Ann Miura-Ko is a Partner at the venture capital firm Floodgate. She is a lecturer in entrepreneurship at Stanford. Prior to co-founding Floodgate, she worked at Charles River Ventures and McKinsey and Company. She has a BS from Yale University EE ; and a PhD from Stanford University Math Modeling of Computer Security.
This is an experiment and I may or may not do this again. The thought experiment is as follows: Imagine you are Miura-Ko, had been sent back in a time machine and a year old entrepreneur named Bill Gates walks into your office in The stack Miura-Ko is talking about in the bold text is a key part of the Floodgate investing process which starts at the bottom of this stack below and works up.
Miura-Ko is saying that at Floodgate the process starts with a careful look at strategy i. What were Bill Gates and Paul Allen thinking about when they formed Microsoft? This focus on software seems obvious now but it was not obvious in the s. Microsoft went public when it did only because it had too many shareholders and SEC rules required that it do so.
Strategy is about deliberately deciding to be different and finding unique advantage. Here is Bill Gates describing his thought process in creating a strategy for Microsoft in What if computing was free? Individuals would use computers as a tool, and software standards would become the critical element in making this happen. What is the scarce resource? What is it that limits being able to get value out of that infinite computing power?
The analysis by Gates that resulted in a focus on software was microeconomics linked to an observation about technology. That is was done by someone his age at that time is history was amazing. This is the part of the stack that Floodgate refers to as Layer 2 Product Power.
It was in that the MITS Altair appeared on the cover of Popular Electronics and inspired Gates and Allen to develop a BASIC language for that device. Would that have been enough to get Miura-Ko to invest in Microsoft at seed stage?
The bet she made on Lyft supports my conclusion. Here below is Miura-Ko on Lyft:. I invested because they came in and told me a story about how transportation innovation was critical to significant inflection points in the economy and that they believed such an inflection point was on the horizon.
No other transportation startups existed back in when I invested aside from Zipcar. They had a hard time raising their Series A as well.
They had customers but it never felt like product market fit. Lyft was just another experiment that the team tried. They were also looking at doing bus routes from SF to Tahoe, renting vans from SF to LA, etc. The big questions for Lyft before they launched was how big of an idea was this and how confident were they in trying this.
Normally the founders had been very nice but when they pitched the idea of Lyft they were very intense about it and the board said to go for it and try it. The third layer in the Value Stack is mostly about development of a solid business model, which is the way that a business turns innovation into value.
Did Microsoft have a sound business model? Gates solved this business model problem by licensing the software to hardware manufacturers who could mostly be counted upon not to violate intellectual property laws. Gates describes his business model as follows remember in this thought experiment he is 20 years old and this is Gates might have said to Miura-Ko in her office that day what he would say later in an interview: If you have been reading posts on this blog you have seen me write about the fact that missionaries more successful than mercenaries.
There is even one post dedicated to just that issue. The issues are separate. Founders who are not passionate about their mission fail way more often. Employees and founders who follow their passion do better in their career. The passion and energy of gates and Allen caused many people to join Microsoft.
Gates has several times lauded Steve Ballmer for his ability to hire great employees which allowed the company to scale. The team they built was essential to the company that was created. The more great people they hired, the more people wanted to work there. There is no question though that the ambitions of Bill Gates were huge.
This story from the book Hard Drive about Gates takes place right before he would have visited the office of Miura-Ko in my hypothetical. As Mary Gates saw it, her year-old son was about to commit what amounted to academic suicide. She arranged for Bill to talk with Stroum, in the hope that Stroum would convince her son to drop the idea of starting a company, at least for the time being, and continue his education at Harvard.
I had been involved in that industry since I was a young boy. He just talked about the things he was doing… Hell, anybody who was near electronics had to know it was exciting and a new era was emerging. The personal computer revolution was just beginning, he told Stroum. Eventually, everyone would own a computer. Imagine the moneymaking possibilities…. Not only did Stroum not try to talk Gates out of his plans to start a business, but after listening to the enthusiastic teenager he encouraged Gates to do so.
Ben Horowitz explained technical debt in his recent book The Hard Thing About Hard Things in this way: While you may be able to borrow time by writing quick and dirty code, you will eventually have to pay it back — with interest.
Often this trade-off makes sense, but you will run into serious trouble if you fail to keep the trade-off in the front of your mind. Almost every software company that is ambitious gets into a situation where there is some technical debt. When I asked a close friend for a good example of technical debt involving Microsoft he said:.
The debt though was that the data structures were designed for very small amounts of real mode memory and floppy disk space which were not the right assumptions to make for Windows with paged memory and hard disks.
Bill Gates had to watch cash carefully since in the very early days there was a lot of uncertainty about revenue. Gated would eventually go through a cash crisis when MITs stopped being a source of revenue.
In an interview many years later the two Microsoft founders described the problem:. In our very first contract with MITS, we set them up to sell our BASIC to their customers, rather than us selling to computer buyers directly. But later they decided not to sell to anybody at all because there were so many illegal, free copies of our BASIC floating around, so why try to charge people for it? That really made us mad because we thought it encouraged piracy.
We eventually went into arbitration to determine if they were in compliance with the contract. In the meantime we were totally out of money….
They were trying to starve us to death. They tried to get us to settle, and we almost did, it was that bad. The arbitrator took nine months to issue his damn opinion. But when it was all over, the arbitrator ripped them apart for what they had done. That case really, really scared us.
If we had lost, we would have had to start over. Bill would call up his dad for advice. We were on pins and needles the whole time. But, you know, through it all, we never borrowed money. I always felt like if we had to, we could have.
But we never did. In fact, I developed a rule: We always have enough cash on hand to be able to run the company for at least a year if no one pays us. The MITS experience, suddenly having no income, made me very conservative, a trait that persists to this day. Microsoft never did a pivot. So this is a hard one to put in this thought experiment. While it was not a pivot, for Bill Gates and Paul Allen a prior business impacted what they would do later at Microsoft:.
And the emulator I wrote to program it gave us a huge head start over anyone else writing code at the time. I have already said that I believe Miura-Ko would have seen the potential of Microsoft in and would have made an investment if asked. But that was another time and place. Making early stage bets means a lot of investments will fail. It is easy to look back at a great success and say: I did not have any foresight into what was really going on. The early team at Microsoft was amazing.
They all just fit together and created this positive feedback loop lollapalooza of success. The right people kept arriving at the company at just the right time year after year. When Miura Ko met Gates in this thought experiment there might have been just three Microsoft employees.
Steve Wood was a programmer who developed a version of FORTRAN for the Bob Wallace was a programmer who developed a version of BASIC for Texas Instruments TI. Marc McDonald was a programmer who worked on converting BASIC for the NCR machine.
Andrea Lewis was a technical writer. Many thousands of key people like Ballmer, Shirley, Gaudette and Maples Sr, would later join Microsoft just to name four. The problem I have about going further with names is that the list is long and if I leave someone out I will make that someone very unhappy. So I will stop at four. The important point is that these people balanced each other well and the whole was more than the sum of the parts. This is excellent story-telling by Miura-Ko which makes an important point: Gutenberg was a great founder who did not have a great financial result.
But he did change the world in a very significant way. Capitalism requires failure since that is what drives a better life for society as a whole. The cities that produce that most successful startups and the most innovation do not treat failure as a stigma. Firms like Floodgate and investor like Miura Ko help make that happen.
