I’m not an economist. So, it’s hard to make sense of the trillions of dollars that are thrown around when it comes to the federal deficit and national debt. So, I thought I’d just normalize the federal income statement and debt statistics against a typical household since it makes more intuitive sense to me. Here we go:
Federal Government (2009 Fiscal Year)
- Income (Receipts): $2,104,613,000,000
- Expenses (Outlays): $3,521,734,000,000
- Surplus/(Deficit): ($1,417,121,000,000)
- National Debt: $11,874,664,000,000
Now we take that data and normalize it against a household with $50,000 in income (which is the US median HH income):
- Income: $50,000
- Expenses: $83,667
- Deficit: ($33,667)
- Debt: $282,110
Now normalized against a household with $100,000 in income:
- Income: $100,000
- Expenses: $167,334
- Deficit: ($67,334)
- Debt: $564,221
Now normalized against a household with $250,000 in income (top ~2%):
- Income: $250,000
- Expenses: $418,335
- Deficit: ($168,335)
- Debt: $1,410,552
Looking at it this way, I have a couple of intuitive observations. The $100k household is spending $14,000 per month. Let’s just say they have $4,000/month in mortgage/auto interest expense. That means the husband and wife are each running up $5,000 per month – each – on their credit cards if they charge everything. That’s an average of $167 charged per day per person on their credit cards. That’s hefty spending especially if you presume only modest savings which is probably a fair assumption given our near negative historical savings rates.
Prior to doing this analysis, I thought the normalized debt number would be outrageous. It’s probably ~2x what it should be. A $100k household through most mortgage calculators can probably afford a $300k-$350k mortgage. So, $564k in debt for a $100k household is clearly too high, but not by several orders of magnitude which is what I though it would be. Anyways, food for thought…
Many in the entrepreneurial ecosystem (VCs included) have used the phrase, “VCs are all lemmings.” Is this true? Is it not? Before answering that question, let us take a look at the lemming migration across the Norwegian coast. How can you compare a VC to a lemming, without detailed knowledge of lemming migratory patterns? Here’s a transcript from a Brittanica.com video – best to start the video at 1:14 while reading the transcript [with VC translation - tongue firmly planted in cheek]:
“The second thing lemmings [VCs] do is reproduce. As more and more individuals [VCs] are born, the food and water supply [good deals] begins to diminish. Every three to four years, the populations in some localities grow to great densities [Silicon Valley, India, China]. In response to this overcrowding, lemmings exhibit a very specialized behavior [reinvention]. Individuals begin to migrate away from the centers of dense population [to other centers of dense population - cleantech, web 2.0, etc.]. They group together and move in detectable waves across the countryside [cleantech forums, web 2.0 forums, etc.]. Whatever barriers block their passage [absence of business models], they tend to crowd in increasing numbers until a sort of panic reaction drives them over the obstacles [capital market ponzi schemes]. The migration impulse [fear their track record will be exposed] affects each individual driving them to keep moving [doing new deals]. If a stream or river interrupts their path [no exit market], they swim across [bridge financings]. Many die during migration – perishing by predation, starvation or accident. Occasionally, some reach the ocean [a new firm] and plunge in [break out a new checkbook]. Once again, they begin swimming [doing new deals]. They act under the same impulse [trying to get a winner] that forces them to cross smaller bodies of water. Swimming until exhausted, all of them drown. Through this migration and mass drowning, the number of lemmings is checked. Scientists do not yet completely understand how this behavior has continued over the centuries when so many of the emigrating lemmings die.”
All in good fun :).
When the market crashed over a year ago, I got pretty motivated to stay on top of global macroeconomic research. So, I started reading about 7 different sources of economic forecasts and analysis. As the year has progressed, I have narrowed in on a couple that I think are keepers. My two favorites are The High Tech Strategist by Fred Hickey and some of the commentary of Jurrien Timmer who runs the Fidelity Dynamic Strategies Fund. But, neither of them has replaced my true source of grassroots economic information, from appropriately named, Grassroots Deli.
