I have a friend – and I don’t remember who it was or else I would give him credit – who compared coming back from vacation to an astronaut coming back from space. Except he said that he always burns up during re-entry.
Last week was my return from nine days in St. Maarten, which is the longest vacation I have taken in five years. In retrospect I think it is really important to get away and I wish I had done it more often. A lot of people say you need vacation to get perspective, but it also gave me an opportunity to do some reading. It reminded me that not all good ideas come in powerpoint.
One of the books I read was “The Big Short”. I won’t spoil it for you, although I am pretty sure that the ten people who read this (“Hi Mom”) either have already read the book or have no intention of reading it.
“The Big Short” is not made to be a movie like “The Blind Side” (also by Michael Lewis). There is very little action and dialogue, and for the most part the book focuses on a group of rogue traders who figure out how to short the housing market and in the process make a lot of money. In retrospect that doesn’t seem like a novel idea – I know a lot of people who thought that housing was overpriced – but these guys had capital, invented a new trade to take advantage of the system, and timed the market right. And they did well while the world outside was blowing up, which makes their success a lightening rod for criticism.
The one thing that stuck out – at least to me – is that the person who made the most money shorting the housing market, a hedge fund manager named John Paulson, was only mentioned once. John didn’t invent the trade, he was somewhat late to the game, and he is socially normal, which I suppose doesn’t make for a gripping storyline. The folks that Michael Lewis spent most of his time describing were weird – their investors revolted, they have strange social mannerisms, and at least one of the guys was diagnosed with Aspergers (which by the way is not that unusual – some of the best entrepreneurs have Aspergers).
It is a familiar story – smart people dream up an idea, they develop it on their own and end up doing ok, but someone else with a little more salesmanship and deep pockets really makes a killing. I can understand why Michael Lewis didn’t want to write that story. But this is how it often plays out, both for entrepreneurs and venture capital investors. The people who can tell a story the best, the best marketers and the best salespeople, end up attracting the most capital and they win. I see it all the time. Particularly when there is an efficient market for ideas.
I am planning to write in another post about how this plays out with entrepreneurs. Almost every popular company gets cloned, and many of the clones are encouraged by venture capitalists, which is something I have grown to detest. As an investment strategy this can make money internationally but I don’t understand why US VCs encourage look-alike companies in the same market. There is no glory in competing for fifth place in a crowded market.
“The Big Short” also had a lesson for venture capitalists. This deserves a separate blog post too, but the theme is the same. There are people with good ideas who have a tough time raising money, and others who have a brand that sells itself. I lived through this when Greycroft went to market to raise Fund II in 2009. We are not social outcasts like the characters in “The Big Short” – at least I am pretty sure of that – but investors flock to well-known brands in tough times.
Greycroft was ultimately successful raising Fund II, but it took over a year and 160 first meetings. It is clear to me that our strategy works, and that truth is more evident now that Fund I is making money. It just wasn’t easy to sell that story. The irony is that the John Paulson’s of the world – in the venture business these are the mega funds with super bowl-esque roman numerals (XLIV) – will inevitably feel an impact if the little guys with the fresh ideas can’t raise capital. I hope that doesn’t happen.