What To Do With Sudden Wealth?
Your company just went public and the lock-up period is over. Your company got acquired and your share of the proceeds just hit the bank account. (Or, you’re wealth managers from Greenwich, CT, and you just won the lottery.) For some fortunate folks, any one of these events can lead to a sudden influx of sometimes substantial wealth. What you’ve been thinking of as paper wealth for months and years, is now real. So, what do you do? This question was posed to me recently, and I thought I’d share my thoughts as I’ve seen this scenario play out for many individuals through the years.
My general guidance is pretty simple: Try not doing much of anything different for one year. Stick the money in your bank in some cash-like instrument and forget about it for a year.
Some ideas of things not to do in that first year:
- Go on a shopping spree and buy new cars, homes, planes, gadgets, clothes, etc.
- Give the money to any number of money managers calling you offering their assistance to “manage” the money.
- Get into financial arrangements with family and friends.
- Quit your job because you’re rich.
- Hire personal staff.
- Buy a country club membership.
- Change how you travel or vacation.
- Become an angel investor.
- Go to Vegas.
- Change your friends or social circle.
The point of raising these items is not to make an implicit value judgment on any of them. What I do think is valuable, though, is letting there be some breathing room from the time your new found wealth hits your account, and the time you start engaging with it. Any number of these items you can still pursue just the same one year later if it’s still important to you.
What’s the value of the year “waiting period”? You remove yourself from the pressures, expectations, and emotions of the moment. That dynamic can often lead down a road where wealth is lost, relationships are injured, and a positive experience turns into a bad one. So many bad decisions are made in that first year when you and your wealth are most vulnerable due to the confluence of so many factors. There’s a reason so many lottery winners end up unhappy. There’s a reason professional athletes end up bankrupt at alarming rates. While accruing wealth from a successful start-up is a different process than winning the lottery or being an athlete – some of the pressures and dynamics of sudden wealth remain the same and unfortunately some of the end results are the same as well.
A few important caveats. I’m not making a suggestion on whether you should sell your stock if that’s the currency of your wealth. That’s a personal decision and perhaps a topic for another post. But, whether you choose to sell your stock or hold on, these suggestions remain largely the same. Additionally, two things I’d consider doing in that first year, if it didn’t open the floodgates on items listed above, are: (1) pay down debt and (2) give to charity.
Is this incredibly boring advice? Yes, guilty as charged. Is it unnecessarily ascetic? It definitely comes off that way, but I’m hardly an ascetic person. I just view pursuing such a path as a lot of upside and no downside, while doing the reverse is a lot of downside without much upside. What you do in that first year of having new wealth may ultimately be the most important investment decision you make.
“Catch Your Kids Doing Good”
I had the privilege of spending this afternoon with the founder of a very promising educational software company. I was intrigued with the background of the founder as it’s not every day that I run into entrepreneurs with an accomplished and extensive background in child psychology.
Given his expertise, I couldn’t resist asking the following question: “If you could snap your fingers, and have all the parents in the world do one thing differently for the betterment of all humanity, what would it be?” After a short pause, his response was: “Catch your kids doing good.”
I asked what he meant by that phrase. His response was simply to praise children when they do things that are good. Apparently parents are quick to give negative feedback to children when they do something wrong, but the more impactful and beneficial approach is to give positive feedback when our children do something good.
I thought that was a pretty profound answer from an individual who has spent his life’s work understanding and helping children.
Which Is More Important – The Stock Market or The Bond Market?
This topic was raised to me today in a meeting, and after thinking about it, doing some research, and trying to put aside my biased interest in stocks – I think a stronger case can be made that the bond market is more important than the stock market. There are a number of reasons for this, most notably starting with size.
The global bond market is about $82 trillion. The global stock market hovers around $40–$50 trillion. So, on pure size alone, the bond market is almost twice the size of the stock market. That’s a substantial difference. Point – bond market.