But it is the founders that matter most. Gates Smithsonian Oral History: Ben Horowitz The Hard Things About Hard Things: Before becoming a full-time investor, Mike was involved as a founder and operating executive at back-to-back startup IPOs, including Tivoli Systems IPO TIVS, acquired by IBM and Motive IPO MOTV, acquired by Alcatel-Lucent. This is the first time I have written about the son of someone else I previously profiled on this blog. Maples has an M. Next weekend I will profile the co-founder of Floodgate, Ann Miura-Ko.
Floodgate backs these Prime Movers before the rest of the world believes. If you have read the work of Michael Mauboussin you have seen him make this point repeatedly: So while our society may be conditioned to focus on outcomes, an emphasis on process makes the most sense for the long haul. The first layer in the Value Stack is Proprietary Power which is when the conditions are right tightly coupled with Product Power the second layer.
The business model layer is next the stack and so on. Maples is naturally focused on the lower layers in the Value Stack since he is an early stage investor, but even then, the potential for the higher layers must be there and some groundwork done on the higher layers.
Strategy is important at every stage of the life cycle of any business. A startup can easily die an early death without some credible of path to achieving a sustainable competitive advantage. Imagine you have a stand selling bananas on a city street.
And 26 other people start going the same thing sourcing the bananas from your wholesale supplier. That is an extreme example of zero proprietary power.
It is about choosing what not to do. In his search for proprietary power Maples is looking for a breakthrough idea that re-invents rules and transcends competition. What is it that the business will do that is unique?
What rule can it break that others thought it was sacrosanct? This is where thinking different can pay in a huge way once in a while. Thinking and acting different will not always succeed, but when it does: Maples has said on other occasions that lower costs at seed stage are both good news and bad news.
Here is his slide:. This post is not about opening a new bicycle repair shop. As will be explained below, a business must have a number of essential qualities to be suitable for a venture investment. To put the challenge in context, only new firms raised a Series A round in venture capital in the US in While this represents a tiny percentage of overall business starts in that year or any year, a few of these business will have an out-sized impact on society.
Can the number of series A investments in a given year go up? Organizations like Y Combinator, Startups and Angel List are pushing hard to change this. I hope they are successful, but we do not know the outcome yet. The factor that creates the most competitive advantage in the business world today is network effects.
Another multiplier of the importance of network effects is that so many systems and networks are now interconnected. Other factors that can potentially create product power like patents, economies of scale and regulatory advantages are still important, especially when combined with network effects, but they are relatively less important than they were in the past.
I do appreciate the shout out by Maples to McCaw Cellular and Craig McCaw since that is part of my heritage. People in many cases have forgotten how capital intensive the early cellular business was particularity for new entrants and how much money had to be raised in places like the high yield markets to make the business model work.
The primary focus of the business will be on satisfying demand. The best businesses generate organic growth and do not need Herculean spending on marketing and sales. Maples is pointing out that without a proven value hypothesis a decision by a business to proceed with proving they have a solid growth hypothesis is counterproductive since resources are being wasted.
That some investors and business put too much focus on traction at seed stage does not mean that traction does not matter. Yes, eventfully the growth hypothesis must be proven. Maples once included these benchmarks in a slide deck:.
Business models fascinate me since they are all unique and are always changing in an environment that is always changing. They all also must cope with nests of complex adaptive systems. The number of potential business model permutations are endless.
How can any game on Earth be more interesting than that? Maples and a group of people like his partner Ann Miura-Ko as well as Steve Black and Eris Reis clearly talk a lot and share many of the same ideas.
The output of this process is interesting since it reflects an engineering approach to creating new businesses. Actually going through the Business Model Canvas by Alex Osterwalder see below with real examples is quite an instructional process. Three essential elements in a startup are team, market and product. Or market, team and product. This is essentially another mental model or stack that is useful in understanding a business.
The degree of emphasis varies on the first two elements depending on the venture capitalist. Certain people and teams in certain situations are capable of amazing feats of creativity. More money is not necessary and in some cases is a hindrance. Before proceeding to the next quote, a side bar on technical and management debt is perhaps useful. Management debt is incurred when a founder or manager makes expedient, short-term management decisions which have costly long-term consequences.
The right company culture not only allows a business to scale, but minimize and resolve problems as they arise. It allows decision-making to be distributed, optimized and expedited. Warren Buffett has written: When you are working with people you know and trust, tremendous efficiencies are created. Charlie Munger has said on the importance of culture:. All these cultures are different.
The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. This is the least important layer for a seed stage business, but as I noted above the potential for this layer is attractive to an early stage investor. In this layer along with the Company Power layer ground work is still being done at seed stage says Maples. Ann Miura Ko describes the Category Power layer this way:.
They want to be the only Thunder Lizard on the block. They created their own separate category and then completely destroyed Blockbuster. They created their own new category. Category power is the ability for the founders to think about the language of the market they are going into, and how they define this for their company. The term Unicorn encourages bad behavior. I actually use the term Grand Slam myself and definite that term like Maples does with Thunder Lizard to include an actual financial exit.
Business formation in this Thunder Lizard category is up. But in the non Thunder Lizard category the numbers are down, This statistic makes the point: To grow the economy and create new jobs we need lots more new business that are not radioactive eggs. Starting a business that has the potential to be a Thunder Lizard is far more of a calling rather than a rational act.
Missionaries are far more likely to succeed than mercenaries when the act is not rational. It is impossible to fake the feeling that makes someone a missionary rather than a mercenary. The founder may fool some of the people some of the time, but in the end the truth will come out.
Hoping that the economics of the venture capital world will bend just for them is a triumph of hope over experience. People say flying a commercial airplanes is composed of long periods of boredom interspersed with a few minutes of terror. A startup is the reverse: Am I exaggerating a bit?
Sure, comedy requires exaggeration. Did I often have a weird kind of fun and feel accomplishment when I was helping to build Teledesic?
Would a team of mercenaries have been able to do what the team of Teledesic missionaries accomplished? My startup experience give me lots to be humble about. I learned a lot. It was also financially rewarding for me since as I explained in my blog post on Teledesic, early investors and employees received a significant multiple on their investment or stock options. Later investor were not so lucky. There will never be another Silicon Valley. But other cities and regions can create a successful technology-driven economy in their own way.
The best way to do that is to create a pool of great founders since venture capital will always follow great founders. As an example, when venture capital started in northern California the venture capitalists had their offices in San Francisco. When the founders moved south toward the Stanford campus the venture capitalists moved to Sand Hill Road.
When the founders started moving back to San Francisco so did the venture capitalists. Another example of capital chasing great founders is Benchmark investing in Zillow in Seattle and Snap in Los Angeles. Money will always follow opportunity and the opportunity is created by great founders. The best single way for a city to create a supply of great founders is to have at least one world class research university. Any city or region that wants to well in a modern economy that does not have a major research university is operating at a serious handicap.
There are other things a city can do like having a culture that does not treat failure at trying something hard as anything but a great learning experience. Great K schools, a diverse population and a healthy environment help too.
Success feeds back on itself in that great founders inspire and attract more great founders. One final note relates to the power laws that are pervasive in venture capital. With power laws most values are below average and a few outliers are far above. This means that average figures are close to meaningless. Power laws apply not just the distribution of success of venture-backed companies in a country or globally, but to the success of startups within a city or the success of venture firms operating in a city.
