want to do instead of driving, is fantastic and makes LA a bit more like NYC for me. Which is a good thing in my book.

#life lessons

Turning It Off Vs Dialing It Down

Today is one of those days when everyone gets back to work after a time off. This holiday break was a particularly long one given that Christmas and New Years came in the middle of the week. So many of us are getting back to work after a particularly long break.

I am a huge believer in down time. I think everyone needs a break to step away from work and rest a bit. I also believe that time away from work clears the head and reveals things that are not always clear in the thick of things.

But I have struggled over the years between the choice of turning everything off vs dialing things down.

It is hard to get real rest and a clear head that comes with new insights if you don’t turn everything off and really disengage.

But coming back from time off when you truly disengaged is harder. There are more emails to answer, more people waiting at your door for answers, and so on and so forth.

I tend to dial it down when I take time off. I try to stay on top of important emails, memos, decks, presentations, scheduling efforts, and the like. I can usually keep that to an hour a day in the morning and another hour at the end of the day.

That makes days like today, when everyone gets back to business, a bit easier for me.

It does come at a cost as I don’t truly disengage, but I have found it to work better for me over the years. That said, I appreciate it when colleagues and others take the opposite approach and really disengage. There is real value to that approach too.

#life lessons

Annual Year End Predictions

As I prepare to write my annual year end posts (what happened and what will happen), I have been reading similar posts by others.

This part one of two posts by Alex Danco is good. I am waiting for the second one to drop now.

The “what happened” post is easier to write but still very helpful to me. It helps me close the door on the year and understand it at a macro level.

The “what will happen” post is harder to write, I get it wrong more than right, and it is embarrassing to look back and see how off I was.

So it is tempting to stop doing it. But I think that would be a mistake.

It is useful to me to try and look into the crystal ball and see the future. It pushes me to get out of my comfort zone and imagine new and different things.

So I keep doing it, largely for myself, and I publish it to keep me honest. Your mileage may vary with it and so take it with a big grain of salt.

I am glad that others engage in this practice as well. It helps me engage in my practice. It is one of the many benefits of people powered publishing.

#life lessons

Smart Home Standards

Yesterday, Apple, Google, and Amazon annonuced that they are teaming up with Zigbee and creating a working group called Project Connected Home Over IP. The Verge has a good post on what is going on here and why. And in that post they show this great xkcd comic:

I am hopeful that something good and useful will come of this new partnership between Zigbee and the largest tech companies in the world.

Over the last two weeks, the Gotham Gal and I have been moving into a new home we built and we have had moments of joy (like when we easily programmed our cars to open and close the garage doors) and pain (when we could not use a Nest thermostat in our office because “that HVAC unit doesn’t talk to Nest”).

When I sit back and compare this move-in experience to one we had twenty years ago, when smart home technologies were new and we were early adopters, I can see how far we have come. You can make a new home “smart” so much less expensively and easily now.

But we are still very far from where things should be and will be.

I am hopeful that some new open industry standards can and will help.

There is nothing wrong with going from 14 standards to 15 standards if the 15th standard is actually useful. And it may well be that the other 14 are too.

#life lessons

Having Kids

Paul Graham wrote a blog post this week about having kids. I read it with interest because I have long noticed that having kids has had a profound and positive effect on Paul. So I was interested in what he had to say on the topic. I am not going to summarize what he said, you can read it here, but suffice it to say that he has found it to be an very positive experience.

The Gotham Gal and I had children fairly early in our marriage and we had three children before I started Flatiron Partners in 1996. That was mostly driven by Joanne as she pushed for having kids early and I went along with that plan.

When founders and other executives ask the Gotham Gal when is the right time to have kids, she always says “now” and explains that there will never be a good time to have kids so you might as well get on with it.

In my experience, that is good advice for a lot of reasons. Having young children is demanding and the younger you are, the easier it is to manage all of those demands.

I also believe that having children teaches you things you can’t learn any other way and that those lessons are incredibly valuable in other parts of your life, including your work life.

In my line of work, I have to work with hard charging willful entrepreneurs who won’t take orders from anyone (nor should they). Having children and learning how to work with them when we are not on the same page has helped me a lot with entrepreneurs.

Children have taught me to be patient, to care, and be present (something that has been a challenge for me over the years). Those are things that are extremely valuable in all walks of life.

But certainly the best thing of all about having kids is the children themselves. I have a lot of relationships in my life, but the relationships I have with my wife and children are the very best ones. Just getting a text from one of my kids is often the highlight of my day.

So if you are struggling with the question of when to have kids, I side with the Gotham Gal on this. Do it now. It will be the greatest thing you do and it will change your life. Like it did for Paul.

#life lessons

Practicing Patience

We went to the Knicks Celtics game last night.

For three and a half quarters the Knicks and Celtics played a tight game and the game was tied at 95 with six minutes left when Coach Fizdale called a time out.

The Knicks came out of that time out befuddled and turned the ball over on three straight possessions which ultimately led to 12-0 run by the Celtics and the game was over.

As we walked out of MSG, I was depressed. More losing.

But my son Josh had a different take. Dennis Smith Jr is finally coming out of his early-season slump. Kevin Knox had a good game after taking a beating in the press recently.

Losing is hard. The Knicks are 4-16 so far this season. There is not much joy in the Garden right now.

But I appreciate Josh’s optimism. By the time we had gotten to dinner, some of it had rubbed off on me.

Patience is hard. Being a Knick fan is great practice.

#life lessons#Sports

Grinding

It is tempting to search for the one magic move that will make everything better. A new VP of Sales. A new database layer in your tech stack. A new brand for your company. Moving everything to the cloud. More capital in the business.

But it is rarely one thing that a business needs to succeed. It is often a little bit of everything.

Back in the early days of Twitter, we could not keep the website and API up. We would hire advisors and they would recommend something new and we would try it and we would still go down. It was terribly frustrating and threatened the business.

During this period of instability, Twitter purchased a search engine called Summize. Summize was a small team of engineers, most of whom had come out of AOL.

After we cut the deal to acquire Summize, I asked Jack Dorsey, who was running Twitter at the time, how we planned to integrate the Summize team. He looked at me and said “we are not going to integrate them, they are going to integrate us.” And Jack made Greg Pass, Summize’s engineering leader, Twitter’s engineering leader.

It was interesting to watch Greg and the Summize team tackle the “fail whale.” Instead of searching for a magic solution, they instrumented the entire system and just started rebuilding every part that was about to break.

It was a slow and steady approach. It took time. But within six months (or thereabouts), we had a much more stable system. And after about a year of this approach, we had mostly said goodbye to the fail whale.

Grinding isn’t very satisfying. It is hard to stand up in front of everyone and say “we are going to fix things around here bit by bit with a lot of hard work.” Big flashy moves are an easier sell most of the time. But they don’t work nearly as well and are prone to complete and abject failure.

If given a choice between a flashy operator or a grinder, I will take a grinder every time. It is a much higher percentage bet. It requires faith and patience and the results are sometimes hard to see. But if you look at the results from grinding it out over a long enough time frame, you can see the power of that approach.

#entrepreneurship#life lessons#management