Lessons in Pitching

How Fab.com got its backing:

From a fundraising standpoint, providing access to the RJ data basically said to the VC’s, “here we are, here’s the data, we’ve got nothing to hide, take a look and decide for yourself if you want to pursue investing in Fab.” Effectively, we turned the pitching on its head. Since the RJ data updates several times per day directly from our database, it was many times more powerful than providing powerpoints and excel spreadsheets. This was the real stuff, auto-updating! And, since RJ enables all the data to be downloaded into excel, the analysts at the VC firms were able to do all of their own analysis on the front end of the investment process.

Now I’ll break away from this to describe what I do for a living: I raise capital for insurance companies.

Insurance companies typically aren’t financially strong enough to absorb the risks associated with the policies they write. Every year, then, they renew reinsurance arrangements with third party companies that give them a boost. This process has all kinds of effects:

  • In a fantastically capital-intensive business, scaling up becomes relatively trivial, if you can demonstrate that you’ll make money doing it.
  • The plain fact that reinsurers ‘give the pen’ to companies that can bind them to financial obligations without itemized signoff means the scrutiny during the renewal process is often intense. This acts as a powerful mechanism for dispensing best practices throughout the industry
  • Bringing several capital backers up to speed on what you’re doing consumes valuable management time. Every year.

This last point is where brokers come in: we’re middlemen that facilitate this process by being a negotiation agent, knowing the market and performing some common data-crunching and cleaning tasks.

Each of these tasks are things that could be done without us. We’re middlemen, after all, as derided a professional class as there has ever been. But in every deal we minimize a big risk of failure.

Negotiation is tough and can break down easily and data cleaning is a pain; most importantly, though, even a small market like mine changes ALL the time and by acting as a clearinghouse for relationships, we facilitate a more competitive reinsurance market (ie maximize terms for our clients in a macro-sense, as well as by being individually awesome).

So let’s go back to Fab.com. They sent out the data and had a quick negotiation in which, they claim, price wasn’t much discussed. Wow, wouldn’t you want to be Andreessen Horowitz in this case? Name your price!

Maybe Fab.com have such a powerful business model that they only need to show some trend numbers and have a quick chat and wrap up 50 million bucks. But as much as it warms an engineer’s cockles to hear a story where a great data system wins the day, all of my instincts tell me that these guys got screwed.

If a deal goes down with so little pain somebody left money on the table.

I just read this by Mark Suster which gives me a clue for why there might be a bigger pie at stake than I thought:

And anybody who follows this blog knows that I believe television disruption has already begun and it is more likely to resemble Internet content than streaming long-form content to our living rooms.

As I talked about this model with several friends in Silicon Valley I always heard the same refrain, “we don’t invest in content business – they are ‘hits driven’.”

I had to laugh a bit at at the irony of this. For one, the consumer-driven startup world has become immensely hits driven. You need star power of entrepreneurs surrounded by star power angels & VCs who in turn get tons of press from adoring journalists who are insiders amongst this crowd of tech cognoscenti.

Publicity! Big-time VCs are tech celebrities, of course, and affiliation with them can legitimize you in some important circles like with early adopters, journalists and investment bankers who will one day give you your big money exit.

Still, I need to swap my “let’s build a business!” hat for my cynic hat to have this make sense.

Then again, maybe legit publicity is actually so value-creating that it’s worth 10-30% of the upside.

The Culture of Hard Markets

In insurance, a hard market is when carriers can exert extraordinary pricing power. I spend an embarrassing amount of time discussing whether the market is hard or soft or hardening or softening and when the hardening or softening will change, etc.

It’s tiresome and really distracting, in my opinion. The business model that relies on timing the market is necessarily volatile and limited in scope, which are things that public equity markets (ie permanent capital bases) don’t like. They like consistency and reliability. A hard market strategy is anything but.

Anyway, I’ll stop my rant there and focus a bit on what hard markets do to the CULTURE of a business.

You see, if you can properly identify a hard market, you have properly identified a free lunch. In such a case, making lots of money is easy: you just have to show up with a minimum of skill. Put your kids in the chair, says my boss, and in a hard market you still get rich.

