Good Is Good: Inside the Dangerous Mind of a Venture Capitalist
Thursday, March 01, 2012
Why Math Matters
To be honest, I didn’t think all that much about math until I was in one of my first business school classes. The guy at the front of the room—one of the world’s top experts on the statistical modeling of the spread of HIV-AIDS—started filling the chalkboard with numbers and symbols, all having to do with the chances of contracting a then-still-deadly virus during unprotected anal sexual intercourse.
That got my attention.
Ever since then I have thought of math like a language, not unlike French or Chinese. The difference is that we all live it and speak it often without knowing how important it is to our daily lives.
As a man, I have gotten very far in this world by realizing that simple fact: Math is wicked important, whether you are looking for a date or trying to make your first million or trying to save the world from an epidemic.
Staring at all those complex equations about anal sex, I realized I am pretty good at math. My brain is wired to think that way. But the most important revelation I’ve had in the 20 years since is that complex math is useless. What really matters is what is simple—stuff like multiplication and addition.
Any business plan can be reduced to a set of numbers for revenue, expense, and profit. To calculate those requires addition and subtraction. You can look at growth rates, which require a bit of multiplication. But the most important issue is profit—how much you have now, how much you expect to have in the future. And based on what you expect to have in the future, what that worth is now.
People talk about multiples of profit, or cash flow, as a way to value companies. That multiple is a shorthand way of expressing how fast the market believes profit in that company will grow in the future.
That’s the sum total of the math I use as an investor, venture capitalist, and man.
What is my belief about how profit (or AIDS, or unwed mothers, or the incarceration of black men) will grow in the future? How does that compare to what the market is saying? And what can I do to affect that rate of change?
Math is crucial, like it or not. Just don’t make it complex. Keep it so simple you can do it in your head.
It’s All About People, Stupid!
Let’s get one thing straight. Great leaders are really good at two things: having a very specific vision of what they want to accomplish, and having the ability to attract amazing people who are way smarter than they are to get those accomplishments done.
There’s a misconception that great leaders should be macho, brilliant, and arrogant. Nothing could be further from the truth. Humility is absolutely required, particularly with regard to your own limitations. It’s not what you do know that will kill you, but what you think you know but are delusional about.
So, in looking at a business idea as a venture capitalist, the most important question is about people. Who is the leader? Is he or she a straight shooter? Does he or she have a very specific vision? Is that person charismatic enough to attract people who are much smarter than he or she is to get the job done?
Great people in a bad business will find a way to thrive. Bad businesspeople with the greatest idea on the planet will screw it up.
When it comes to goodness, I’ve always thought it to be an inside job. We each have to figure it out for ourselves. But to fix the inside you have to look outside for examples of people who have the answer to whatever problem is vexing you as a guy: depression, addiction, marriage, fatherhood, meaning.
When it comes to who is going to inspire you to deal with the inside stuff, you really can’t judge a book by its cover. In fact—for me, anyhow—it’s been men who look incredibly different than I do—a Hispanic prisoner in Sing Sing, a combat photojournalist, a gay victim of abuse—who have been the most important in my journey so far.
There’s one thing that’s common between great business leaders and men who have helped me figure out as least part of how to be a good man: They tell the radical truth about themselves. There’s no sugarcoating, no denial, no covering up out of self-pity or embarrassment. They rip the Band-Aid off and get down to the important stuff.
So I try to do the same, whether helping to run a bank in Mexico or talking about my own life to men who have lost their way.
Risk is Your Friend
In the investment world, there are two main kinds of risk: “beta,” which refers to the risk associated with the overall market, and “alpha,” which refers to idiosyncratic risk that is uncorrelated to anything but you. I love alpha and hate beta.
The world is a risky place. Life is a risky endeavor. That’s why it’s so darn cool. The sooner you come to terms with that, the better off you will be. Hiding under a rock really won’t do you much good. I have friends who are stockpiling gold to protect against the coming apocalypse. “What the fuck are you going to do with gold after the world blows up?” I always ask them. “Shave off slivers of your gold bullion to try to persuade food rioters not to kill you? Not sure that is really going to work.”
Hiding under a rock to avoid risk doesn’t work.
One of the benefits of having lived a life with plenty of failure, both personal and professional, is that I am not afraid to take risk. Many people don’t stick their neck out because they are afraid to lose what they have. In poker it’s called “playing tight.”
But for long stretches of my life, I quite literally have had nothing to lose. If I flip a coin, it’s heads I win or tails I lose…and then I dust myself off and find another coin as fast as I can.
