Losing In Double Overtime

Longtime readers know that I am a Knicks fan. Or as the Signal group I have with a couple of my kids is called, a “Frustrated Knicks Fan.”

Last night we lost at home in double overtime to the Bulls. That is the third time this season we have lost to the Bulls. Twenty percent of the Bulls wins this year have been against the Knicks.

Last night’s loss was a microcosm of the season and this team for me.

We played hard, we made a couple big buckets to take the game to OT and double OT.

But in the end, a boneheaded play by the player who was keeping us in the game lost it for us.

Fandom is such an interesting emotion.

It is self-torture and yet we enjoy it.

Ugh.

Timing

There is a big difference between being right about something and being right about when something will happen.

Sadly, to profit from being right you either have to get the timing right or you have to hang in there until the timing is right. The latter can be incredibly painful and most investors don’t have the stomach for it.

This is particularly true of short positions. It is not enough to know that something is going to blow up. You have to know how, why, and when.

On long positions, like venture capital investments, you do have the ability to buy time but it requires a lot of conviction and patience and the carrying costs can negatively impact the returns.

Which is why the best venture capital investments are always the right idea at the right time by the right team.

I remember watching streaming video over a 14.4 modem in 1997. Ten years later YouTube nailed that opportunity. Right place. Right time.

A lot of venture capital investors ask “what can go right” instead of “what can go wrong” and that is exactly the right mindset in VC investing. But you also have to ask “when will it happen and why?”

Being Direct

I saw The Gotham Gal’s reply to an email this morning that we were both copied on. I can’t remember exactly what she said but it was something like “I understand, but no.”

No beating around the bush, no letting down softly, just complete and total honesty about where our heads are at on something.

She has taught me this lesson consistently over our almost forty year relationship. I have a tendency to be too nice and leave people with an unclear view of where I am at.

I’ve gotten much better at this over the years as the pain of leaving things hanging has taught me this very important point.

Being clear and direct with people, even if it means upsetting them, is better than being nice and leaving them confused.

Seeing that email reminded me of that and the next hundred emails I replied to got a very direct answer this morning.

Meditation And Distraction

I’ve been meditating for ten to fifteen minutes every day for the past two months. I have not missed a day since I started. I find it to be a wonderful practice which I enjoy and look forward to very much every day.

I am experiencing a number of benefits but the one I am most cognizant of is an increased ability to avoid distraction in a conversation or some other situation where I need to be focused.

I’ve always been good at being focused, sometimes to a fault. But I also find my mind wandering in situations where I am losing interest and that’s obviously very bad.

At the core of my meditation practice, as it was taught to me, is bringing my mind back in focus and back to the breathing. It is that thing “snapping back into focus” that I do regularly in my meditation practice that has helped me so much with staying present throughout the day.

Meditation is like repetitive exercise of the focus muscle in the brain.

So if you are having trouble being present in situations you want to be but can’t, I would strongly recommend trying meditation. It’s helped me with this and I imagine it will help you too.

Taking Money “Off The Table”

One of the hardest things in managing a venture capital portfolio is managing your big winners. A big winner can dwarf the rest of the entire portfolio and you end up sitting on enormous paper profits that you can’t get liquid on. I realize that this seems like a great problem to have, and it is, but it is still a challenging situation.

We faced it in Twitter in 2010/2011/2012, in the years before Twitter went public (which happened in the fall of 2013). We had bought 15% of Twitter for $3.75mm in the first VC round in 2007 and though we had been diluted down a bit in subsequent rounds, we had a very large position that was worth in the neighborhood of $1bn by 2011. Our entire fund was $125mm and so we were sitting on a position that was worth 8x the entire fund. It was a wonderful situation in many ways but I was nervous that macro events or a setback at Twitter could go against us and the position would go down in value, possibly significantly.

The way we managed this issue is we sold a portion of our position in two secondary transactions and in connection with those sales, I stepped off the board, making room for an independent director who would be helpful as the Company scaled and got ready to go public. We sold about 30% of our position in those two secondary transactions for about $250mm and returned 2x the entire fund to our investors.

That allowed us to “chill out” and hold the balance until the IPO, which had a customary 180 day post IPO lockup. After the lockup came off, we distributed the balance of the position, returning another ~$700mm to our investors.

Though we sold stock in the secondary transactions at lower values than the eventual IPO, I have never regretted doing that and believe that it was the right thing for us to do for many reasons.

We have done similar things in many other situations including Zynga, Lending Club, MongoDB, and a number of other investments. We typically seek to liquidate somewhere between 10% and 30% of our position in these pre-IPO liquidity transactions. Doing so allows us to hold onto the balance while de-risking the entire investment.

I was reminded of this topic when I saw the news that Benchmark, First Round, and Menlo sold between 15% and 50% of their positions in Uber to SOFTBANK. I think they all acted rationally and responsibly in doing that. It does not mean that SOFTBANK is making a mistake purchasing the shares. There are many reasons to believe that SOFTBANK made a good deal. But if you look at First Round, for example, they have a position worth $2bn or more at the $50bn valuation of the SOFTBANK tender. I don’t know the exact details, but I believe First Round’s fund that holds Uber is less than $100mm. So they returned something like 8x the entire fund and still hold the majority of their position. That was “well played” in my book. Same with Benchmark. Same with Menlo.

