This post has nothing to do with new paradigms in finance or markets or anything like that. It does however have a good dash of entrepreneurial zest. But mainly it’s about skiing and how following one’s passion is a great way to start a new business. And it’s also a reminder that not all startups fit the Y Combinator model and that venture capital can (and should) be a broad church…
Just last week I’m happy to say I closed on a modest personal investment in an exciting new ski company called the Faction Collective:
Faction. n. ‘A minority group working within, and in opposition to, a majority group.’
When we founded Faction, our manifesto was (and continues to be) to build the best high performance skis we can, without compromise. Our focus is on providing versatile, progressive products that answer the needs of freestyle and freeride skiers – designed by riders, for riders. Every person involved in Faction, from the people working here in the office through to the guys in the warehouse and the team riders on the hill as well as you the consumer, has a say in how we design, build and manage our products.
Now as many of you know, I am an avid skier, however my true passion is racing. Fast, hard, steep. 5,4,3… So when my friend Alex Hoye first approached me about Faction (where he is co-founder and Chairman) last year, I was skeptical. First, I didn’t know the first thing about investing in a consumer goods start-up and secondly, I didn’t feel I had any way to judge the quality / desireability / competitive position of their products as Faction is focused on freestyle, freeride and big mountain (off-piste) skis. Give me a GS ski, well that’s something I can have an opinion on… But I had a look, and the vibe – reminded me of my teenage skateboarding days, kind of like a 21st century Powell-Peralta for snow: the new Dogtown (and Z-Boys)? – felt great and so I asked him to send me a couple pairs of skis to test. I had them for 2 or 3 weeks and not only did I test them, but I let a number of my ‘local’ friends try them out too, including a teenage ex-racer, a ski instructor and a ski shop owner. Everyone, including me was blown away. Not only that, except perhaps for the teenager, we were all pretty skeptical in an old reactionary kind of way to these ‘newfangled’ funny looking “skis” (if you could call them that.) All of the sudden, I rediscovered the joys of off-piste skiing – powder, crud, bowls, glades – it was so easy and fun. And I’ve never seen skis turn so many heads in a lift-line. The final confirmation that these guys at Faction were on to something is when the teenager didn’t want to give back the skis and kept insisting he would buy them off me! I decided I better dust off the IM and take a closer look…
They are only making about 1200 pairs or so this season (and just the folks I know will probably put a dent in that limited number!) so if you want the ultimate Christmas gift for your teenage son or daughter who spends all day in the snowpark, or if you want to go off-piste or tear up the powder and feel like you are a teenager again, I definitely wouldn’t wait too long to order yours, once they are gone, they’re gone…Contact the good folks at Faction and they’ll tell you who sells them close to you.
And once you’ve kitted yourself out in the latest, greatest gear from Faction, you’ll probably be thinking I need to book a place to stay! That’s where my next set of (non-tech) entrepreneurs come in. Martine and Laurent are good friends, who are living their life’s dream and putting the finishing touches on the brand new 4-star hotel they have built and will run in Meribel. For those of you that don’t know it, Meribel is an absolute gem of a resort in the French Alps, sandwiched between Courchevel and Val Thorens at ‘the heart’ of Les Trois Vallees – the world’s biggest ski resort. We’ve been going there for over 15 years now and I can tell you there is something for everybody. However one of the things that is in short supply in Meribel is hotel beds – the resort has c. 40,000+ beds but most of these are in chalets and apartments. Until this year if you wanted to stay in a luxury hotel, you really only had a choice between two and they were booked up years in advance. With only 20 rooms, and an ideal location, modern infrastructure (the advantage of building from scratch!) I’m sure after this season it will be equally hard to get a room at L’Helios.
Trust me, I had a tour a couple weeks ago – it is going to be awesome! And unlike most alpine hotels it is ready made for families and groups, with many interesting interconnecting suites and modular grouping of rooms, including many with duplexes. Unfortunately you can’t book directly online yet (has to do with banking/payment laws and the fact they are just starting up, don’t ask…!) but contact them via their website and I’m sure you will get a prompt response (especially if you tell them I sent you!) Sadly I’m not an investor in L’Helios but I’m sure it will be a roaring success. And if you do go let me know and maybe we can have a drink together on the sundeck. (I might even be able to get the owners to let us have it on the house!)