I’ve often said after a particularly successful event in my business career, when the whole world seemed to move in my direction, causing a lot of wealth creation, “It’s better to be lucky than smart.” And I actually believe that. Luck does play a part in what happens to you in business and in life; there’s just a ton of shit that is out of your control.
But there is one way to make sure you are never going to be lucky: to get so damn smart you shoot yourself in the foot.
I was the CFO of a $2 billion company with 5,000 employees. I liked to say that I never took an accounting class (that’s not quite true), wasn’t a CPA, and certainly didn’t know debits and credits. Most of the time, when I invest in a company, I know precious little about the industry—and what I do know I try to forget.
There’s a concept in meditation of looking at the world with fresh eyes—meaning with no preconceived notion of what you will see. I try to apply that to my business career and to my life.
In business, the worst thing you can do is to know too much; worse yet is to know what everyone else thinks about a certain business area and decide to follow him or her like a lemming over the cliff. It’s a recipe for disaster in that it shuts off your ability to make real-time judgments and think creatively.
So I try to stay stupid. I don’t read too much about what other people are saying about a particular industry, even after I have made a significant investment. I try to keep my own eyes fresh.
That’s true in life too. I try not to listen to what strangers are saying about me or about the things I care most deeply about. I try not to carry what happened yesterday into today. I try to wake up every morning stupid, fresh, ready to see what is going on right in front of me, with no preconceived notion of what that might be.
I no longer have an office outside the home. I have a study in our attic that my wife designed complete with a day bed. My greatest pleasure is dropping my kids off at school and then coming home, going up to my study, and pretending to read a book while I drop off for a morning nap.
Come to think of it, I haven’t done that in a while. Gotta get back to that.
Laziness as an investor—and as a man—goes along with this idea about surrounding yourself with good and inspiring people. Manhood and leadership in our culture are so wrapped up in doing. I would argue that success in both realms is just as much about not doing.
“But what if you have big aspirations as a man or leader of some big business?” you might ask. My response is that being lazy is even more important. You aren’t possibly going to do it all yourself, and the more you try, the deeper into the woods you are going to get.
The key to success is to set a well-defined vision of where you want to get, find amazingly good people to tackle big chunks of achieving that success, and get the fuck out of the way.
I am pretty bad at actually doing pretty much anything. But I am good at keeping track of whether or not people who are working for me are doing what they aspire to, holding them accountable, cheering them on, and busting their asses when appropriate.
Perhaps more important is my experience that things never go the way they are supposed to. Inevitably there are these key moments when the success or failure of my endeavors will be determined by how I respond to an unanticipated but critical decision, generally forced upon me with a time fuse and only partial information.
If I have my hands in the minutiae of actually getting stuff done, constantly over everybody’s shoulder when my input really isn’t needed, I will not have the ability to get the big decision—the one that will determine my fate—right. I might not even see that there is a crucial decision that must be made to save what we are trying to do.
So I delegate like hell—to the great annoyance of everyone from my wife to my business partners—and take lots of naps. Not because I don’t care, but because I care probably too much. I need to stay out of the way of the people I have asked to take responsibility for getting real shit done. More important, I need to get ready for those critical moments that need heightened attention, throwing my whole being into trying to figure out the big picture issue that must be resolved correctly—even if that requires a ton of pain—in order to get to the Promised Land.
I know that goes for business, but I think it also goes for pretty much any manly endeavor. Bide your time. Delegate. Rest up. Keep your mind clear of detail. When the time comes, you will be all there for what matters most: a sick kid, a friend in need, or a marriage on the rocks. You’ll know when it’s time to get off the day bed and bring your best self—the thing that truly does matter.
Metrics and Reporting
Okay, this sounds really boring but it’s really not. It’s actually the key to pretty much everything in life: Things that are measured consistently, if that measurement is focused on regularly, will improve.
But here’s the hardest part: What do you measure? What is the metric that is the key to succeeding in a business? Or to finding happiness? Or being a good guy?
Very often, when I go into a business situation there is a ton of data—in the old days, it was stacks and stacks of paper; now, it’s massive files stored somewhere in the cloud. But no one even really reads all that shit. They certainly don’t use it to make decisions. Most likely, they either don’t pay attention to what information they do have, or they make faulty assumptions about what metrics are the most important.
In figuring out what metrics are really important, I start by trying to link piece by piece a causation chain between what things are happening in the business—or my life—and what outcome I am looking to achieve: revenue growth, profit, subscribers, PVs, happiness, goodness, meaning.