The bond market has a broader set of issuers as you have different segments: corporate, government & agency, municipal, mortgage backed, and funding. Whereas the stock market is a construct for a limited set of corporations – for example, the US has 17,000 public companies. Point – bond market.
The stock market is arguably more influential on sentiment. What’s the key indicator of the stock market? My guess is most would say S&P 500 or Dow. What’s the key indicator of the bond market? Probably most don’t know (e.g. indexes like Merrill Lynch Domestic Master). That, in and of itself, gives the stock market a broader reach and voice. Point – stock market.
That being said, and this may be a reach, but I think the bond market is more influential on the stock market than the other way around. The primary reason is that the returns on bonds are more predictable due to the fixed yields. If yields are very high, there’s no reason to invest in stocks. The comparative risk-reward isn’t there. But, if yields are low, that’s an incentive to move into risk assets like stocks. It doesn’t work as seamlessly the other way around because returns on stocks are less predictable and more volatile. Point – bond market.
This is hardly a scientific analysis, but based on just off the cuff research, what’s more important – the stock market or bond market? I’d probably have to go with the bond market.
My Trip To Haiti
I wasn’t originally planning on blogging about my trip to Haiti as the decision to go was more of a personal one. But, having been back for a week now, I figured if blogging about it could help in some way, then I might as well. So, here it goes:
I spent a week in Haiti serving through a collaboration between two organizations – Jordan International Aid (JIA) and J/P Haitian Relief Organization (J/P HRO). Our sending organization, JIA, has been sending medical teams to Haiti every third week of the month since the earthquake first hit Haiti. Our receiving organization, J/P HRO, manages one of the larger tent cities in Haiti – Petionville. The two organizations collaborated such that our team at JIA would be staffing the hospital and triage clinic at Petionville – a tent city of 50,000 people. J/P HRO also enabled us to set up some mobile clinics at other tent cities where the refugees in many cases had never received medical care.
When we first landed in Haiti and drove around Port-Au-Prince, I was struck by how the city looked frozen in time a full six months after the earthquake. There were buildings that had been pancaked from the earthquake and others clearly damaged beyond repair – just sitting there untouched. I was struck by the lack of both demolition and construction. The earthquake could have happened the day before. Port-Au-Prince, itself, was terribly congested with a mix of cars and people owning the broken streets. Our team stayed at what used to be an orphanage – needless to say, we felt lucky to have some semblance of running water, power, and intermittent Internet access at our home for the week.
The team was principally comprised of doctors, nurses and a couple pharmacists from the Bay Area, alongside a few non-medical folks (like me) from my church. Our principal role was to help staff and run the “hospital” and “triage clinic” at the Petionville tent city. If you can imagine M*A*S*H, you’d get the idea of where we were serving. They were basically tented areas with stretchers and boxes to sit on. Every day hundreds of people would line up from the tent city, and often wait for hours to receive care. We had the usual pediatric issues of fever, dehydration, diarrhea, etc. We would often also see lacerations, burns, and blunt trauma. There were individuals we treated with longer-term issues like AIDS, cancer, and stroke. There were a number of babies also delivered during our time. And underlying all of the traditional physical issues – there were serious issues like post traumatic stress disorder that were prevalent. Each day, we would see about 150–200 patients at Petionville. We also had the opportunity to set up mobile clinics at other tent cities in surrounding areas.
Though Haiti was just a 2 hour flight from Miami, I couldn’t have been further from my little world of Boston private equity. And, that is a good thing. It was really helpful for me to see the plight of the Haitians and hear their stories. So many people stick out in my mind from this trip. The boy who came in without complaint, despite having a severely burned arm from top to bottom. The woman who gave birth to two very premature twins who did not ultimately survive. The girl who couldn’t have been older than 13 years old, coming in with her three younger siblings – all orphaned. The deaf and mute boy on the Petionville grounds whose spirit could not have been brighter. Our many Haitian friends and staff at the hospital and Petionville who had lost loved ones.