Grassroots Deli is a hole in the wall deli across the street from my office on 183 Devonshire Street in Boston’s financial district. They have great homemade muffins in the morning and a mean turkey platter for lunch. The owner mans the register and she remembers everyone’s name and usual order. It’s a little bit like Cheers – where everyone knows your name. (BTW, this is for another blog post, but I think she’s cracked the code on customer retention in the restaurant business – good food and remember the customer’s name.)
Every once in awhile, I ask her how business is which is my gauge for the health of the economy. Here are some tidbits of what she’s said over the past:
- Summer 2008: She was feeling the effects of the vacancy level at 1 Federal Street. She commented that the money managers spend a lot more money on lunch than the lawyers do – and it’s the money managers who left the building. I guess money managers are OK paying $10+ for lunch which is important in her business. She was also feeling the pain of the high oil prices which led to fuel surcharges tacked on by her food suppliers.
- Fall/Winter 2008: Feeling the sting of many layoffs around the downtown – deer in headlights. Even more infuriating was the continued oil surcharge from food suppliers despite oil falling from $100/barrel to $35/barrel.
- Summer 2009: Business demand is still well below average, but what’s hurting her business is the price of sugar. Sugar had climbed from $0.12/pound to $0.18/pound inside of a year. Climbing commodity prices across the board are hurting her margins since she can’t raise her prices. Profits are being squeezed at the cost of goods line – business is tough.
I got my latest update today:
- Fall 2009: Hopes of a pick-up in business after Labor Day have now faded. Business is still very slow. She said her paper supplier who has been working the Boston and Cape Cod region for 38 years said his business in Cape Cod fell by more than $1 million year over year. It’s at it’s worst point in 38 years.
Well, the food is great at Grassroots Deli, but business is still challenging. Her business is probably a microcosm of many different businesses as she is doing a great job servicing her customers but there are things out of her control. Her little business illustrates the fundamental and wide-ranging impact of things like commercial vacancy rates, rising commodity prices, and high unemployment. I’m definitely rooting for a better forecast next time. Official Grassroots Deli Economic Forecast: not out of the woods yet.
Take a look at the middle tier of most Boston VCs – and what will you find in abundance? Harvard Business School (HBS) grads. Here’s a smattering of folks you can find with HBS degrees, including two of our own:
- Rob Go, Spark Capital
- Jon Lim, Polaris Venture Partners
- Ryan Woodley, Polaris Venture Partners
- Irena Goldberg, Highland Capital
- Amanda Herson, Highland Consumer Fund
- Jesse Feldman, Battery Ventures
- Dayna Grayson, North Bridge Venture Partners
- Cali Tran, North Bridge Venture Partners
- Matt Witheiler, Flybridge Capital Partners
- Geraldine Alias, Fidelity Ventures
- Sean Cantwell, Fidelity Ventures
- And on and on….
Now let’s look at the graduate school education some of the more established VCs in Boston:
- Todd Dagres, Spark Capital – MBA, Boston University
- Scott Tobin, Battery Ventures – no MBA
- Dave Tabors, Battery Ventures – no MBA
- Rob Soni, Matrix Partners – no MBA
- Bob Davis, Highland Capital – MBA, Babson College
- Dan Nova, Highland Capital – MBA, Harvard Business School
- Dave Barrett, Polaris Venture Partners – no MBA
- Joel Cutler, General Catalyst – JD, Boston College
- John Simon, General Catalyst – MA, Oxford University
- David Fialkow, General Catalyst – JD, Boston College
- Mike Zak, CRV – MBA, Harvard Business School
- Anne Mitchell, Fidelity Ventures – no MBA
Over the last 10 years, venture capital has become a more mature industry (meaning more job opportunities) and a highly desired career path for business school grads. When I joined the venture industry in 1998, there were probably <10 non-partner positions in the Boston VC community altogether. Nowadays, it’s not uncommon to find individual firms with 5–10+ non-partner positions. Back in 1998, the typical HBS grad probably wanted to do investment banking or consulting. These days – it’s hedge funds and private equity (VC & LBO). Put that altogether, and it makes logical sense that HBS grads are far more prevalent in the Boston VC community than they were 10 or 20 years ago. It’s the end result of every Boston VC firm that has a job opening going to HBS and aiming to hire the best of the best.