The damnest thing is that often, even once you figure out the right variable, people have a tendency to want to measure that one metric 10 different ways. When I took over as CFO at The Providence Journal Company, we had 12 television stations, a newspaper, a million-subscriber cable business (with 26 franchises), and a handful of startup businesses like Peapod and the Food Network. Each one had its own accounting system, so if I wanted to know what “cash flow” was for a particular period of time, I literally had to think which of these 20-plus accounting systems I was talking about because the very definition of the term varied one to the next. To do this, the first thing I did was go through the massive headache of getting everybody on the same accounting system so I could then build reliable consolidated financials that made any kind of sense.
Here’s how the thing that is measured will improve. In most organizations, there’s information distortion both in terms of what’s important and how that metric is reported to stakeholders.
“Management is always complaining and they don’t see what’s really going on.”
“Cheerleading inside a house that’s on fire isn’t going to get us anywhere.”
Media businesses are valued based on cash flow. That’s an objective fact. Once the metric is measured in a consistent and uniform manner, it’s the essential role of leadership to report the actual undisputable numbers to all stakeholders, set goals to improve that metric, and report back on actuals vs. goal through time.
It’s always amazing to me how powerful the positive impact is when data clutter gets reduced to a single crucial metric and a big group of people focuses on doing their part to improve it—whether cash flow, pageviews, or revenue. And a reward to everyone, from Vice President down to admins, if you make the number always helps too.
When it comes to manhood, I still don’t know the key metric for anyone else, but for me, it is honesty—and that is not a black or white measurement. I can always go deeper into the truth and see more of what I had been afraid to look at before.
You Always Need an Exit Plan
The real bitch about venture capital, particularly seed stage investment capital, is that you have no way out. Quite often you are investing in an idea that is a black hole until and unless you’re able to make something out of it. That doesn’t mean an exit plan isn’t essential, just provisional.
In investment terminology, being able to sell an investment quickly is called its “liquidity.” When you invest in a venture company, liquidity generally comes from either taking the company public when it’s big and profitable enough, by recapitalizing it with debt (and dividending the cash), or, most often, by selling to a bigger company that sees what you have done as strategic.
“Look forward and reason back,” a game theory professor once told me. And that’s the key with investing in venture and life in general.
Even if the exit is way off and not even a sure thing, you have to have a plan to get there. The only way to get a company to the point at which it will be strategic to a big industry player is to know exactly what characteristics will make it such, and then put in place a plan to build that company. I’ve been involved in companies where we knew what we had to do to get the exit and built that foundation from day one, but it took us a decade to get there. The key was never taking our eye off the ball.
The other kind of “exit” is a lot less fun. It happens when despite everyone’s best efforts, a company hits the wall at full speed with a good old-fashioned splat. I’ve shut down more companies than I care to remember, taking a full write-off. Zilch, zippo, donut.
You can look forward and reason back all you want and sometimes the answer is simply, “There is no way in the world this will ever work.” The tough, manly thing to do at that moment is to face reality and pull the plug. Denial, or cowardice, just increases the pain later.
All of this, I would posit, applies to life—not just the venture business. Aspire to a vision of the life you want to lead in the future. Have a plan to get there. And if things go so far off the rails that it is never going to work, have the balls to cut your losses. Take responsibility for the mistake. Move on. Try something different.
No Woulda, Shoulda, Coulda
If there is one thing I hate, it is excuses. Failure is part of life. Saying that if only someone else had behaved differently, or some event hadn’t occurred, or you had known what you know now, you would have succeeded instead of failing is just missing the entire point. Life, in my opinion, is about preparing, about doing every single thing you can to get to where you are going, giving full effort without wasted motion, and then letting the chips fall where they may.
My rowing coach in college, who did more than any other single person to teach me about manhood, business, and life, used to talk about Spartan warriors. “They came back with their shields if they won a battle or on top of them if they lost,” he’d tell us. “But they never came back without their shields because that meant they had given less than everything.”
In business, this whole idea of Woulda, Shoulda, Coulda often gets translated into an internal vs. external locus of control. Someone who sees the world as being controlled externally doesn’t believe there is much that can personally be done to determine the outcome of a business. When things go wrong, that person blames others. Someone who assumes an internal locus of control believes that he or she can influence the outcome of just about anything—and if things go wrong, it’s nobody else’s fault but one’s own.
One of the things that you learn as a recovering addict is that the really bad shit that happens to you in life recurs until you get to the bottom of why it’s happening. You can make rows and rows of girlfriends, marriages, business situations, family interactions…and when you strip down, you can see the patterns of behavior and problems repeating over and over again, albeit with different people.
The truly humbling part is to realize that the pattern might be the same, that the people involved might be different. But one thing is the common element: the addict who is repeating the bad marriage or getting fired at work or fighting with family members. The only way out of the box is to fix the person causing the problem—to move from an external locus of control (“It’s all her/his/their fault”) to an internal locus of control (“I’m doing this to myself”).