And just to make sure you are counting the days until first tracks, here is a little Faction video to get the imagination going:
To paraphrase Schumpeter, ‘successful business people are always conspiring to preserve the status quo.’ And one of the best ways to do that is to leverage your position in the market to influence, ideally control, the conversation around how the business or sector operates. Yet again it’s an example of everything you need to know, you learned in high school: “anyone who doesn’t do business by our rules is a loser.” Potential dangerous and should be ostracized. Of course this kind of self-interested ass-covering is entirely understandable in the context of human nature and for what it’s worth is fair enough: “I’m on top of the hill and I’ll use all the advantages that affords me to stay here.” Not enormously noble, but fair enough. What is somewhat more stomach-churning is when, in a vain attempt to rationalize their naked self-interest, these same incumbents wrap up their need to protect the status quo with some spurious justification that it is in fact to “protect” the “little guy.” What a load of crap. You want advice? How about running a country mile anytime someone who’s interests are clearly orthogonal to yours tells you they are looking out for you.
All industries operate within echo chambers; ironically the rise of the web has probably accentuated this as most communities go ‘deep’ rather than ‘broad’ in terms of information flows. Like any good flatlander, after having spent 15 years in institutional capital markets, I was certain that that industry’s echo chamber reverberated loudest. But now having spent a couple years around the fringes of the venture capital industry, I know that isn’t true. Further I suspect every industry and community suffers from this disease more or less equally. I’m not an anthropologist but I bet it has something to do with the evolutionary hard-wired pre-disposition for people to form tribes. I’m not sure why, but naively I expected the venture capital industry to be less political, less petty, less groupthink than the investment banking industry. Well it’s not. In fact it might even be more dysfunctional. And it certainly could use a few more traders within it’s ranks. (Just to be perfectly clear, that last opinion is completely self-interested, possibly self-centered and isn’t trying to help anyone except possibly me, including the poor entrepreneurs.)
I don’t mind the fact that this (or any other) industry is messed up. That’s where the opportunity lies. And being outside an echo chamber looking in is a wonderful – if sometime lonely – vantage point from which to recognize and capture these opportunities. And ifI’m right, just maybe I’ll have an edge. Everyone needs an edge. And if this edge helps me succeed (I mean really succeed) then just perhaps one day the frame of reference will shift. And I’ll be the one out there telling everyone not to rock the boat because, “y’know it’s really helping the little guys.” Not. Well at least I hope not. But I can’t guarantee it. So if this comes to pass, that’s when you should tune out. Find a new prophet…because you know it will just be so much baloney…
Recently there seems to have been a heightened level of existential discussion on the venture capital industry, its future and appropriate structure and objectives. Perhaps kicked off with Paul Kedrosky‘s report for the Kauffmann Foundation and taken up by people like Fred Wilson, Chris Dixon and others.
A few years ago, when I first started to take a close look at the venture capital industry, its structure and its business model, I must admit the first thing that leapt out at me was that it seemed just as settled in it’s status quo, comfortable in it’s received wisdom as the investment banking industry I had spent over 15 years navigating. Perhaps I shouldn’t have been surprised, however I couldn’t help but find it ironic that an industry ostensibly focused on finding and financing innovative technologies, business models and people, should itself seem so immune from these forces, almost to the point of being anachronistic.
And so I set out about educating myself as to why this was the case. Why was this just “the way things are done”? And unsurprisingly I found a couple good reasons buried in a mountain of inertia and vested interests buttressing the flimsiest of rationales. So answering my friend Max’s request for ideas, here are a few of my ideas on how to improve venture capital.
Greater diversity of economic models: monocultures are naturally fragile – my point is that the GP/LP with 2 and 20 isn’t necessarily wrong or right, but it has weaknesses that would be mitigated by competition arising from a more diverse ecosystem of economic models and approaches.
More emphasis on clear, well-defined sector expertise and specialization (both in terms of firms and people.) Clearly we are talking our own book here, but if don’t believe me, Marc Andreessen makes the point as well.
More permanent equity and secondary markets (and less frequent fund raising.) The most profitable private equity and venture capital firms are the ones that are much better at raising capital than investing it. You get what you pay for. Change the structure and incentives and you’ll change the outcomes. Further, the best course of action for any given company should obviously not depend on their investors’ capital structure and yet under the current industry structure, the dynamics of your partners, venture firm and/or individual fund can and does often drive strategic decision making. It’s called the tail wagging the dog and it’s as sub-optimal as it sounds.