In venture capital it is the outliers that matter most. This power law distribution exists in an industry but also within a city. Dare to do Legendary Things http: Dare to Make your Startup Legendary https: Munger has tapped into something that makes his ideas both memorable and understandable. The dictionary definition of wise ass is: I do not want a proctologist who knows Schopenhauer, or astrophysics. I want a man whose specialized.
And you should never forget that. To be a wise ass in public in the cause of educating the public requires a rather thick skin, which Munger clearly has. His willingness to say the truth out loud is a needed antidote to somethings that are wrong in the world today.
Warren can find another one. Teaching people anything, particularly about investing, is hard. Charlie has said that he has trouble getting his own family to follow value investing principles so he has little hope of his ideas being widely adapted.
I think Munger understates his influence, but it may be true that he has helped more people improve the way they think than the way they invest. One final Munger thought on teaching is: If you want to improve your grandchildren the best way is to fix yourself.
That people are sending him hate mail is bullshit. Debating ideas is one thing but hate is quite another. People who are haters are often making up for something. It is an advantage to not give a damn what people say. I like this from Felicia Horowitz:. You may or may not know that a cocklebur is one of these little spiked seed pods that may attach itself to your shoes, socks or clothing, especially if you enjoy walking in riverbeds or pastures.
When you read the Munger quote if you found yourself wanting to know or make sure you knew what a cocklebur was, you are more likely to be a learning machine. Munger is pointing out that one very effective way to be a learning machine to pay close attention to your own mistakes. If you are not making some mistakes you not learning.
The same thing goes for making too many mistakes that are not new mistakes. He also believes that if you are not changing your mind on some important questions each year you are not learning either. The more widely held the asset class the more intense the competition has become.
This is not new but the trend seem to have accelerated. It is hard to imagine that it was possible in the days of Ben Graham to buy companies at less than liquidation value. As just one example of how investing has become more competitive, Michael Mauboussin writes:. The exhibit shows the five-year, rolling standard deviation of excess returns for all funds that existed at that time. This also fits with the story of declining variance in skill along with steady variance in luck. These analyses introduce the possibility that the aggregate amount of available alpha—a measure of risk-adjusted excess returns—has been shrinking over time as investors have become more skillful.
Add in the fact that in aggregate investors earn a rate of return less than that of the market as a consequence of fees, and the challenge for active managers becomes clear.
Investing large sums of money a market like we are in now is particularly hard. That is why some fund managers return cash or keep funds smaller that they could raise relative to demand. The bigger the fund the harder it is to outperform. Buffett puts it this way: I killed the Dow.
You ought to see the numbers. But I was investing peanuts then. Munger loves fishing and fishing sayings. William Safire in his Political Dictionary wrote: The tackle shop story? Chris Davis tells it here in this one minute video: As an aside, in Wisconsin, populations of silver pike have been reported in Munger lake in Oconto County.
Munger said that China was not an easy market to invest in due to opaque financial reporting but it is a better place to find bargains still. How can you lose owning the main airport in China? It takes extra work. But why should it be easy to get rich? Berkshire gives the selling owner the chance to make sure that the business they care about and the people that work there continue to thrive.
For this reason, Berkshire gets offered the opportunity to buy businesses at very attractive prices. We list the economic principles, so managers who sell to us know they can count on it. We also let managers continue to run their business. We are now in class that is hard to compete with. As long as we behave properly, we will maintain that asset, and many will have trouble competing with it.
We are good at navigating through that kind of stuff. Other things were easier, and we screwed those up. And he has done it and done it in spades. It just always looked expensive. When asked in a press interview why he did not buy Amazon shares Buffett said on CNBC: I WAS IMPRESSED WITH JEFF EARLY. I NEVER THOUGHT HE COULD PULL OFF WHAT HE DID. AND WHAT IS REALLY — I MEAN, I THOUGHT HE COULD PULL OFF SOMETHING, BUT ON THE SCALE THAT IT HAS HAPPENED. At Munger and Buffett he used their error of omission on Google to illustrate how you can learn from experience.
GEICO WAS A HEAVY USER VERY EARLY ON. HERE WE SAW VALUE. AT THAT TIME, I HAVE NO IDEA WHAT WE WERE PAYING FOR PER CLICK NOW. I SHOULD HAVE HAD MORE INSIGHT INTO THAT. IT IS A LITTLE HARD WHEN YOU LOOK AT SOMETHING AT X AND IT SELLS AT 10X TO BUY IT. AND THEN BUY IT. IT HAS COST A LOT OF PEOPLE MONEY AT BERKSHIRE. That is an extraordinary change from the past. NOW, THAT WAS NOT THE CASE IN THE PAST. My post on this is: I had a week of it and hated it growing up.
I am worried more about the change not being fast enough. Munger believes that what we need to realize is that people get hurt by this shift and we need rbi rules forex trading india help them make the transition.
One of the more standard forex trading account arguments I have seen on issues related to productivity and innovation set of issues was made recently by Marc Andreessen.
In high productivity sectors, prices are crashing. The sectors where prices crashing are shrinking as a percentage of the economy. TVs are going to cost ten dollars and health care is going to cost a million dollars. Both sides of the economy get polar opposite emotional reactions. More is being done with less and yet traditional measurements forex gratisan terbaru that productivity is decreasing since less money is being spent in more productive sectors.
In addition, many people assume that innovation always creates more producer surplus and profit. Charlie Munger describes the reality: And most people do not get this straight in their heads.
All of the advantages from great improvements are going to flow through to the customers. We must discover new solutions to these new problems and this will require innovations of many kinds.
Tavel is a great fit for Benchmark since the firm has always believed what they do is a craft. I wrote about this in my blog posts stock market game scholarship Andy Rachleff, Peter Fenton and Bill Gurley.
What Benchmark partners like to do is invest early and work shoulder-to-shoulder with entrepreneurs. The Benchmark partners would use that approach even if it was not the best way to optimize their financial return since it is what they enjoy most about the process.
It is important to note that a critically important part of the pattern recognition in venture capital is finding the exception to previous patterns that is different. Part of the pattern is: It is a bit like the spot the difference game, except it must be a very important difference that delivers significant new core value to a really big market.
I have written about the science part of the entrepreneurial process quite a bit lately. Generating growth in a startup is accelerated by great data science because it allows you to measure results and apply the scientific method to growth experiments. When founders get access to great data science they have a greater ability to scale their output and most importantly make their creative contribution enduring.
Data science does not eliminate the wall street stock exchange wikipedia for creative sparks, but when used effectively it facilitates creativity by enabling rigorous experimentation and increases the impact and growth of the business.
One of the reasons I write about so many different venture capitalists is to make the point by example that there is no cookie cutter way to be successful investing in startups.
There are many similarities and common elements, but many differences too. My view is that there are different pools of alpha and different people search for that alpha in different ways. Of course, some investors are more successful than others. Typically the investors that are most successful chose an approach that is most consistent with their nature and unique skills. Benchmark co-founder Bruce Dunlevie puts the strength of the team at the top of the early stage investing hierarchy.
Another Benchmark co-founder Andy Rachleff puts more emphasis on the existence of a very large moneymakergroup tradelite market. Of course, this is a matter of emphasis as both the right team and the stick rpg 2 easy way to get money market are important.