There are things you cannot control as a businessman or as a man. But there’s a ton you can. Do everything possible to prepare for that which you aspire to become. And if you win or lose, you will have peace for knowing you did not run from the battle having lost your shield. You stayed and fought with nobility no matter the ultimate outcome.
Timing: Better too Early Than Too Late
When you are sitting on a big profit, don’t get greedy. Sell when you can. Many things in life are volatile. What goes up will go down. And if you happen to catch a wave so things look too good to be true, they most likely are.
This applies to trading as well as life. If you started out thinking that you were the only one to see a certain trend, or back a long shot company, only to have the whole world come around to your point of view, don’t waste time patting yourself on the back. Get the fuck out of dodge. Sell, sell, sell.
In quite a few situations I have been involved in, a company went from certain death to a highly valued darling worth hundreds of millions or even billions of dollars. The natural reaction when the world is telling you how right you are is to believe them. Dangerous. Don’t ever believe it when people start telling you that you were right all along.
I’ve sold companies when I could have gotten more if I had been more patient and sold shares of public company stock before they peaked. But in each situation I had already created a very handsome return and waiting for the peak would have put my perilously close to the cliff when sentiment turned and instead of too early it became too late.
I helped save a company from bankruptcy called Art Technology Group in 1997, investing at $0.26 per share. Two years later the company had gone public and the stock was trading at $52. Six months after that it was trading at well over $100. I sold every last share I owned. The stock peaked at close to $200 before eventually trading all the way down to $0.50 when the Internet bubble burst (close to 10 years later the company was sold to Oracle for $6 per share).
I missed some of the upside by selling early, but I missed a shitload of downside by not drinking the Kool-Aid and sticking around for the collapse.
You Gotta Be a Contrarian to Succeed in Life
Here’s the thing about business, and, I think, life: if you do what everybody else does you are gonna get run over like a chipmunk in front of a Mac Truck. Crowds all tell themselves the same reinforcing thing until someone raises their head and says, “No, you’re all fucking wrong!”
See the theory about the world being flat (as an aside my favorite book of all time is The Structure of Scientific Revolution by Thomas Kuhn in which he describes the way paradigm shifts occur even in the hardest, most “objective” of sciences). The guys sailing across the Atlantic didn’t fall off the edge of the planet. They discovered the New World.
If you invest where everyone else already has his or her money, when the fad fades and everyone leaves it’s kind of like a game of musical chairs. You become the odd man out. It’s very hard to make money doing what everyone else is already doing.
In order to be successful as an investor you have to act in a way that’s contrarian to the rest of the world. That doesn’t mean just by doing the opposite of popular sentiment you will succeed. Popular sentiment is most often right and by doing the opposite you will get wiped out.
But if you take a position that popular sentiment is wrong, based on thoughtful analysis that allows you to see something everyone else is missing, and you turn out to be right—that’s were fortunes are made. You buy something for a penny that turns out to be worth a hundred or a thousand times as much.
Understanding this dynamic puts a wise investor in the role of constantly questioning popular sentiment to see where it might be wrong. I think that’s true of the good man as well. To be good you not only have to question what is expected of you but develop an original manhood that is authentic and to some extent contrary to the external forcers at work to make you comply with convention.
Why Women Make Better Business Partners
Here’s the thing: men can be assholes. I know. I am one (a man and very often an asshole). I can’t completely explain but over the stretch of a 25-year business career my most trusted advisors, employees, and partners have generally been women. Even now the person I do all kinds of crazy deals with—from game companies to a Mexican Bank we are starting—is a mom with three kids who happened to go to Stanford Business School and be one of the smartest business minds I have run across. She and I have been partners now for over a decade.
I realize that generalizing about gender is a bit like sticking your foot into a fire and hoping it won’t burn, but in my limited experience women tend to have smaller egos in business, they tend to focus on the important stuff, and they also tend to be able to negotiate very tough without making it personal.
I suppose part of the reason that it makes sense that I have generally worked best with women is because, like I said, I can be such an asshole. You do need a good cop and a bad cop in most situations and the role of bad is already taken (by yours truly).
None of which is to say that women can’t be egotistical, obnoxious, and the bad cop in business. There are plenty of examples of that. But perhaps because the glass ceiling still hasn’t quite been shattered they are less likely to lead with their fist and more likely to use their substantial brains. I need that in a partner. It keeps me out of trouble, more or less.
For more of Tom's works, as well as other pieces on related topics, go to The Good Men Project Magazine online, here.