I’m sure many people have given money to Haiti – but I came to appreciate that giving time in many instances is worth a lot more because it’s through time that you build relationships and start to really care. I also came to appreciate that in situations of devastation like Haiti, anyone who has an interest to help, can help. I’m back in the saddle at work now, but I think about Haiti every day – wondering if there’s a broader way to help that country. I’m quite sure I don’t have the answers, but somehow I think thinking about it is a good thing.
Does God Answer Prayer?
In response to the question presented in the title of this post, the following poem was read at my church service this morning – author unknown. I thought it was insightful, so decided to pass it along here:
I asked God for strength, that I might achieve,
I was made weak, that I might humbly obey.
I asked for health, that I might do greater things,
I was given infirmity, that I might do better things.
I asked for riches, that I might be happy,
I was given poverty, that I might be wise.
I asked for power, that I might have the praise of men,
I was given weakness, that I might feel the need of God.
I asked for all things, that I might enjoy life,
I was given life, that I might enjoy all things.
I got nothing I asked for, but everything I hoped for.
Almost despite myself, my unspoken prayers were answered.
I am among all men, most richly blessed.
Time Horizon Does Matter
Ever since I started in the investment business, entrepreneurs would often ask in meetings, “What’s your typical time horizon for an investment?” To be candid, I never thought this was a particularly relevant question. No institutional VC or growth equity firm will say we’re trying to flip our investments in a year. And, no firm will say we’re looking to hold every company for 15 years. Though every firm with some history will have examples of both taking place. I’d guess that most firms will say their typical holding period is in that 3–6 year range with flexibility above and below that. To that end, I have always thought that time horizon was never that distinctive or critical of an attribute when selecting a firm.
As the years have gone by, and I’ve been exposed to different investment philosophies – financial or otherwise – and I’ve come to appreciate that in many ways, time horizon can be a driving force in one’s strategy or even ideology. Though in my vocational world, time horizon isn’t that distinctive because most firms are within a similar band, in the broader world, time horizon is profoundly implactful. Here’s what I mean…
On investments: What if a firm came along with the resources and focus to invest in companies with a 10–30 year return on investment? All the traditional defining attributes of a firm – stage, sector, geography, etc. – are subjugated to the outstanding fact that this firm is optimizing for the 20 year return, not the 5 year return.
An example of this might be Google. Google bought YouTube for $1.65B in 2006. Since that investment, they have taken much criticism because YouTube continued to burn cash and the business model hadn’t been proven to work. In other words, the YouTube acquisition didn’t make sense if your investment horizon was 3–5 years. But, what if Google’s horizon was 10–20 years, and that’s what they were focused on? What if they didn’t care as much about the economics and importance of video over the near-term, but just wanted to make sure they were dominant 10–20 years later in video? Google is one company that can afford to do that, and a different time horizon leads to a different set of actions.
On economics: Let’s say that you are sitting in Tim Geithner’s seat (U.S. Treasury Secretary) at the start of his term last year. And, he has a simple question – do I bail out the banks? I would argue that the question to drive the answer is – what’s your time horizon? Are you aiming to stabilize the U.S. economy in the 1–4 year horizon – over Obama’s term, or is your priority to create the stage for a strong and vibrant economy over the 20–30 year horizon? Clearly the nature of politics dictates a nearer-term horizon, and hence, the logical decision is to bail out the banks and deal with the consequences later. But, if your primary objective is to optimize the long-term (20–30 years) health of the economy, one could make a strong argument that bailing out the banks is not the right thing to do. This is not about big or small government, left or right ideology, populist or otherwise – this is simply about time horizon.
On poverty: Let’s say you want to help the homeless in Boston. Again, I’d argue that time horizon is a big driver. If your objective is to help today – you’d probably walk outside and lend a helping hand through money, food or clothing. If your objective is to help this year, maybe you’d support or volunteer at a homeless shelter. If your objective is to help over the 20–50 year horizon – then you’d probably focus all of your energies on a structural issues like education and jobs. Sometimes I wonder if different ideologies on poverty (e.g. Democrats and Republicans) are really just differences in time horizon rather than core philosophy.