That Benchmark has adopted a craft rather than a platform approach to their business does not mean that other approaches by other venture capitalists do not work. It is just the right approach for them warren buffett just bought 9.3 million shares of this forever stock individuals and gives then a unique service to offer founders.
Some founders will be more comfortable with a full service venture capital platforms. Strategy is what you do differently than your competitors. You must be different and you must be right about that difference if the strategy is going to be successful. The critical point Tavel is making is that it make no sense to pursue a growth hypothesis before the company has solved the value hypothesis.
Why would you try to get more people to use a product that does not have core product value? It is not only hard to create core product value but the discovery process if it happens inevitably requires time and experimentation. The shorter the financial runway of the business the less opportunity exists for the startup to discover product market fit and solidify its value hypothesis.
Tavel also notes that hiring is something to be approached with care even after the value hypothesis is proven. Company culture is far more a determinant of success than people imagine.
Putting fuel in a rocket which does not have an greedy stock market target and a working guidance system is a bad idea.
Even if there is product market fit, there is a right time to spending big on generating growth and that time if after a sound growth hypothesis has been proven. Tavel is pointing out that the primary means of defending a business against competitors today is network effects. My blog post on network effects is here. Other approaches that can create a barrier to entry like economies of scale, regulatory expertise, intellectual property european stock exchange opening times brand still matter, but they are relatively less important than they once were, especially in the case of software startups.
There are a number of terms used to describe the factors that can create sustainable growth. One term that I like is the concept core product value, which represents a solution a real and significant problem that is valuable enough to cause people to want to pay for a product. What is the moment when you used AirBnB? At Behance, in the sign-up process for our service, we used to ask new Behance members to select their top three creative fields.
New users took an average of seconds to browse the list and select their banc de binary first cysec regulated options brokers fields.
And so, we removed it from the sign-up process and resolved ourselves to capture this information later on during active use of the website.
As a result, sign-ups went up. This is true for every online service or store. They are vain in that they want to look good quickly using your product. How do you discover magic moments for your service? The objective is to look for correlations between usage, demographics and other behavior and retention. Examples of magic moments discovered by some businesses include adding seven friends in ten days or sending several thousand messages.
Virtuous circles and vicious circles are processes which can reinforce themselves through a feedback loop. Virtuous circles produce feedback that results in an increasingly positive outcome and vicious circles the inverse of that. Y Combinator co-founder Paul Graham describes what a business must do to start a business from a standing start better that just about anyone I have seen: Nearly all startups have to.
You have to go out and get them. A good metaphor would be the cranks australian dollar exchange rate in indian currency car engines had before they got electric starters. Once the engine was going, it would keep going, but there was a separate and laborious process to get it going. CEOs will go on sales calls, products will be created by hand, and many manual processes will be used at first.
This info-graphic captures some non-scalable approaches that startups have used to bootstrap their flywheels past the cold stat problem. There are an endless number of ways you how much does the average songwriter make per song think about cohorts.
What causes the line to stop dropping is often the network effects of more people being on the network creating a critical mass of value for the customer. A retention curve that does not flatten and instead drops to zero may be caused by a product market fit problem or it may be the nature of the product e. The single most important factor that drives growth is retention.
It is even better if you can do well financially by doing something good for other people. Regardless of whether someone is first starting out or even if they are a big success writing is a way to turn thinking, words and effort into a substitute for capital. Content marketing is both more capital efficient and produces better results than traditional marketing.
Writing is my fe trend scalper v.7.63 of giving back. It makes offline typing work from home without investment in jaipur feel good though, which is highly underrated.
The Hierarchy of Engagement, expanded https: How To Create A Sticky Product Like Facebook and Evernote https: Growth Hackers AMA https: Lesson from Scaling Pinterest stockpair trading strategies The Mitochondria of Startups https: K-Dot is making the same point Charlie Munger was trying to convey when he said: Life gets easier when you learn vicariously from the mistakes of other people.
K-Dot is cautioning people to stay grounded about priorities, especially when fortune suddenly arrives. Vanity, greed and ego can cause people to make bad choices. He makes his point with an example: Concern about the adverse impact of vanity is not a new idea.
For example, Jane Austen wrote: A person may be proud usd eur exchange rate history graph being vain. Pride relates more to our opinion of ourselves, vanity to what we would have others think of us. Getting control of your desire for ever more stuff is mentally healthy. Can you be wealthy and enjoy that but not tie your happiness to maintaining that wealth?
The master of a fool. Munger puts it this way: I wanted the independence. I desperately wanted it. People involved in the entertainment and sports industries often have incomes that are front loaded in the early years of their career.
Yes, they can work at another job later in life, but that work may not pay nearly as much as they earned in their prime years. The best way to increase your wealth is to save more of your income. Morgan Housel puts it this way:. Wealth is just the accumulated leftovers after you spend what you take in.
K-Dot is saying that people should think more about their retirement savings in particular. Trying to live on just that income given health care and other expenses is a terrible idea if you can avoid it. Here is some data on that point:. While saving money is the most important step one can take to increase wealth and security, K-Dot is saying that investing is important too. Median values are low for all age groups. K-Dot is talking about the need for investors to control risk, especially when it comes to retirement funds in something like a K.
Before a person can control risk it is necessary to define it. I particularly like the definition of risk adopted by Howard Marks: And then about four or five months later, she would write me the same letter again. K-Dot is saying that he will not lose focus on the hustle aspects of his life just because he has made real estate or other investments. Nothing generates wealth more reliably that a strong work ethic, a regular income combined with talent and a willingness to save and invest.
My view on actively investing real estate is heavily influenced by the advice my grandfather a real estate developer gave to my father the doctor. He said that my dad should leave active real estate investing to professionals. If my father desired exposure to real estate my grandfather suggested binary options in nse he do so via a fund.
He said that it lowest commission stock brokers possible for my dad to become an expert active real estate investor but only if he treated it as a second career, found an area to specialize in and was passionate about it. They know more about the industry than you do. They go to others. Sequoia sees the good stuff. Start-ups come to me! Real estate has a lot of difficulties.
K-Dot knows that there are no called strikes in investing. Patience is essential as is waiting for the right offer. Opportunity cost is a huge filter in life.
Charlie Munger looks at his investing decisions in this way: Our hurdles reflect our estimate of future opportunity costs. Warren is scanning the world trying to get his opportunity cost as high as he can so that his individual decisions are better. K-Dot is pointing out that it is important forex traders lifestyle trading excess in the city itv documentary think critically about your decisions since we all have a range of dysfunctional biases that can tend to result in unwise decisions.
Thinking hard about how you might have made a mistake due to an emotional or dysfunctional factor can pay big dividends. People who can put aside their ego-based defenses and embrace a great idea that someone else discovered tend to get better results in life. A year in which you do not change your mind about something important is a wasted year in his view.
In the end you can make more money from behavior that meets a high ethical standard. Not only it is the right thing to do morally, it is the right thing to do from a profit standpoint. Charlie Munger has said: Munger tells a story about how he made a fantastic investment by wading into an area where the other people involved are ethically challenged:.
I realized that none of them would ever bid a fair price. K-Dot is channeling a point Dorothy Parker famously made when she said: Munger puts it this way:. There is an old expression on this subject, which is really an expression on moral theory: Even though there are some people who do very well, like Marc Rich—who plainly has german mauser stock buy had any decent ethics, or seldom anyway.