What would happen if a hard market was the norm? What would happen to an institution if the degree of difficulty for profit suddenly dropped? [edit: what I’m really asking is what happens when a hard market lasts a long time and then suddenly reverses. Like a bubble, you never know you’re in a hard market until you leave one]

Well, luckily we have a case study.

I’d say that this is what happened in the investment industry in the Great Moderation period, up until the wrenching (ongoing) financial crisis we’re living through right now.

We recently reviewed our pension scheme and we were astonished at the terrible menu of choices presented to us. In a book of 500 different mutual funds, there were very few index funds and even these only got as cheap as 0.72% of assets per year.

Expensive, but we’re a small company so our costs will be higher. Fine.

But how about the rest of the funds, with expense ratios of 1-3% per year? Maybe the managers can justify this when they’re beating the index funds reliably, but we know that’s simply not possible for the VAST MAJORITY of funds to do, right?  And run-of-the-mill mutual fund managers?

Puh-leeze. They’re 30th percentile at best.

Eventually, when the market turns, they get found out. As Tyler Cowen says, we aren’t as wealthy as we thought we were. Well, banks weren’t as smart as they thought they were. And that’s WITH bailouts protecting them from the realization of exactly how stupid their high leverage business models were.

When the music stops and you look back, here’s what I’d bet you realize was happening when you suffered the illusion of a prolonged hard market:

  • Lesser talent being paid like it’s higher talent
  • Aspects of Scott Adams’ confusopoly, where the money is so plentiful everybody starts taking little cuts from all over and it becomes really hard to compare options.
  • The market rewarding ex-ante status, power and wealth (ie status, status and status) as opposed to real value-creating activity.
  • Astonishingly stupid pseudo-science to explain what is going on

So if I may caricature: the median firm/employee becomes richer per point of IQ*, higher status (child of or former celebrity/ politician/professional athlete), employed in obfuscation rather than productive activity and unable to distinguish between luck and skill.

*I don’t like using IQ here because I tend to think its predictive power as an exogenous factor in success is vastly overstated. But it works as a placeholder for ‘units of ability’.


This is jr. Middleweight Mexican boxing sensation Saul ‘Canelo’ Alvarez:

That’s right, that guy’s Mexican. A very Northern  European-looking Mexican, isn’t he.

I grew up in a town with a prominent minority of light-skinned, light-haired Mexican people. I have no evidence that Canelo Alvarez is of the same tribe, but the likeness is vivid.

These were a branch of Mennonites (who speak a strange hybrid language*) that originally fled the borderland between the Netherlands and Germany to Russia when they were going to be forced to enter the draft. They redoubled their exodus when Revolutionary Russia’s political climate threatened some of the privileges they negotiated (in exchange for populating farmland) and took off again.

Some, like those that run this awesome awesome restaurant, wound up in colonies in Bolivia. Many went to the Canadian prairie. Many went to Mexico.

And many of those that went to Central/South America wound up moving to my home town in Canada. Always looking for farm work, always looking to be left alone.

They dress a bit funny (yes, they brought and kept this fashion sense with them into Canada)

I mostly went to school in another town so I didn’t have any of these kids in my classes at first. By the time I went to high school back in town I was 16 and many/most of my Mennonite contemporaries had dropped out to, presumably, start on the farms their families moved there to work.

Of those that were left, some were later-generation products whose families had assimilated. The others, though, had more in common with the other small minorities (SE Asians, Middle-Easterners, other Central Americans – a very diverse town of 25,000, Leamington) than they did with the local kids, physical appearances aside (and this is a powerful lesson: race and  discrimination have nothing to do with skin color).

Now, given that Mexicans are huge boxing fans, maybe Canelo IS a mennonite?

So I asked the patrons of the restaurant I linked to above whether they had heard of him. Blank stares. Hm. You sure?  (holding my hands up like an idiot, mimicking a boxer) Boxing? Nope.

So is Canelo a Mexican Mennonite? I doubt it, I suppose, much as I’d relish the coincidence with my past. When you’re a people that keeps apart (and farmers always have this inclination, in my experience) you aren’t about to send your kids to the boxing camps.