If you look at all different aspects of life – career decisions, child rearing philosophies (think about sleep training), relationships, etc. – different time horizons leads to different decisions. Hence, while I tended to be dismissive about time horizon in the past, now in many ways, it’s a starting point for making decisions. I’ve come to appreciate that it’s a healthy thing to ask in any decision making process – what’s my time horizon?
On The Blind Men And An Elephant
Perhaps my favorite online video series is the Authors @ Google series where they bring the best and the brightest to Google to talk about their area of expertise. Tonight I was watching the video of Tim Keller (below), founding pastor of Redeemer Presbyterian Church in Manhattan. He was speaking at Google about his book – The Reason for God.
There’s an interesting part of his talk where he brings up the famous story of the blind men and an elephant - and the response of Scottish missionary, Lesslie Newbigin.
As Wikipedia summarizes: In various versions of the tale, a group of blind men touch an elephant to learn what it is like. Each one touches a different part, but only one part, such as the side or the tusk. They then compare notes on what they felt, and learn they are in complete disagreement.
In John Godfrey Saxe’s version (1816–1887), one man falls against the side of the elephant and proclaims the elephant is a wall. Another leans on the tusk and proclaims an elephant is a spear. Another touches the trunk and proclaims the elephant is a snake. Another touches the knee and proclaims the elephant is a tree. Another touches the ear and proclaims the elephant is a fan. And the last one grabs the tail and proclaims the elephant is a rope.
The point of the story is that while each blind man is proclaiming what they believe to be is an absolute truth, in fact all of their truths are just relative based on their experience of the elephant. No one has the Truth, in its entirety. This story is often used to critique those who proclaim some knowledge of absolute truth – most commonly those with a monotheistic religious world view. It is intended to teach us how knowledge and truth is in fact relative.
Here is Lesslie Newbigin’s response:
In the famous story of the blind men and the elephant… the real point of the story is constantly overlooked. The story is told from the point of view of the king and his courtiers, who are not blind but can see that the blind men are unable to grasp the full reality of the elephant and are only able to get hold of part of it. The story is constantly told in order to neutralize the affirmations of the great religions, to suggest that they learn humility and recognize that none of them can have more than one aspect of the truth. But, of course, the real point of the story is exactly the opposite. If the king were also blind, there would be no story. What this means then is that there is an appearance of humility and a protestation that the truth is much greater than anyone of us can grasp. But if this is used to invalidate all claims to discern the truth, it is in fact an arrogant claim with the kind of knowledge which is superior that you have just said, no religion has.
As Tim Keller further clarifies in his talk:
To say, I don’t know which religion is true is an act of humility. To say, none of the religions have truth, no one can be sure there’s a god is actually to assume you have the kind of knowledge, you just said no other person, no other religion has. How dare you? See, it’s a kind of arrogant thing to say nobody can know the truth because it’s a universal truth claim. To say, ‘Nobody can make universal truth claims.’ That is a universal truth claim. ‘Nobody can see the whole truth.’ You couldn’t know that unless you think you see the whole truth. And, therefore, you’re doing the very thing you say religious people shouldn’t do.
I think Newbigin and Keller make a valid and compelling point. Here’s the rest of the @ Google talk if you’re interested:
The Unofficial Cool Parent Test
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.
1+1 = ?
True to the name of this blog, I had the random thought of how many unique and legitimate answers there are to the simple question: 1+1= ? Here are a few that I came up with:
- arithmetic: 1+1 = 2
- visual: 1+1 = 11
- logical: 1+1 = 1+1
Answers from the blogosphere:
- artistic/comical: 1+1 = window (video)
- binary: 1+1 = 10
- vegas: 1+1 = craps
- boolean: 1 (True) + 1 (True) = 1 (True)
- basic algebraic: 1+1 = +1 (were ‘+1’ is the name of the variable)
- algebraic field theory: 1+1 = 0
- anagrammatical: one plus one = unseen loop
- blackjack: 1+1 = 2 or 12
- basketball: 1+1 = 0, 1, 2
- synergy: 1+1 = 3
If you can think of other answers that are both unique and legitimate, post them in the comments and I will add it to the post. By the way, I would not consider 1+1 = 5–4 as unique. It is legitimate, but not unique since I’d still put in in the arithmetic category.