But, what does this mean for how the Boston VC culture will change over the next 10 years as opposed to where it came from the past 10–20 years? What does it mean if a preponderance of Boston VCs all have the same educational training? My guess is that both generations will find their own success, but perhaps their success will be for different reasons. Perhaps the “HBS Generation” will succeed due to pure analytical horsepower and smarts. Perhaps the present/past generation found success due more to creativity and courage. It’s hard and ultimately unfair to generalize, but I have to think that things will change – maybe not better or worse – just different.
Following my 1+1= post, here’s another post about numbers. But, this post is less about numbers and more about the words used to articulate those numbers. Below, you will see a comparison of the actual words used to say the numbers represented on the left. The first set of words is the number represented in the English language, and the second set of words is the number represented in the literal English translation of the Chinese language. So the sequence is (#, English, Chinese). Here we go:
- 1: one, one
- 2: two, two
- 3: three, three
- 4: four, four
- 5: five, five
- 6: six, six
- 7: seven, seven
- 8: eight, eight
- 9: nine, nine
- 10: ten, ten
Nothing earth shattering here. When you count from 1–10 in English and Chinese, ten unique words emerge representing the most basic of numbers. But, from 11–20, the languages diverge (#, English, Chinese):
- 11: eleven, ten one
- 12: twelve, ten two
- 13: thirteen, ten three
- 14: fourteen, ten four
- 15: fifteen, ten five
- 16: sixteen, ten six
- 17: seventeen, ten seven
- 18: eighteen, ten eight
- 19: nineteen, ten nine
- 20: twenty, two ten
In the English language, to count from 11–20, you need to learn ten new words. So, to count from 1–20 in English, 20 unique words need to be learned. In the Chinese language, to count from 11–20, no new words are introduced. Chinese language reincorporates the same words used for 1–10, to cover all the numbers from 11–20. If you can count from 1–10 in Chinese, you can count to 20 by default. What if you expand it to 100 (#, English, Chinese)?
- 30: thirty, three ten
- 40: forty, four ten
- 50: fifty, five ten
- 60: sixty, six ten
- 70: seventy, seven ten
- 80: eighty, eight ten
- 90: ninety, nine ten
- 100: one hundred, one hundred
In the English language, to count from 21–100, eight new words are introduced (thirty, forty, fifty…hundred.). In the Chinese language, to count from 21–100, only one new word is introduced: hundred. No new words are introduced to count from 11–99 in Chinese. Therefore, to count from 1–100 in English, you need to learn 28 words. To count from 1–100 in Chinese, you only need to learn 11 words. It’s a profound difference and impacts learning.
Watch kids learn to count in Chinese. After a child learns to count from 1–10 in Chinese, it’s seamless to watch them count from 11–99 – it happens in a snap. Why? Because they don’t have to learn a single new word to count from 11–99. By learning to count from 1–10, they have learned everything they need to count from 1–99.
Watch a child learn to count in English. What happens after they learn 1–10? They get confused, because it’s ten new words to count from 11–20. And what happens after they count to 20? It’s a quick hop and skip to 26, 27, 28, 29…. But then they often get stuck at each ten segment for the very simple reason that it’s a new word – thirty, fourty, fifty, etc.
Some researchers hypothesize that one possible reason some Asian cultures show proficiency in math at an early age ironically has nothing to do with math – it has to do with language. It is easier to learn to count in Chinese than it is in English because it requires learning fewer words. While numbers are the building blocks of math, maybe language plays an unspoken role in making math easier.
Are you a cool parent? It all depends on whether or not and under what circumstances your teen has “friended” you on Facebook. The following ranking is principally based on real experiences of parents I know. Here we go from the most cool (1) to the clearly not cool (10):
- Your teen sought you out and invited you to be their friend on Facebook. Kudos to you, you’re cool. You’re in the top 10%.
- You signed up with Facebook and invited your teen to friend you. After 6–12 months, your invitation was accepted without any intervention from you. Congratulations! It took awhile, but look at it this way – after extensive diligence, you have passed the cool threshold. Congrats.
- You invited your teen to friend you on Facebook. You have been accepted – but the content on the page looks thin. You have been accepted with limited information access – real friends have full access. Look at the bright side, at least your child doesn’t mind his/her friends knowing that you exist. You’re not explicitly cool, but you’re not a total embarrassment either.