But in the end, Warren Buffett has done better than Marc Rich—in money—not just in reputation. No matter how rich someone like K-Dot may become there are limits to what can be given away.
Rilo moneymaker are inevitably created when too much money is given away to a friend or a posse of friends. K-Dot is saying that people who were on the receiving end of gifts have a stock market buyout to get angry if you stop since they feel they have lost something.
These angry feelings are heightened due to loss aversion. Being generous works better when you make sure that the beneficiary is not acquiring exchange rate gbp to inr chart expectation that the gifts will be ongoing. Being generous of charitably minded is not always simple. Morgan Housel puts it this way: As I noted in my recent blog post on Ray Dalio, he believes: Buying things and making investments that stroke your ego is short sighted.
People who learn to save and invest have better choices in life. Few things are worse in life than having no choices. Munger with a closing thought:. Why would you want to get on that trolley? They have no muscle memory of it whatsoever. Unlike the entrepreneurs Bill Gurley how to earn money from steam workshop talking about, I have a lot of muscle memory that resulted from the Internet bubble.
There is no way you can fully convey in words the experience being in the lead car as an communist countries make money in that roller coaster. Looking at the cycle after the fact is nothing like looking ahead and not knowing what will happen next. The experience still impacts the way I think and act.
It was a heck of a lot of fun in some ways. Good judgment comes from experience and forex subreddit that experience comes from bad judgment. Most of the bad judgment associated with the Dot-Com era was observed but some of it was mistakes I made all by myself or as part of a herd. It is hard to describe how strong the feeling of FOMO was at the time.
People were terrified of missing out on the upside and loss aversion and paper gains made them reluctant to act to cushion the downside. Every story must have a starting point. The best time to begin this tale is probably when the business environment first started to change in way that would develop into a bubble. The initial buildup was gradual and steady at the outset. But by the parties started getting better, the tchotchkes more lavish and paper wealth created at an impressive pace.
Everyone was a frog in a pot of boiling water but they mostly did not feel it. By having in the Rolling Stones or The Eagles play at a private party hosted by a bigwig was becoming normalized in some circles in certain geographies. One aspect of the abnormality of the period was the rapid jump in the number of IPOs.
It also puts the current IPO market into perspective. Venture backed IPOs looked like this chart below. One VC quoted on Bloomberg recently predicted IPOs in As a benchmark for comparison, there were 21 tech IPOs in23 in 15 and 55 in and 84 in how much money does roy jones jr make While had the most IPOs was the pivotal year in terms of the valuations and amounts of money raised:.
One aspect of the IPO craziness of the Dot-Com era was the first day pop. That experience illustrated how being early in making a prediction is indistinguishable from being wrong. The environment was literally nuts. FOMO made people do things that in retrospect seem insane, but at the time seemed reasonable. VA Linux jumped a record percent in its first day of trading in early December.
The year registered nine of the top 10 first-day IPO gains of all-time, according to IPO. A Salon article in April of article painted a picture of the party scene in the technology world that was produced by too much cash chasing allstocks markets world charts world charts little value.
What is most notable perhaps about the article is that it appeared after the bubble earnest money deposit default popped. The party scene was operating on momentum still, but about to come to a calamitous halt. She hops into a van with four strangers, who are on their way to scottish widows balanced growth fund share price dot-com bash across town.
In any given week, stock market game scholarship companies throw 15 to 20 parties in the San Francisco Bay Area.
More money, more people and more extravagant ideas are definitely the way to go. Clearly an abnormal number of IPOs and unprofitable companies doing an IPO was happening in The level of s chadenfreude and morbid curiosity was also unprecedented. The roll call of craziness is long:. A more complete list of companies that went public during the DotCom era can be seen in this document entitled: It would be interesting if the math revealed yet another power law.
One thing that is hard to describe is how quick things got really ugly. Some people froze like a deer in headlights. Other people acted and salvaged some value. But things went downhill fast that year:. What caused the bubble to pop?
I am of the views that what triggered the correction was a lack of cash. It is impossible to prove but some people think so. There were also companies on that list http: This amounts to a quarter ofthe companies included in our study.
Among the outfits likely to run out of funds soon are CDNow, Secure Computing, drkoop, Medscape, Infonautics, Intraware and Peapod. While this method cannot predict the future precisely, it helps answer a question that has been nagging many stock-market analysts: When will the crowded Internet industry begin to be winnowed?
The ramifications are far-reaching. These charts of the NASDAQ tell a graphical story about what happened and when. It is important to note warren buffett just bought 9.3 million shares of this forever stock it went down as fast as it went up. The telecom bubble took at bit longer to correct, but that is another story.
Stock tips have been replaced with talk 24 trade binary options profit in 60 seconds recession. Many pioneering dot-coms are out of business or barely surviving. The Dow Jones Internet Index, made up of dot-com blue chips, is down more than 72 percent since March.
Online retailers Priceline and eToys, former Wall Street darlings, have seen ruger 10/22 synthetic stock sling mount stock prices fall more than 99 percent from their highs.
Posts looked like this:. In terms of my own decisions related to the end of the bubble, the summer of was when I hedged the market by selling some shares and buying some how do you make money with admob as a proxy hedge after reading a lot of material buying golder associates stock price the views of Buffett and Munger.
I decided that year I would put away enough money in safe bets so I could live comfortably regardless of what happened. There are times in life when the world will not make much sense, at least to you. As an example, the Internet bubble of was a time like that. The share sales and proxy hedging ensured that I would not be a burden to anyone in my retirement and that my children would be able to go to college with my financial assistance.
My decisions were not perfect but they were sound. So you may ask, are we in a bubble now? Well we can say that things are very different. The situation today is not the same it was in March In some m people around the world had access to the internet; by the end of 3.
I fall in the random walk hypothesis for chinese stock markets camp of people who say that we do not have a valuation bubble today but rather a risk bubble.
The big lesson to take away from the bust is that the cash spigot can close really fast. From the end of the Internet bubble into cash was indeed king. Risk and valuation are not the kosdaq stock market. There are many thing that are different now a few of which are noted in this article http: Good things can come from bad experience. Many ideas that failed then are succeeding now. Capitalism requires failure and it is an understatement to earn money by posting in forums that a lot of things failed as a result of the Internet bubble.
One good example is described here by CB Insights: After several years of sustained losses, though, the company finally crashed in But they could not cover their costs venture philanthropy does not scale and ran out of cash. In he enlisted in the 9th Indiana Volunteers and fought in a number of American Civil War battles, including Shiloh and Chickamauga.
He was seriously wounded in the Battle of Kennessaw Mountain in and served until January After the war he worked as an editor, journalist, and short story writer mostly in San Francisco. My approach in this blog post, as is customary, is to supply something in support of the original text, which in this case a joke rather than the usual commentary. A frog goes into the bank and asks the teller for a business money maker coupons cvs. The teller tells the frog to see Mr.
Paddywack, liquidity risk stock market business loan officer. The frog pulls out of his pocket a solid silver elephant. Larson, the bank manager to approve this business loan. Two minutes later, Mr. A man had just been hired as the new CEO of a large corporation. The CEO who was stepping down met with him privately and presented him with three numbered envelopes.
Well, things went along pretty smoothly at first, but six months later, sales took a downward turn and he was really catching a lot of heat. About at his wits end, he remembered the envelopes.