Management fees at cost (not as a % of assets under management) and restricted equity as performance incentives. This one seems like a no-brainer: management fees have a minimum fixed component and generally are correlated with both the number of investments and the complexity of these investments. Typically there is some degree of positive correlation between these factors and assets under management but the implication (which underlies fixed % management fees) that it is mechanical and linear is completely wrong. You would think that investors (‘LPs’) would be 100% behind this innovation, and yet I have been surprised to find that many are at best ambivalent, and some actually hostile. The only reason I’ve been given for this attitude is having ‘certainty’ in terms of costs, although I think this is a total red herring: a cost-driven management fee would entail the venture capital firm getting their budget approved by their Board and given the relative simplicity of the business, would be relatively trivial to determine with a high degree of certainty, even over time.
Standardize investment terms by developing and adopting a document analogous to the ISDA Master agreement structure and pricing supplements (for individual deals.)* Not only would this lower costs and reduce complexity but it would also facilitate a more active and robust secondary market.
More syndication – lead underwriter rewarded for driving process forward; increasing use of ‘managed accounts’ (vs discretionary management.) The idea here is to bring together complementary syndicates of specialist investors, each bringing something slightly different and valuable to the table, as opposed to just a jump ball between a number of more or less identical generalist funds.
Price ancillary services (advisory fees, directorships, etc.) transparently and honestly. This is an area where I think venture capital could learn a lot from their private equity cousins by making more explicit – and charging appropriately for – services they provide to their portfolio companies. Clearly this approach is not perfect nor is it immune from abuse, but by combining with point (4) above and structuring much/most of the payment for services in equity rather than cash, it would actually reduce the scope for abuse and discrimination amongst shareholders and would force both companies and venture capital providers to justify any additional value (beyond investment capital) that venture capital firms or partners provide. Under the current operating model, the venture capital firm’s investors effectively subsidize the portfolio companies’ use of the professional resources of the venture capital firm. And there is a cross-subsidy within the portfolio, with companies that don’t need any services effectively subsidizing those that do.
In fact, if you take a step back and look at these recommendations, they would have the effect of making venture capital look a lot more like a collective, scaled-up version of professional angel investing. And as I was writing (and re-reading) these points, I fear that the short form of a blog post is probably ill-suited to make relevant and nuanced arguments as to the pros and cons of various elements of the venture capital business model. And yet I simply don’t have time to write an essay. I’m not Fred, but perhaps if I’m lucky, that essay will write itself in the comments here and elsewhere. So have at it!
* (via Wikipedia) The ISDA Master Agreement is a bilateral framework agreement. This means it contains general terms and conditions (such as provisions relating to payment netting, tax gross-up, tax representations, basic corporate representations, basic covenants, events of default and termination) but does not, by itself, include details of any specific derivatives transactions the parties may enter into. The ISDA Master Agreement is a pre-printed form which will not be amended itself (save for writing in the names of the parties on the front and signature pages). However, it also has a manually produced Schedule in which the parties are required to select certain options and may modify sections of the Master Agreement if desired. The Master Agreement would be modified to the extent the modification is mentioned in the Schedule. Details of individual derivatives transactions are included in Confirmations entered into by the parties to the ISDA Master Agreement. Each Confirmation relates to a specific Transaction and sets out the agreed commercial terms of that trade. Confirmations are generally quite short as they will normally incorporate one or more of the definition booklets published by ISDA. Each of these definition booklets relates to a specific type of derivatives transaction and, in addition to defining terms, they include mechanical provisions (e.g., Articles 5 and 6 of the 2000 ISDA Definitions set out how to calculate the Fixed and Floating Amounts payable under an interest rate swap) which do not then have to be laboriously reproduced in the Confirmation.
Corporate bonds to recover: didn’t get involved here as I didn’t have easy access to a leveraged play on this and was too busy/lazy to buy some iShares in my pension fund. Dumb miss, as market up 15-25% depending on the index from start of year.
Equity markets to go up and vol to drop:S&P is now c. 1020 (up from 890 at year end, c. 15%) but traded down to 666 first. I’ve kept my individual portfolio holdings throughout (AAPL, AIRV, RMG, EWZ) but was stopped out of a leveraged long on S&P at c. 800 and did not get the trade back on. Didn’t play on VIX which has come down to c. 25 from 40 at the end of last year.
Selective Emerging Markets will outperform (in particular Brazil, India and Sub-Saharan Africa): Brazil iShares (EWZ) has outperformed S&P by about 50%, I held my long position but didn’t add to it as my limit orders were a bit too greedy. As for India and Africa, my preference was for private plays but if public markets are a proxy, directionally these seem to have done well also, with India outperforming S&P by c. 30%, whereas Africa it’s less clear.