* I remember this language from my childhood. I never spoke it, but noticed all these strange-looking people speaking it. My dad mentioned that it was called ‘low German’, which to my young ears meant ‘low-class German’. Not even close. It turns out that ‘low German’ is ‘low’ in the sense of literally lower altitude, as in the ‘Low Countries’ (Netherlands) and this language is from the area between Holland and Germany. During my last trip back home (for Thanksgiving) my more mature and worldly ear overheard a bit of conversation in Low German and I definitely picked up on the German part but also a serious whiff of something that wasn’t German, English, Russian or Polish (and definitely not any Latin-based language). It almos sounded Swedish. Turns out what I was hearing was the Flemish influence.

No Free Lunch [Or: The Stupid Germans Come Home To Roost]

I know that my friends and associates who work at at investment banks make piles of money. I know that they make this money mostly because the value of their skills is colossal. I know that the value of their skills is colossal because people with their skills can make mountains of money with a sprinkling of capital and a deluge of leverage.

Nine years out of 10, anyway.

But in that 10th year they wipe out about 10x-100x their capital. The business model is spared, the conventional wisdom goes, because of bailouts of various kinds.

But bailouts don’t tell the whole story for me. Bailouts aren’t certain so there will only be SO much money willing to bet on a bailout. There’s an idiot at that poker table and I think we’re figuring out who it is.

Here are some quotes about this recent paper:


this is the latest in a series of papers arguing that the U.S. shadow banking system consists in large part of … European banks. This suggests that the creation of the euro had large implications even in US capital markets; and of course it suggests that the financial fallout of the euromess could be very large here as well.

In short, the ECB could be in the process of destroying not just the euro, but the world.

Cowen quotes the abstract under the title “If True We Are Doomed”:

European banks may have played a pivotal role in influencing credit conditions in the United States by providing US dollar intermediation capacity. However, since the eurozone has a roughly balanced current account while the UK is actually a deficit country, their collective net capital flows vis-a-vis the United States do not reflect the influence of their banks in setting overall credit conditions in the US.

Michael Lewis:

When Goldman Sachs helped the New York hedge-fund manager John Paulson design a bond to bet against—a bond that Paulson hoped would fail—the buyer on the other side was a German bank called IKB. IKB, along with another famous fool at the Wall Street poker table called WestLB, is based in Düsseldorf—which is why, when you asked a smart Wall Street bond trader who was buying all this crap during the boom, he might well say, simply, “Stupid Germans in Düsseldorf.”

How To Make Temporary Friendships (Sell Stuff)

From Barker:

Overall, we find that retail employees use five broad categories of rapport-building behaviors in commercial contexts: uncommonly attentive behavior, common grounding behavior, courteous behavior, connecting behavior, and information sharing behavior.

All the old sales gimmicks work.

One thing that intrigues me is the connection between these traits and Chateau Heartiste ‘beta’ behaviour traits. While I think the boys at CH take those arguments to extremes sometimes, it’s probably fair to say that women like bad boys, but need to mask that fact because society, in general, likes nice, attentive people.

Aha! So That’s What Social Media Is For!

Cringely recently ran a piece asking what his readers think the next world-changing technology. He then ran one with his ideas, which are:

I think our next frontier should be a combination of additive manufacturing and autonomous flight… Additive manufacturing is in the middle of a revolution that within a decade will have usable devices appearing in volume and at competitive prices from backyard sheds and sold into local commerce…

…What qualifies autonomous flight as a good frontier is that it fits beautifully in the traditional frontier paradigms of population expansion and steadily increasing property values. American frontiers, as I wrote earlier this week, have long been paid for with free or inexpensive land…

Powerful ideas, particularly additive manufacturing. But this feels a bit too much like so many pronouncements of yesteryear on what ‘the future’ will look like. They’re always wrong. And they’re always wrong because they are about technology and the future is shaped by economics.

His point about flight reducing land values (possible… I suppose) is close. But the most powerful idea in economics is that incentivized individuals collaborating privately produce astounding things.