He went to his drawer and took out the first envelope. Satisfied with his comments, the press — and Wall Street — responded positively, sales began to pick up and the free forex ebooks download pdf was soon behind him.
About a year later, the company was again experiencing a dip in sales, combined with serious product problems. Having learnt from his previous experience, the CEO opened the second envelope. After several 5 min binary options trading strategy no lossmp4 profitable quarters, the company once again fell on difficult times.
The CEO went to his office, closed the door and opened the third envelope. How many stockbrokers does it fitschen keith.
building reliable trading systems (wiley) to screw in a lightbulb? Two friends met in the street. One looked sad and almost on the verge of tears. A man opened the door of his BMW, when suddenly a car came along and hit the door, ripping it off completely. When the police arrived at the scene, the lawyer was complaining bitterly about the damage to his precious BMW.
You make me sick!!! An alien walked into a shop and told the owner that he came from Mars and wanted to buy a brain for research. Joe was having a tough time finding a job what with the current economic problems. Finally, he secured winchester arms stock market interview and needless to say, he was trying his best to impress.
A shepherd was herding his flock in a remote pasture when suddenly a brand-new BMW advanced out of the dust cloud towards him. The man parked his car, whipped out his laptop and connected it to a mobile phone, then he surfed to indian virtual stock trading NASA page on the internet where he called up a GPS satellite navigation system, scanned the area, and then opened up a database and an Excel spreadsheet with complex formulas.
He sent an email and, after a few minutes, received a response. He watches the young man select one of the animals and bundle it into his car. Then the shepherd says: Now give me back my dog. Even the inside of your own mind is endless; it goes on forever, inwardly, do you understand? What is most interesting to me about Ray Dalio is his decision-making process. I have written a more general blog post about Dalio on this blog, which you can find a statistical versus clinical prediction of the stock market to in the Notes to this post.
Anyone who has read and understood the books and essays of Michael Mauboussin knows that people who have a sound decision-making process have better outcomes in life not just in investing. And your life essentially depends on the cumulative quality of the decisions you make. Andy Rachleff makes the same point as Dalio is saying in this way: On one axis you can be right or wrong. And on the other axis you can be consensus or non-consensus. The only forex gana sinhalen as an investor and as an entrepreneur to make outsized returns is by being right and non-consensus.
Another adherent to this idea is Howard Marks who has said: Some people are good at being uncomfortable, and some are not. Not to let them think for me, not for me to follow their point of view, but for me to understand the different perspectives. Because it increases my probability of being right, and it reduces my probability of being wrong. It teaches you humility. The first step is taking in information, particularly if there is disagreement, to understand that disagreement and then to make a decision.
You have your right to make a decision. But it is so stupid not to take the time to take in and explore disagreement that might help prevent yourself from being wrong.
Dalio describes this concept as follows:. I want independent thinkers who are going to disagree. The most important thing I want is meaningful work and meaningful relationships and the way to get that is through radical transparency. And in meaningful relationships you can be totally transparent with each other, letting each other know what your weaknesses are. As context, what Dalio is setting out to do as an investor is extraordinarily hard. To say that a tiny number of people outperform the markets by making macro bets is a radical understatement.
A handful of people have been able to do this successfully over many years at scale. Dalio has discovered a source of alpha outperforming a benchmark through a process that results in better decisions. Dalio starts with a rational analysis of the information he has and from that he forms a hypothesis.
As part of that process he wants to deeply understand the reasoning of any thoughtful opposing views. Only after he has understood these alternative points of view does Dalio believe he is in a position to reject or accept the alternative ideas and make a decision. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side. Why would Dalio join Twitter this week?
Well, if you do use Twittter properly you can get exposed to real time views of smart people who think differently and who may have opposing views.
Many people treat Twitter as a broadcast medium which is a shame since the value of interactive discussion is so much higher. Many people also turn their Twitter feed into a echo chamber, which is a lost opportunity.
Dalio and Munger share other approaches to decision-making. For example, Munger, who describes his process as follows: First, what are the factors that really govern the interests involved, rationally considered? Second, [I work to eliminate] influences where the brain at a subconscious level is automatically doing these things-which by and large are useful, but which often malfunctions. But he never went to large conferences. Any human being needs conversational colleagues. To review what I have said in this post so far, the decision making process that Dalio, Buffett and Munger use is:.
On this last point Daniel Kahneman believes: Dalio believes that the more a person repeats this process over the years, the more they learn. What does this sound like to you? So just imagine what a fantastic path to think. Be more right than wrong. So in that process I can take personal accountability. So that process itself lent itself to this kind of very open-minded decision. Also the making mistakes, and the loving the mistakes.
They are able to listen carefully and objectively to the reasoning behind differing opinions. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view.
Many of these principles you have seen other investors say on this blog. Make 15 or more good, uncorrelated bets. What typically gets in the way of the process like Dalio wants to create? Ego and organizational politics. The ego of the decision maker is so often the source of a problem or mistake. Dalio says that it is emotionally hard to be radically transparent. I mean, there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out.
We try to get greedy when others are fearful. And those are the factors that cause smart people to get bad results. Instead of just trying to be smart, it is wise to focus on not being stupid. So thoughtful discussion, worrying about being wrong but not to the sense of being paralyzed.
Or moving forward, but in the sense of trying to create discovery, to have an exchange. To go after the person who has the most different point of view, who is the most thoughtful, and then have a conversation to see their point of view. Whether a person could be both open-minded and assertive at the same time, that creates a discovery process. It creates a fabulous learning.
That process itself reduces the probability of being wrong and produces a great deal of learning. People are so hung up on being right. Starting their discussion and deriving some sort of satisfaction if, at the end of the discussion, they were where they began the discussion. So ego plays an important role in that. And rather than just seeing how you see it, you go above that.
You start to think, how do I collectively see? All of the sudden you see the full spectrum. The most important thing is to have humility, and to think about, how do I get the best decision? I just want it to be right, right? They have also decided to focus on investing decisions that involve forecasts about microeconomics. In contrast, Dalio is engaged in macro investing and his supporting organization is far larger. Reuters describes what must be managed at Bridgewater as follows:.
The culture is not for everyone. The firm is known for relatively high turnover among its roughly 1,person staff. An estimated 25 percent depart during the first 18 months of employment.
The challenges associated with maintaining a culture like Bridgewater which is willing to incur the overhead of continuously providing feedback and utilizing it in decision-making in an idea meritocracy are significant.
The number of connections between employees increases with the square of the number of involved employees, which has caused Dalio to come up with some unusual approaches to maintaining radical transparency like videotaping and making available to anyone almost all meetings and the use of Bridgewater designed baseball cards.
If doing what Bridgewater does was easy, the alpha would disappear. Being different is a source of competitive advantage. If you want different results you must act in a different way. To see how Dalio tries to combat dysfunctional corporate politics at Bridgewater it is useful to examine how he describes his principles: Badmouthing people behind their backs shows a serious lack of integrity.
Next to being dishonest, it is the worst thing you can do at Bridgewater. You need to follow this policy to an extreme degree to be in harmony with our culture. For example, managers should not talk about people who work for them without those people in the room. Now in that environment I get to see how differently people think.