Buy long dated calls on Oil: really angry on this one, my size was too small so my broker didn’t want the hassle of doing the trade for me. Was looking at $65 to $75 Dec 2010 calls. Even with big brokerage costs these are up 5-6x… Note to self, get new broker.
GBP will stop going down: I am structurally very long GBP so my trade here was not to hedge. So far so good as GBP is up c. 10% against the major crosses so far this year, having been even a bit higher a few weeks ago.
So, where do we go from here? I know it’s not very exciting, but I suspect we go mainly sideways in most asset markets between now and year end. If you are holding the positions above, I would continue to run them but tighten stops and look to take profits if S&P approaches 1100, Oil gets above $85 and GBP re-tests it’s August highs vs USD or EUR. Would be more patient or less nervous with positions in corporate bonds and Brazil; although both would probably suffer in a generalized market sell-off, I’d be more inclined to add on dips. Generally, I think it’s not a bad time to be raising cash again and sitting on the sidelines waiting for a better opportunity to come in: choppy sideways – which is more or less what I expect – is a very dangerous market to trade unless you are doing it full time (in which case it can be profitable and fun.) My biggest regret? Not buying AMZN when it traded below $50 like I swore I would. Have raised to $60 but not too hopeful. Otherwise I’m pretty happy with how my portfolio weathered the financial hurricane of ’08/09. Learning? Don’t overtrade: fastest way not only to lose money, but also your sanity.
(Self-)Report card: Predictions A, Trading C+, Overall B- Trading is always harder than predicting.
We hope you’ll agree. Never seemed to quite make it to the top of the never ending list of priorities and then when it did our favorite designers were booked up for months (that’s what happens when you are good.) Anyhow it was their concept and we loved it. I hope you like it too. So now you really can go visit Nauiokas Park, at least the one in the cloud!* And while you are there, don’t forget to stop by and buy a book or two, we figure if we sell 130 million books or so, we won’t need to raise any outside capital and better yet we will have created an enormous community of like-minded souls to help us in our mission to catalyze innovation and well, change the world.
And for those of you who always wondered it’s: \ˈnī\o-kas\ˈpärk\ -
Etymology: Modern finance, from Anglo-American, from Banking, Trading and Technology, from Latin crescere to grow, visio to see and successus
Date: 21st century
1 a : a place where capital and ideas meet b : a space at the intersection of financial services, markets and technology
2 a : an area designed to nurture and grow companies with “disruptive” business models or technology b : a place where expertise in strategy and operational execution combine with experience and a vibrant network to create value
3 the center of an ecosystem from which will grow the next paradigm in financial services and markets
4 a state of mind characterized by creativity, curiosity and an openness to new ideas
5 a place where innovation grows
And remember, everything takes longer in a start-up than you thought it would!
* In the spirit of eating our own dogfood, we used cohesiveFT’s Elastic Server toolset to set up our -admittedly very simple – virtual web server in the cloud.
Ah. Now I know why I look forward to working on the weekend. And why I enjoy working in a start-up – despite the even longer hours – than in a big company. And my epiphany is down to Paul Graham (once again – I have to meet this guy) wonderfully articulating something I sensed and knew sub-consciously but couldn’t quite surface:
I find one meeting can sometimes affect a whole day. A meeting commonly blows at least half a day, by breaking up a morning or afternoon. But in addition there’s sometimes a cascading effect. If I know the afternoon is going to be broken up, I’m slightly less likely to start something ambitious in the morning. I know this may sound oversensitive, but if you’re a maker, think of your own case. Don’t your spirits rise at the thought of having an entire day free to work, with no appointments at all? Well, that means your spirits are correspondingly depressed when you don’t. And ambitious projects are by definition close to the limits of your capacity. A small decrease in morale is enough to kill them off.
Much of what I do (and have done for several years – including when I was trying to build a new division in my old investment bank – RIP) needs ‘intellectual momentum’: ie it takes time to get into the flow. Often time this looks like just farting around – and maybe it is – but there is no other way to rev up the brain and prepare it for the task at hand. Sort of like booting up a computer or a new program perhaps. (So does that mean I’m a PC? Oh no…) And then once started, the worst possible thing that can happen is to be interrupted. The cost is higher than just another hour’s reboot. It usually means starting all over again. Switching metaphors, imagine doing a high jump: if you get stopped 5 meters from the pole, you can’t just resume your run-up from there… So that’s what I mean by intellectual momentum. I used to think that my need for this was just because I was getting old, but now thinking about it, it’s always been this way. The best work I ever did at school or university fit this pattern as well: a longish incubation and then a burst of sustained productivity (and occasional brilliance even.) The production curve looks – of course – like a power law:
So from now on, I’ll try to keep this front of mind and to be a bit more ruthless about dividing days into ‘manager’ or ‘maker’, and when not possible try harder to schedule meetings either at the start of the day or the end. Thank you Paul.
ps I’ve got more done in the past 36 hours than in the past 2 weeks…
Did you notice? If not perhaps I shouldn’t say anything. No harm, no foul.
