This post is prompted by a number of conversations I’ve had over the past several weeks with friends and colleagues in the technology and investment industries. As year-end approaches, the primary topic of these discussions has been how they should approach compensation, bonus, and promotion discussions in their respective situations. For the most part, we’re in a pretty good cycle. The stock market is up. The IPO window is open. Technology is hot. Things are good. For the most part, these specific individuals can make a strong claim that they have performed really well. And, for the most part, they come with the mentality that they expect to get rewarded generously for their performance. At the highest level, I don’t have any issue with this point of view.
That being said, my guidance in these conversations is rarely about money, but about mentality.
First and foremost, we need to remember that it’s easy in the good times for us to take too much credit for our success. While undoubtedly we may deserve a lot of credit, in reality, our successes are probably dependent on other factors as well. Our success probably begins with someone giving us the opportunity to be successful, even when it might not have been obvious that we deserved that opportunity. There are probably many people around us who have contributed to that success – whether professional colleagues, family and friends that supported us, or that one person whose vote of confidence made all the difference. Our professional success almost always has some dependency on the assets of the company that we work at – assets which we may have largely inherited. Especially in the investment business, our success is also influenced by external factors completely out of our control like economic growth, Fed policy, the stock market, and consumer sentiment. Before we claim full credit for our success and expect to get paid accordingly, it’s important to be grounded in the reality that our success is never solely our own. It would be a healthy exercise to thank some of the individuals that helped us achieve our successes this year, before going into some of these compensation discussions, to help get into the right frame of mind.
Secondly, we need to maintain perspective. In the good times, especially in this business, it’s important to remember that bad times are inevitable. None of us will have careers without hard times. Therefore, we need to remember to represent ourselves during the good times in a way that we will still be proud of and not regret when the bad times come. If we claim all of the credit and operate with a sense of entitlement during the good times, it’s very easy to erode the foundation of support from longstanding relationships that we all need to sustain us through the bad times. Once we lose that support, we have lost something that is far more valuable than any near-term compensation. It’s hard to see that when we’re in the moment, but it’s the most obvious observation in hindsight.
Finally, we need to remember that in the long run, it’s not money that will bring the most happiness. The fulfillment of increased income is typically a fleeting fulfillment. It’s often other aspects of a job that drive a person’s joy in their careers. It’s working with people we enjoy and respect. It’s being in a position to learn and grow as a person. It’s about being part of something we value. It’s about having fun and contributing. It’s about being able to achieve professionally while still being able to be the person we want to be at home and with our families. If we’re fortunate enough to be in a situation where all of the intangibles line up for our enduring professional fulfillment, it would be unfortunate to compromise that over something like money that will never quite fulfill us.
That being said, this doesn’t excuse people making compensation decisions from being generous with the talented people around them. They absolutely should be. This is more of a reminder for us not to lose ourselves in near-term financial decisions when over the long-run, so many other things matter more.
After hearing dozens of company pitches over the last week or so, I noticed a common theme with how CEOs told the story of their business. They typically expended great energy explaining what their company’s product or service does. They will talk about features and functionality that no other player in the market has. Where appropriate, they will dive into a demo to show exactly how their product is such a game changer. While this is important, in some respects, I think it is putting the cart before the horse.
Personally speaking, I think a good story for a business starts with the problem that is being solved. It’s hard to fall in love with a product, if you don’t believe it solves a big problem. A problem worth solving is one that is a high priority issue for the one experiencing it. It is a problem that is experienced to a similarly high degree, by a large and common constituency. It is also a problem that people are willing to pay, and sometimes pay substantially, to resolve.
In every company pitch, the CEO will try to tell me what the company does. But, you may be surprised that in many pitches, the CEO may neglect to really spend time articulating the problem their company solves. Sometimes when I ask very directly what problem it is that they solve, the response will be a description of product functionality, not in fact a problem. This to me is a telltale sign that the company was started to create functionality, not necessarily to solve an important problem.
If we were ever to get into due diligence on a company, we will likely spend as much time validating the magnitude and priority of the problem the company solves as we do on the merits of the product. If we love your product, but are unconvinced on the problem it solves – we are unlikely to get across the finish line on an investment. The reality is a company can control how a product evolves and develops. But, the problem is what it is – so choosing the right problem to solve is critical for the ultimate success of any business.
So my simple advice is that when you tell the story of your business, start with the problem. If you convince people of the problem your company is trying to solve, you have laid the foundation for them to love what your company does.
They say that one man’s trash is another man’s treasure. Unfortunately, this statement is more reality than idiom for a large swath of the global poor that find their daily sustenance in city dumps. Perhaps the only shortcoming of this statement is that it leaves out the women and children that also scavenge city dumps around the world. Alas, city dumps are brutally equal opportunity.