And technology pronouncements are about the things we DO think of, which means we need to think about the meta-process that produces technology. That means (to me) that the real future will be shaped by the revolution that is starting in education.

Consider this HN discussion:

TITLE: Best approach for self-taught developer looking for job?
Comment 1: Pulled up your github account. Aside from you accidentally adding your home directory, you’re making good progress. If you’re looking to get a job quickly, I’d encourage you to focus on one area and I think your shortest path is the front end technologies. Pretty much every firm I know of in NYC is hiring front end developers and the main limitation is finding people who actually know javascript…

And you can demonstrate it by sticking something on github

Prove yourself on Github and you suddenly have absolutely no need for a college degree. Even today I’d argue that there’s nothing you can achieve in a college liberal arts program you can’t do with a blog (implying an Internet connection as well) and a library card. That is to say, more or less for free.

This cuts to the heart of what an education is, which is two things: learning things and proving it. The reason why people don’t go to Wikipedia University isn’t that you can’t learn anything there, it’s that you can’t prove you learned it. It’s too easy to misjudge competence: even losers can look and sound like they know what they’re doing. The signaling aspect of ‘going to Harvard’ gets around this problem. But messily. And for so very few.

Now that’s changing. If you can demonstrate real domain competence in an open environment, suddenly the dual-power of a University (giving not just knowledge but also a piece of paper that proves it) is broken.

Michael Nielsen is getting close to what I’m thinking of in pushing for collaborative science. I’m imagining a Github for all worthwhile public goods in all scientific disciplines, but not as an output, as an input. Eventually all scientists will grow up sharing everything they do online. Those Githubs will be their training grounds. The universities of the future.

And they’re free.

Watch The Kids Play. Then Beat Them Up (or Eat Them).

Steve Hanov’s latest post discusses a recent conference he attended. He really caught my eye with his general observations of startups:

  • Disruption – Disruption is big. If you’re not disruptive, you might as well be selling mainframes and typewriters. Companies are disrupting each-other at an astounding rate. Sometimes, while one company is busy disrupting an industry, another one will sneak up behind it and try to disrupt it when it is not looking. That is why companies need to be agile and pivot frequently.
  • Metrics – The info-geeks have taken over. Founders are demanding dashboards for their business, updated in real time. But not only for themselves — every click of the web site, and every cancellation is streamed to every employee to give an accurate picture of the health of the company. A special version containing only the “Customer Happiness Index” and a huge happy face is streamed to the investors.
  • Crowd-sourced employee recognition – At least three companies are working on this. It can be hard for bosses to identify their best contributors to allocate bonuses. The idea is to crowd-source this from their workforce. “So we’ll give them a button — so whenever anybody does something nice, other people will just push it and they get a — a pony point — yeah! And then I just have to add them all up to find the best contributors!” If you’ve worked at a large company for more than a year, you already know what an awesome idea this is. Just rename “pony” to “stab”.
  • Skype – Ask anybody, in tiny or large companies. Odds are that they bypass their Enterprise Collabosoft GrouperWare system and secretly use Skype to communicate. Just a minute while I go privately Skype to people about why Microsoft should acquire my startup.

Great stuff, right? And no doubt smaller, nimbler, more tech-savvy (younger and geekier) companies are taking advantage of all these things. Do they make employees more productive? Perhaps. If they do, what’s going to stop a larger company from just doing this stuff anyway?

Nothing. Remember the tech trends. Everything else is just adoption, which isn’t really exogenous, but rather function of the rate of the other trends.

Anyway, remember Marc Andreessen’s investment strategy? Pick startups that will beat the big boys at their own game by being, well, better at computers.

Earlier I disagreed with this view. Still do.

Obviously this is true at some margin. There will be disruptive startups that take over big industries. But I think something else drives most innovation. Let’s call it the Cronus strategy.

Cronus, you see, had this problem:

Cronus learned from Gaia and Uranus that he was destined to be overcome by his own sons, just as he had overthrown his father. As a result, although he sired the gods Demeter, Hera, Hades, Hestia, and Poseidon by Rhea, he devoured them all as soon as they were born, to preempt the prophecy.