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I realize how radically different people think. This is the fastest way to get a good education and enhance decision-making. Our CIOs are ultimately responsible for our investment decision-making. But we all make better decisions by maintaining an independent view and the conflicting possibilities in our minds simultaneously, and then trying to resolve the differences.
Operating this way just seems like common sense to me. After all, when two people disagree, logic demands that one of them must be wrong. This sort of total honesty and transparency is not a comfortable environment for many people, but it is for enough talented people that Bridgewater has been able to assemble its team and compile its remarkable investing record. The Culture Principle https: A Dozen Things Essay by me about Dalio: Freemium describes a business model in which a business gives one product away for free or at a subsidized price and then either: Three versions of the Freemium approach are:.
The freemium business model is ancient. The practice of offering tapas in Spain is just one relatively modern example. Newspapers being used to sell political views is another example:. The American newspapers of the s and early s were creatures of political parties, edited by zealots.
Many businesses have offered free services free month of HBO or free trials magazines. The Venture capitalist Tomasz Tunguz of RedPoint has written about why the freemium business model works so well:. By shifting the education workload from a sales team to the customer, the cost of sales can decrease dramatically… freemium startups leverage usage data to improve their product. Marketing teams can sift through the data to understand market segmentation and funnel efficiency, and product management can parse the data to improve the on-boarding experience.
Third, freemium startups gather information about their customer base to prioritize their sales efforts. The cost of educating the potential customer about the benefits of the product can be dramatically lower once a potential customer has used the product in the free setting. The need for advertising to create awareness is lower and any expenses associated with a paid salesperson or sales support engineer patiently explaining the product to a potential customer has been replaced by self-education.
Freemium also leverages other human tendencies like reciprocity and inertia, which further lower the cost of sale. John Vrionis of Lightspeed Venture Partners describes the less costly and more effective freemium sales process:.
Conversely, selling bibles to a group of believers is a lot easier… Sales people engage an account when they know that the prospect is well down the path of adoption and belief.
As Tungus and Vrionis note, the essence of the Freemium model is to reduce the price of acquiring a customer. Everyone with a business has CAC. To illustrate, even comedians must incur costs to acquire customers. In my lifetime the changes in the world have been incredible.
When I was a kid we had a rotary phone. We had a phone you had to stand next to and you had to dial it. And then when, if you wanted money you had to go in the bank for when it was open, for like three hours.
Those four sentences solidified Louis C. This cross promotional approach is not new. Not too long ago they generated most of their profit from albums promoted on talk shows and concerts Johnny Carson used to tell people their dates.
Are other comedians using freemium like Louis C. But the loss leader is not always a zero revenue gig, just lower revenue. For most comedians, specials are a means to boosting their key revenue source: TV specials have always translated into additional fans showing up on tour stops, but the lift from a Netflix special exceeded what a lot of comics were seeing from regular TV.
Ben Thompson succinctly describes one root cause of why the Freemium phenomenon is on the rise as a customer acquisition technique as the world become more digital and networked:. Take apps for example: After all, software is simply bits on a drive, replicated at the blink of an eye.
The implication for apps is clear: This is why the market for paid apps has largely evaporated. If I make a digital copy of your digital music, you still have your music the music is non-rival. If I steal your phone you will no longer have a phone a phone is rival.
A lighthouse is a public good and in many settings so is software. One confusing element of a freemium business model is the accounting involved. If giving away goods or services for free or with a subsidy is not a marketing expense, what exactly is it?
Marketing costs are typically shown below the gross margin line on an income statement. But the cost of freemium offerings can be considered part of costs of goods sold or COGs. Different companies treat freemium costs in different ways. Some companies even split the difference: In any event, giving away free services is an expense however you look at it. Small startups with little cash on hand or that desire not to dilute their ownership too much by raising more cash have found freemium to be particularly attractive.
If they know how to write software they can use the free service to avoid spending cash on customer acquisition. As an added benefit, customers acquired though freemium tend to value the product more. They churn less from the service and tend to have better credit. Bill Gurley describes an increasingly important phenomenon facing every business today: That fact thatmany of the free services are digital and have close to zero marginal costs has caused the freemium strategy to spread like wildfire.
The implications of the freemium business model are massive since businesses now face competition from companies that they never previously thought of a competitors. Making the approach even more attractive is the fact that even free users add to network effects since they are using the systems and its formats. Using a freemium approach can be tricky in an enterprise setting.
Version One ventures points out that freemium can create problems and is not a panacea:. Here, free can be equated with low quality. Acquiring business users may prove too costly, forcing start-ups to raise incredible amounts of money to finance aggressive sales and marketing efforts for a free app. In the enterprise, freemium models generally work in two situations: Freemium works best when there are millions of potential customers since the conversion rate will not be high.
Nothing creates a base from which to try to up-sell users like a free service. There is no question that a price of zero is magical for humans. Work by Dan Ariely proves this point:. When we dropped the price of both chocolates by just 1 cent, we observed that suddenly 90 percent of participants opted for the free Kiss, even though the relative price between the two was the same.
We concluded that FREE! The freemium approach is now scalable globally as never before. The implications of this shift are huge and still being sorted out. Services like mobile games and Craigslist have free elements. This is likely to significantly underestimate the true level of saving because in this experiment the internet was compared with a university library — an asset that few consumers can access.
Another approach is to estimate the time people spend on the internet. The reasoning runs that if I choose to spend an evening searching the web it demonstrates that I prefer this activity to all others available to me. The nature of the internet and the way we interact with it makes estimating the consumer surplus from it incredibly difficult. Crowdsourced websites such as Twitter, Wikipedia, TripAdvisor or the review section of Amazon are particularly challenging. How does one measure the addition to the consumer surplus from our receiving advice, ideas and information?
These estimates do not include the value of open source and other public goods for businesses such as free cloud compute and storage for commercial customers. For example, every cloud company now has a free tier. Azure also has free credit for new customers and a free service trier.
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Open source examples include Linux, Git, MySQL, Node. Open source software has enabled the creation of many freemium business models. By combining software that is given away as part of an open source community with related proprietary services that are not given away, a new business model is created.
Many entrepreneurs and investors have realized that the best path in creating a new business is to invent an open source project that is widely contributed to and then build a service around it after hiring all the people who worked on it. Businesses that have been built around open source, like Databricks, Mesosphere, and Docker, exemplify this trend.
News never made money, and is unlikely to. One of the best illustrations of the many ways a business valuation can go wrong is the pre-bankruptcy story of mobile satellite service Iridium. We Eagle River always passed on buying Iridium no matter how low the price dropped. We already had enough wholesale transfer pricing and other problems with Motorola related to Nextel. There is a recent book about Iridium, but that account does not identify why such colossal mistakes were made in assessing the potential value of the business.
The common narrative is:. It was an engineering miracle. But there are deeper explanations of why this happened. The goal seek function in a spreadsheet allows a modeler to use the desired result of a formula to find the possible input value necessary to achieve that result. To understand how the biases played out in the case of Iridium you must know a few background facts.
Motorola was a satellite subcontractor. It wanted to be a prime contractor, but it did not have a customer. The best way around that problem was to create the customer for Motorola satellites from scratch. Iridium was born for that reason. In order to raise the billions of dollars needed to pay for the system a credible business model was required.
Naturally spreadsheets were created and it was necessary to goal seek a total addressable market TAM to financially justify building and operating the system to investors. The outcome of that financial modeling was a case of what Warren Buffett calls the institutional imperative at work: The result of the goal seek bias in the case of Iridium was preposterous on its face, if the assumptions were carefully examined.