Who Is The Venture Capitalist’s Customer?
Venture capitalists always talk to their portfolio companies about how important it is to define your customer, understand their needs, and create a compelling value proposition for them. Though, if you talk with enough VCs, we have a hard time defining the customer for our own business. I was having a recent discussion on this topic with some colleagues in the industry and no unified consensus emerged. It is always a debate between our limited partners (“LPs” – those who invest in VC funds) and entrepreneurs. We all know that we ultimately get “paid” by LPs. But, we also know we don’t survive if entrepreneurs don’t want to work with us. So, who is the venture capitalist’s customer?
To try and get some feedback, I decided to ask my twitter friends: Who is the VC’s customer? I specifically asked VCs to respond. Somewhat surprisingly, no VCs responded, but I got a slew of responses from entrepreneurs. They were quite aligned:
- apsinkus: “institutional investors are real customers of VCs (in my opinion). Entrepreneurs are merely suppliers. No LPs, no money.”
- brandonhaskins: “Although not one myself, a VC is ultimately in investment management, so customers are investors – entrepreneurs are products!”
- muhammadkassim: “VCs’ customers are investors into the fund. Entrepreneurs are VCs’ business partners.”
- gmsheehan: “their investors”
- AppStruck: “The VCs customers are the institutional investors you raise money from.”
- meetthestreet: “LPs…pension funds and endowments are clearly VC customers. In money management the people who give you money are your customers.”
- CameronHerold: “unfortunately for entrepreneurs the Investors are the VCs customers. The entrepreneur is the VCs product.”
- EdLoessi: “the VC’s customer are the people who gave them the money the tool is the company invested in and sometimes you break your tools!”
I’d say 85%+ of the respondents said the VC’s sole customer is the LP. Not a single responder said that the entrepreneur is the VC’s principal customer. So, in an unexpectedly round about way, I got my answer from entrepreneurs, not from VCs. If entrepreneurs are the VC’s customer, surely entrepreneurs would know that. Since they don’t know that – either VCs are doing a terrible job taking care of their customer (which is possible) or in fact the entrepreneur is not the end customer of the VC.
My personal belief is that the VC’s primary customer is the LP. There is a clear and constant relationship between VCs and our investors which is consistent with the traditional definition of a vendor/customer relationship – they pay us for providing a product/service to them. We have to provide a great product/service to our LPs and service them well as our customer or they can take their business elsewhere.
Then what are entrepreneurs to VCs? First of all, entrepreneurs should be no less important to VCs than LPs. Without LPs, VCs are out of business. Without entrepreneurs, VCs are out of business too. Entrepreneurs can take their capabilities elsewhere, same as LPs. So, while entrepreneurs and LPs are equal in importance, it is a different relationship. I do not have a vendor/customer relationship with the entrepreneurs I work with. In my mind, the entrepreneur is not the VC’s customer any more than the VC is the entrepreneur’s customer. Nor do I think describing entrepreneurs as the VC’s product or supplier is accurate. Neither of these lines of thinking fit for me as the right way to describe the relationship.
I think the best term to describe the relationship between VCs and entrepreneurs is partners. The official definition of partner is: “a person who shares or is associated with another in some common action or endeavor”. I view the entrepreneurs I work with as my partners. I think they view me as their partner as well. I am sure that any of my CEO’s will tell you the effort that I put in towards being a value-added partner to them. We partner together for the common end goal of building great companies and creating value for shareholders. So entrepreneurs are not customers, suppliers or products for VCs, they are partners. We work side-by-side as partners at the end of the day. I wouldn’t have it any other way.
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