But just in case you were wondering, yes, parkparadigm.com was down for almost two weeks. It started with a corrupted file server and then well things got complicated. But I have to give it to Jof and Benjie at Brainbakery; not only did they have my back, their calm professionalism saved this old man from a heart-attack in the wee hours of the morning on that fateful night. I owe them dinner and since they are charming company as well it will be my pleasure.
I always try to look for the silver lining, and in this case I think there are two. First, I now know more about how the plumbing of these here internets work – nothing like a crisis to help one climb a learning curve. And second, I now realize just how embedded this blog is in how I work, think and project my ideas into the wider world. That may sound obvious, and it’s more a question of degree, but had you asked me two weeks ago, I’m not sure I would have admitted or understood just how valuable this little patch of the metaverse has become for me.
And I hope you are still here, not having been put off forever by the temporary purgatory of a ‘server not found’.
Well after 6 days essentially without email or web access, I’m back online. From the giant number of unread emails in my inbox, I’m sure one or two of you are wondering why the radio silence. Apologies. Now you know.
I must admit, although I wouldn’t say it was surprising per se, this episode did open my eyes on how indispensible (only 15 odd years after it’s popularization) fast, unfettered, continuous access to the web is for the way I (and many others I’m sure) work.
Had I known that I would not have access to the web for 6 days, I obviously would have organized my time differently (and I wouldn’t have spent the better part of three days in a futile bid to fix it) – there are still things that can be done offline, but even for many of these – reading, research, writing – my default mode has evolved to weave in annotating, footnoting, elaborating, complementing these activities with online tools (the most common, but by no means exclusive being Google, social bookmarking, wikis, social networks…)
I guess if there is a silver lining to this disaster (I feel like I’ve fallen a month behind in my ‘to do’ list…), a ‘learning’ to take away, it is that the productivity enhancing power of the ubiquitous web (at least or especially for ‘knowledge workers’) is truly incredible. And I’m not sure we really appreciate it. It’s like aging: if I look in the mirror, I don’t think I look much different than I did 15 years ago; until I look at a photo of myself from 15 years ago!
So here’s a challenge. Take a moment to reflect on how you live and work today. Now try to transpose this to 1994: could you do what you do today? more slowly? at all? And if you have the luxury and inclination to do so, try switching off the internet/email and your mobile phone for a week (landlines and fax machines allowed.) If you do, what you might find will surely excite – because you will appreciate how much more productive you now are – and frighten you – because you will realize how dependent you are – in equal measure.
If banks are systemically important to our economic and social system, then telecommunications infrastructure is vital. I wonder if our politicians understand this.
When did you ever go to a drug dealer banker, and the drug dealer said, “you know, you should come back tomorrow, this is not very pure. a good deal.” It doesn’t happen.
I suspect that there may be more than a few talented (financial markets) developers who have now found themselves with more free time on their hands than they would like. Some of that time might even be spent reading this blog, and so with that in mind, I thought it was worthwhile to pass on this exciting opportunity at Mark Davies’ BusyLab in Ghana (who are behind the fantastic Esoko/TradeNet initiative, on which I have commented several times in the past:)
BusyLab is a software company engaged in building innovative mobile web solutions for the African market and beyond. Our main project, Esoko , is a web and mobile based market information system that includes an SMS gateway component, a J2ME mobile application, and an ajax-driven, open API web application. We were recently featured on CNN and in the Economist, and are currently in 12 countries throughout Africa and Asia. Our mission is to improve livelihoods by building healthier and more efficient markets. We believe agriculture in developing countries is one of the final frontiers to benefit from the technology revolution of the last two decades.
We’re looking for an experienced software developer interested in trying something different and sharing knowledge in Africa.
You should be able to teach the processes and best practices of software development with our bright young team, and contribute to a world-class innovative web and mobile application product.
You should know:
- html, javascript, ajax
- php or java (J2SE/J2ME)
- sql databases (postgres or other)
- software development process
- software testing and quality assurance practices
The position would be for a minimum of six months.
I’m sure for whoever takes up this challenge it will be rewarding in many ways. Good luck!
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