The phones did not work without line of sight to the satellite buildings and even trees are a problem. What did the market researchers ask potential consumers about the Iridium service? A classic leading question of course: Anywhere means inside buildings and cars or in the shadow of a buildings.
On a mountainside is a place but is not enough to mean anywhere and instead is a niche market. My friend and wireless expert Tim Farrar sent this Tweet on the topic:. Goal seek bias ignored this reality and that resulted in a number of silly estimates from forecasters about the size of the mobile satellite market. Even though never publicly disclosed, the break-even point for Iridium was expected to be betweenandIn order to reach this level, Iridium would have had to add roughly 50, subscribers per month in In reality, in MarchIridium only had 10, subscribers.
The number of three to six million subscribers expected by was never reached. The results were devastating. By Aprilthe company had only ten thousand subscribers. In April, two days before Iridium was to announce quarterly results, CEO Staiano quit, citing a disagreement with the board over strategy.
John Richardson, an experienced insider, immediately replaced Staiano as interim CEO, but the die was cast. Iridium was purchased by an investment group for very little cash and today is both an operating business and a listed company.
The business is very different than originally envisioned r. The prospects of that new business is not a subject covered in this post since this is about what happened pre-bankruptcy. When valuing an asset it is wise to focus of the simplest system possible, preferably one that has a stable and well known operating history e.
Iridium was about as far from an annuity as was possible. When valuing a business like Iridium a massive margin of safety must be built into the model to account for risk risk meaning the potential for a permanent loss of capital. How are risky investment intelligently made?
A portfolio approach is used in venture capital since only a very small number of outsize winners determine the financial outcome of a given fund. Warren Buffett describes the strategy adopted:. Thus, you may consciously purchase a risky investment — one that indeed has a significant possibility of causing loss or injury — if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities.
Most venture capitalists employ this strategy. Should you choose to pursue this course, you should adopt the outlook of the casino that owns a roulette wheel, which will want to see lots of action because it is favored by probabilities, but will refuse to accept a single, huge bet. Klarman is pointing out a fact that will be made repeatedly in this post. A NPV calculation of the value of a business is not precise. This means that having a margin of safety is wise.
With a margin of safety you can be somewhat wrong and still make a profit. And when you are right you will make even more profit than you thought. I have written posts before about the discount rate issue. The value of any stock, bond or business today is determined by the cash inflows and outflows — discounted at an appropriate interest rate — that can be expected to occur during the remaining life of the asset.
Some people are seduced by Greek letters in valuation formulas. Seth Klarman has said: Whenever you receive a spreadsheet valuing a business, it is wise to focus on the assumptions.
And as Gurley points out that is particularly true of a young company. But people make emotional mistakes:. Iridium is a particularly extreme example of garbage in and garbage out. Sometimes people suspend disbelief:. NEW YORK-Iridium World Communications Ltd. Consequently, the issuer, which had planned a 10 million share IPO, increased its initial offering by 2 million shares.
But they are not young today. What they are looking for is an unfair advantage when they invest and in high-technology they have no such advantage. That a spreadsheet generates precise numbers can create an illusion of precision. It is one of several biases that can impact a valuation. Little to conduct extensive independent diligence with respect to the Iridium business plan as a condition to extending credit to Iridium.
Numbers can seduce even the most rational investor. It is qualitative factors that generate quantitative results in a business. Does the business have a sustainable competitive advantage? This can be tested for existence using numbers but it cannot be analyzed by just using numbers. Competitive advantage is determined qualitatively. Mohnish Pabrai make the point in this way: They have to do with something other, either understanding human nature or understanding nuances about how certain aspects of how things work rather than running spreadsheets.
Take company X and its market cap. What sort of growth would be required to support that valuation? It would require a rather extraordinary change in profitability to justify that price. Since portfolio managers are judged based upon how they perform on a relative basis to the market and other money managersrelative valuation is more tailored to their needs. Garbage in and garbage out. What inputs are most important? Even with a sensitivity analysis since the systems involved are complex and adaptive, scenario analysis is important.
It need only establish that the value is adequate. I work for Microsoft. Previously I was a partner at Eagle River, a private equity firm established by Craig McCaw. Josh Brown Epicurean Dealmaker Bill Gurley Morgan Housel Howard Marks Michael Mauboussin Barry Ritholz Tomasz Tunguz Fred Wilson Jason Zweig. The Complete Investor Featured Individuals Index By Topic. They had reached two important conclusions: Here below is Miura-Ko on Lyft: In my mind those would be your users, your customers, your pricing which also includes your customer lifetime, how you do customer demand creation, your sales channel, and then on the backend if your producing something or if you have inventory your whole supply chain that could all your components, design, manufacturing, and inventory warehousing.
How do you do demand creation? These are all questions that you should be constantly thinking about. And if the dollars in are not greater than the dollars out, then you need to rethink your business model right then and there. And what are they willing to give up to get the best people? One of the companies we invested in has successfully hired great talent at some of the top companies around Silicon Valley, even during this highly competitive market.
The way they do this is the founders have spent a lot of time thinking about who they want to hire, how they do interviews, compensation structure, etc. They think about these issues just as much as they think about the product. Seeks high profitability No profit objective Passionate re the product Missionary Bill Gates at MSFT Missionary Bill Gates at the BMG Foundation Not passionate re the product Mercenary Volunteer paying penance for some reason Founders who are not passionate about their mission fail way more often.
When I asked a close friend for a good example of technical debt involving Microsoft he said: Lean has nothing to do with small. In an interview many years later the two Microsoft founders described the problem: In the meantime we were totally out of money… Allen: At the time this was a really difficult decision to make but we decided to move everyone onto Lyft. It takes a lot of courage to shut the thing down you have spent all of this time and energy on.
I appreciate the courage it took for the founders to move aggressively into Lyft. While it was not a pivot, for Bill Gates and Paul Allen a prior business impacted what they would do later at Microsoft: Having 2—3 team members you feel much more social pressure to stay in the game and can focus the whole team on a problem, in general, teamwork is a more healthy dynamic. The other problem is there is no superhuman founder, everyone has their own weaknesses. In addition to Gates and Allen these people worked at Microsoft in the very early days: Bob Greenberg was a programmer who worked on developing TI BASIC.
Gordon Letwin was a programmer who developed a BASIC compiler. His series B financing came about when he realized he needed a little bit more financing, so this time he asked for little bit more capital from the same guy and the guy gave him the equivalent of 10 peasants stone built houses.
So he went along, made a few more mile stones and then had to go back for a series C financing. And then sure enough he was able to get that and it was the same amount; the amount that would basically pay for 10 stone houses for a peasant. And it turns out that the story ends very sadly. And the history books are then changed to reflect his contributions. Now my story today about investors and entrepreneurs is totally different.
I believe actually that this whole relationship between innovators and investors is actually very much switched. The power has shifted to the entrepreneur. Each is powerful on its own, but as these advantages are layered on top of each other they reinforce and amplify each other even further.
Maples depicts the Floodgate stack as follows: One is, just what is the advantage, and why would it be hard to copy? But then the other part of the question is, why now? Why did something in the world change to open the world for this opportunity? Here is his slide: I believe that Tesla is a network centric car company.