While the Greeks considered Cronus a cruel and tempestuous force of chaos and disorder, believing the Olympian gods had brought an era of peace and order by seizing power from the crude and malicious Titans, the Romans took a more positive and innocuous view of the deity, by conflating their indigenous deity Saturn with Cronus.

So call me a Roman and Marc a Greek, then.

Now I’m not saying that big companies are sitting back and chuckling to themselves at the silly little startups trying to nick their lunch. Quite the contrary. They are and should be terrified that they are missing the innovation boat and aren’t using current technology properly.

But corporates are conservative institutions: they have something to lose! And most startups fail for good reason. Their ideas are bad and Keith Richardses are hard to come by.

And most importantly…


Oh, yeah. Just because the kids are using facebook doesn’t mean that you can use it to sell insurance or dishwashers, or make dishwashers for that matter.

My hunch is that it’s usually a cheaper strategy to let the startups sort out which technologies are disruptive to which industries and then either pull a Cronus or just steal the idea.

The question, of course, is which ideas are worthy of theft?

If In Doubt, DI-friggen Y

Peter Thiel’s latest idea: DIY science.

Surely the power of decentralized learning is the great innovation of our times. It defines the information age, non?

I am enormously sympathetic to this idea if only because so much of the way I think has been shaped by me just reading and learning about everything I can online.

If we could teach kids ONE thing in school, and that one thing was having the confidence to DIY, the world would immediately become a better place.


Study Failure, Too

Here’s a decent article on JaMarcus Russel. A few quick comments:

Those who excel at ANYTHING differentiate themselves at the higher levels on mental strength alone, I think. Here’s an important quote from Russell:

I take some responsibility, but I was one guy… . I may have missed a throw, but I didn’t give up 42 points, I didn’t miss a block.

Nope, not good enough. Everyone is going to be surrounded by incompetence. The great among us aren’t just people who have the highest levels of personal skill. The greatest walk around with an incompetence-minimizing force field that brings everyone’s level up.

It is precisely that JaMarcus didn’t take responsibility for his team members’ failures that makes him a poor leader. Let’s say his force field had a neutral effect on others. In that case, sure, he’ll respond to Top-1% coaches, teammates, management and trainers. But that situation rarely presents itself and, crucially, he also responds in a similar but opposite way to bottom-1% affiliations.

Don’t be Mick Jagger with all the talent. Be Keith Richards and elevate everyone else. It’s the harder job.

I’m reminded of an excellent podcast Bill Simmons did with the CEO of Ticketmaster. One fascinating observation was that we think of these gigantic sports franchises as being run like the best-performing corporations in the world. Well, they aren’t. A lot of the time it’s better to think of them like family businesses, which are often run poorly.

People will bring you down if you let them. Russell doesn’t have what it takes to excel at the highest level.

Innovation Is Not Shovel Ready Stuff

Here’s Mandel linked to from his blog:

We have only two ways out of our current global economic mess: innovation and inflation. And as the saying goes, we should hope for the best (more innovation) and prepare for the worst (higher inflation).

I agree with this simply because I try to read a lot on this topic and I haven’t come across a third way.

The problem is that innovation / productivity growth isn’t obviously happening anywhere. The bigger problem is that there is a lag between when innovation ‘happens’ and when it results in real economic growth.

As others have pointed out, our economy is increasingly dominated by services, simply because we’ve gotten pretty good at manufacturing stuff efficiently. Forget about the China crap, that’s a red herring. We were going to hit this wall eventually (think about 3d printing as eventually displacing even the cheapest Chinese labor).

And the thing with services is that, in an information economy, we get people handling and processing lots of data. And people are bad at handling and processing data. They make datapiles not datasets.

The problem with training people to be better at using machines is that you either need to teach old dogs new tricks (how many CEOs are this enlightened?)  or you need to wait until the slow march of demographics increases the IT IQ of corner offices around the world.

The point is this: if innovation needs to reform the services sector, the people in that sector need to become better programmers. And that ain’t happening soon.