The city dump pictured above (June 2012) is in Guatemala City. The specs in the picture that look like people, are in fact people. They are referred to as scavengers in the local community. There are 13,000 of them that live in 16 slum communities surrounding the dump. Since the dump is located at the bottom of a canyon, it requires at least an hour walk down the canyon to get there. The people in this community are scavenging for recyclables that they can bundle and sell. On a typical day, they will work 14 hours and might earn $3 to $6 for the materials they collect. That’s before they pay a truck driver $2-$3 to drive their collections out of the dump. Mondays are typically good days because there’s more trash to sort through from the weekend. They risk themselves daily against the garbage trucks whose drivers have learned to ignore their presence. It is common for people to get run over or lose limbs. The dump has a preponderance of children – who are working. Many parents are forced to trade the long-term value of education for the near-term necessity of income. If you ask a child in this dump what they want to be when they grow up, they will say truck driver. For what better job can there be than the one who they pay $2-$3 to every day? This is the daily reality for some of the poor in Guatemala City.
Sadly, poverty looks the same around the world. The city dump pictured below (April 2012) is in Cebu, Philippines. Children are born in this dump. Umbilical cords are cut with sticks. Shelters are built out of trash on the worthless land surrounding the dump. Proximity matters to have fast access to prized trash. Drug abuse and alcoholism are common to blunt the full and perverse effect of the daily routine. The cycle repeats, for generations.
Thankfully, there are people who have dedicated their lives to care for the people in these dumpsite slum communities. In Guatemala City, it’s Potter’s House. In Cebu, it’s Grace Community Empowerment. In both cases, despite the dumpsite being a patently dangerous place, the staff members for these organizations are protected by the very people they serve. Walking around with them in the chaos of a dump, you would actually feel strangely safe. These organizations have had a profound impact on the lives of those they have served. They have helped parents create businesses. They have enabled children to go to school. They have treated wounds and delivered babies. They have listened and cared. But, probably most important of all, they have treated a community of scavengers, not like scavengers at all, but with the decency, love, and respect that all human beings deserve. For that alone may be the starting point for a brighter future.
This weekend, I learned something fundamental and important about the plight of the global poor. I learned that for most of the global poor, they live in a world without the rule of law. What this means, quite simply, is that they live in a world where crimes committed against them go systematically unpunished. In fact, because their status in society is so low, crimes committed against the poor may not even be considered crimes at all, despite their patent illegality. Even worse, it is not uncommon for crimes to be committed against them by the very institutions we would expect to protect them – law enforcement.
In a world of lawless lack of accountability, the primary weapon of intimidation and subjugation against the weakest of society is the oldest tool in the book: violence. This leads to a tragic reality that the global poor are inordinately subjected to crimes of severe violence.
Imagine living in a world where you could permanently lose your home or farm because someone just decides to take it – by showing up at your front door, physically beating you, threatening your family at gunpoint, and forcing you out. This act alone means you lose your income and shelter and your children become at serious risk of starvation. And, you can do nothing about it. Imagine living in a world where your child can be tricked and taken from you and trafficked into commercial sex trade. You live with the knowledge that every day your child is violently coerced into repeatedly performing sex acts for customers in some far away brothel. And, you can do nothing about it. Imagine living in a world where you could be framed for crimes you did not commit and further be sentenced to death because you wouldn’t pay a bribe to the police. You live in terror on death row as other innocent prisoners around you commit suicide having given up all hope. And, you can do nothing about it.
Sadly, this is not an imaginary world for the global poor – it is the stark reality of living in a world where the rule of law is absent. This injustice is common and pervasive. This weekend I was fortunate enough to meet with the global area directors from an organization that is enabling the poor to have a voice and to do something about it – International Justice Mission (IJM). IJM is an organization of lawyers and social workers doing good – but the evil they face every day is profound. The scenarios I described are the all-too-common real-life stories of people in places like Rwanda, Guatemala, Bolivia, India, The Philippines, Cambodia, and many others. It is the reality for the global poor.
The impact of not having a functioning and honest criminal justice system has implications that extend well beyond the individual. As Gary Haugen and Victor Boutros write in a Foreign Affairs article, And Justice for All, “The absence of functioning public justice systems for the poor jeopardizes half a century of development work, because there is no effective mechanism to prevent those in power from taking away and blocking access to the goods and services the development community is providing.” The well-meaning efforts to provide the poor with sustenance, property, employment, skills, education, and healthcare, in some sense, rely on a fundamental assumption that is not true for most of the global poor – that they have rights and those rights are enforced. As Haugen and Boutros point out starkly, “Farming tools are of no use to widows whose land has been stolen.”
The absence of the rule of law perpetuates the cycle of poverty and injustice at the societal level. If you want to help take a community, region, or country out of poverty – one of the fundamental building blocks has to be the just rule of law. As David Brooks wrote this week in a NY Times article, “You can cram all the nongovernmental organizations you want into a country, but if there is no rule of law and if the ruling class is predatory then your achievements won’t add up to that much.” Unfortunately, the ruling class is predatory in much of the developing world.
The global poor live in a different world than we live in. It is incredibly hard for us to imagine their real circumstance. Our images of poverty are often associated with the absence of more tangible items of food, shelter, clothing and healthcare. But, it is in fact the absence of that which is least tangible, the rule of law, which may ultimately be the most defining variable for the present and future plight of the global poor.
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.
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.
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.
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.
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.
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?