Taking money off the table is smart portfolio management. It is very different from selling your entire position, which could be brilliant but is equally likely to be a mistake. Selling a portion of your position, returning a multiple or two (or eight) of the fund, and holding on to the balance works out for you no matter which way the position goes in the future. If the position blows up, you got a lot out and booked a huge gain. If the position goes up significantly, you make even more money on the part of the investment you retained. If it goes sideway, you got a little bit out early. It is a win/win/win pretty much every way you look at it.

Which takes me to crypto (naturally). If you are sitting on 20x, 50x, 100x your money on a crypto investment, it would not be a mistake to sell 10%, 20% or even 30% of your position. Selling 25% of your position on an investment that is up 50x is booking a 12.5x on the entire investment, while allowing you to keep 75% of it going. I know that many crypto holders think that selling anything is a mistake. And it might be. Or it might not be. You just don’t know.

Video Of The Week: Vitalik Buterin

In honor of Ethereum trading (briefly) at north of $1000USD this week, I thought we’d hear this weekend from Ethereum’s founder Vitalik Buterin.

This is an interview that he sat for in October at the ETH Waterloo event (where, among other things, CryptoKitties was born).

I’m Having A Meltdown

So the chips we use in our personal computers and cloud computers have some newly discovered security holes. One is called Meltdown. The other is called Spectre.

My first reaction upon hearing the news yesterday was “so what do we do about this?”

The answer is you can’t do much on your own.

For Meltdown, we need the operating system and hardware manufacturers to issue patches and firmware upgrades. I am sure they are furiously working on them.

The Verge has a good piece on what we can and should be doing about this.

Here’s the key part of that post:

  • Update to the latest version of Chrome (on January 23rd) or Firefox 57 if you use either browser
  • Check Windows Update and ensure KB4056892 is installed for Windows 10
  • Check your PC OEM website for support information and firmware updates and apply any immediately

I expect Apple will be issuing an update shortly for their OS.

Apparently Microsoft, Google, and Amazon’s cloud services are already patched for Meltdown.

As for Spectre, apparently there are no fixes for it as of now, but it is also a lot harder to implement hacks using that one.

Finally, my partner Albert has some optimism about all of this. We should expect some good to come of this mess.

Some Thoughts On Checking References

We do a lot of referencing in our business. We certainly ask around about a team before investing in them. But we do even more referencing post investment when we help the founders and management of our portfolio companies build a team. Investors often have access to references that founders and management don’t. So we can add a lot of value to the hiring process by reaching out to our network and asking about people.

The thing I have learned in thirty plus years of making reference calls is to pay attention to how things are said more than what is said. And pay particular attention to what is not said.

I have also learned to call people instead of sending emails. Most people don’t want to put negative things in writing, but will do so on the phone, particularly with someone they trust.

It is also helpful to talk to people with knowledge of a situation but not handcuffed by it. For example, a CEO may not feel comfortable saying something negative about someone they transitioned out of their company, but a co-worker might be. Or a close friend of a co-worker might be.

I don’t mean to suggest that references are all about finding out the negatives. You should also seek to hear what someone’s strengths are. Most people are good at some things and not so good at other things. Getting a sense of strengths and weaknesses and making sure the person is a good fit for the role is what referencing a person is all about.

But I do believe strongly in hearing the negatives when hiring someone. If you can’t find anything negative about someone, that is a red flag to me. Often negatives in one situation can be positives in another.

If someone says to me, “they were great when the company was small but got lost as the company scaled” that means that person is great at the very early stages of a company’s development. And that is often the most valuable time in a company’s life. Finding people who can operate in that environment is not easy. So I like hearing that about people. I know where to orient them.

I am not a fan of calling the references on someone’s list unless I know those people well. What I do instead is figure out who I know well that knows the person or knows someone who does. And then I reach out and call them. It’s more work but it yields much better results.

I am also a believer in having a group of people do the referencing. Getting multiple angles of attack on a situation is valuable and multiple people will have a much bigger network of close relationships to leverage.

I am not a fan of referencing by checklist questions. I have been on the other end of calls where the person is reading from a list of questions. That strikes me as an odd way to do a reference check. I think a conversation where you can dig into the meat of the issue in a natural way works a lot better. At least it does for me.

Finally, I think you should wait until you have a good sense of the person and are seriously considering them for the role before doing the references. The more information you have about the person and their potential fit for the role, the better your calls can be. But you don’t want to wait too long. If there is a big red flag on a candidate, you want to know that before you spend too much of your time and their time on the hiring process.

Referencing is an art more than a science. Getting people on your team and around you (on your board, your advisors, your investor group) who are good at it can be super helpful. And don’t forget to reach out and use them in your hiring process. It can make a huge difference.

Email Bankruptcy

I saw this tweet in my timeline yesterday and thought “what a great way to start the new year.”

I had 1,625 unread emails in my inbox this morning.

I have archived all of them that came in during 2017.

If you sent me an email in 2017 and did not get a reply, you won’t.

I am starting the year fresh. It feels good. Thanks for the suggestion OoTheNigerian.