- You have not been friended by your teen, but they have friended a close friend of yours. They know that your friend will probably let you check in online every once in awhile through their account. Your kid thinks you’re cool enough for some access, but he/she’s not ready to go public with that sentiment. Ask your friend why he/she is cooler than you.
- After the 6–12 month wait, you coerce your child through a mix of threats and gifts (like a car) to accept your invitation. Your invitation gets accepted with your child under extreme domestic pressure. Not cool – stop taking parenting tips from 24.
- Your invitation to your teen to friend you on Facebook has been flat out declined. It’s got to sting, but look at the bright side – at least he/she was honest with you.
- You invited your teen to friend you. You have heard no response. You keep waiting. No response. 6–12 months have passed – you’re afraid to bring it up. Your invitation may have been “ignored” by your teen – which is the polite way of saying “No Way!”. Look at it this way, at least your kid cares about your feelings enough to not neg you outright.
- You have no idea what Facebook is. Not cool, but there could be worse.
- Your teen friended you on Facebook, and the very same day you clicked to every friend they have, looked at every friend’s links, pictures, videos, etc. Not cool – that is parental stalking. You give parents a bad name. Beware of the next one:
- You were friended by your teen, but you have been subsequently defriended. Ouch, you screwed up somewhere along the way.
Venture capitalists often talk about different kinds of risk. It’s worth asking the VC’s you meet with what types of risk they feel most comfortable or uncomfortable taking. All VC’s have their preferences and it’s a good way to assess whether your company is a good fit for that particular VC. Here are some of the big categories of risk in the VC brain:
- Product risk. Will the product actually work? This is a risk that is inherent in early stage companies, especially those that are pioneering novel science or technologies. Any early investor in A123 Systems for example was clearly willing to take product risk.
- Market adoption risk. Will the dogs eat the dog food? Is this the right product/market fit? This generally refers to all the risks related to getting your first sets of customers, starting to get momentum in the market and whether the value proposition, pricing, etc. will resonate with your target customer.
- Market size risk. Lots of companies get to $15M-$20M, but can’t go from $20M to $100M+. That ultimately becomes a market size question. We’ve seen many an enterprise software company run into this trap where they hit the wall at $15M-$25M in revenue and flatten out. That’s a market size issue.
- Market timing risk. Is this the right product for today or 10 years from now? Back in the late 90’s, wireless applications, electronic medical records, etc. were all hot. Fast forward to 2009, and their time has finally come. Market timing is the difference between the lack of success of Six Degrees of Separation and LinkedIn.
- Competitive risk. Are there dominant players that you have to contend with or are there 25 other start-ups doing the same thing that create too much noise? This was always an issue in the IT security space where there would always be a dozen “heel nippers” in each segment. The robust capital markets in 2000 exacerbated this issue for all dot coms.
- Financing risk. How much capital will it take to get to the finish line? This was a risk inherent in many of the communications services companies back in the bubble days and is also a risk inherent in many clean tech and biotech companies. It’s hard for an average size fund to manage through a company that requires hundreds of millions in capital.
- Execution risk. Does this business rely on a specific execution approach that is uniquely complex and difficult? For example, a roll-up strategy requires a specific expertise. Running a young global business also requires expertise.
- Management team risk. At the end of the day, VC’s invest in entrepreneurs and managers. Who is the A player on this team that you are “backing”? If there aren’t any, often VCs have to decide whether they want to go through the process of helping to build that team which brings with it different challenges.
- Exit risk. So you build an interesting company, get some great customers, generate healthy revenue and margins – but will anyone care? This is often a concern with companies building good businesses in niche markets which may not be strategic to anyone and also may not quite be large enough for the public markets.
Looking through this list, the types of risk I dislike the most are: management team risk, financing risk, and competitive risk. I’m pretty comfortable with the other risks now that I think about it. At the end of the day, any young company will be fraught with risks, that’s why venture capital is “risk capital”. But, hopefully the potential rewards justify those risks. A good VC partner should help an entrepreneur not only expand the potential upside of their company, but also de-risk their downside as well. The partnership should make a high value outcome more probable.