Yesterday, I had the unexpected opportunity to speak with a former executive of a major fruit and produce company. I always find it really fun to talk with someone about something I know nothing about – and in this case, the topic was bananas. So, I asked him about the economics of bananas, and this is what he said:
- Depending on location, retail price is ~$0.70 per pound.
- That retailer buys them by the box which is 40 pounds. So $28 is the retail revenue per box.
- The producer charges the retailer $12 for the box.
- The retailer also incurs additional costs for 7-days of storage and refrigeration at 56 degrees for ripening.
- The producer pays $10-$11 in costs for that box ($6-$7 for pick and pack, $1 for packaging, $2.50 for shipping, and $1 of marketing/sales overhead)
- Within a few hours of picking, the bananas are stored and shipped in refrigerated containers at 56 degrees. Shipping can take 7+ days.
- The picker probably makes ~$12/day and is paid per stem picked.
It’s always interesting to look at a supply chain of a product and decipher where in the chain you’d want to be. In this case, I’m happy to be the one eating the banana.
Periodically, some of the partners at Volition will do network television spots on shows related to business and technology. Today, I paid a visit to 30 Rockefeller and the MSNBC studios to participate in J.J. Ramberg’s show, “Your Business” (also author of It’s Your Business). The show won’t air until later, but this will give you a sense of what happens behind the scenes.
People often ask me whether or not I know what questions will be asked before going on the show. In general, I know the topics that will be discussed, but the questions actually asked are far more fluid. So, generally I prepare comments around the topics and then hope that the questions asked align with what I’m prepared to talk about. If not, winging it is the only option. But, the preparation still helps to think quickly.
It’s always a bit intimidating when you arrive at the studio, and you realize it’s the same studio used to tape all of the same shows you watch on TV. In this case, the studio for MSNBC is at 30 Rockefeller. The Today Show was taping when I arrived. And, no, I did not run into Tina Fey.
After making it through security, I’m ushered up to the green room. Before I visited a green room, it sounded like a fancy place where the big TV personalities hang out. In reality, it can be a rather humble room in some cases. Typically the show that you will be participating in, if it’s a live show, is playing in the green room so you can get a feel for what’s going on.
I didn’t appreciate how important make-up is until I saw myself on TV without make-up. Not a pretty sight. It’s non-obvious when you’re watching a show, but everyone on camera has substantial make-up on. It looks normal on TV – it looks abnormal in person.
If it’s a live show, typically I get brought into the studio during a commercial break and have less than a minute before we go live. It’s somewhat nerve rattling that right after the technician gets your microphone hooked up, you hear someone else counting down, “In 5, 4, 3, 2, 1…” Today, it was a taped show, so there was a little less pressure.
When we’re on air, we’ve been coached not to look at the camera. We’re supposed to ignore the cameras and simply have a conversation with the host and any other folks on the panel. You can see all of the final segments on Volition’s “On Air” section of our website.
That’s the whole process in a nutshell!
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.
Coming out of college, without even really knowing what they do, my dream job was to one day work at Bain Capital. Their reputation was that they took the very best of the young investment bankers and management consultants a couple of years after college. Since I was headed into the management consulting world after school, I always kept in the back of my mind that maybe I’d have the chance to work at Bain Capital one day. Having grown up in the 80′s, I viewed Bain Capital as the “Top Gun” of investment world. It’s where the best of the best went.
Nearly a couple of years into my management consulting experience, I called up a friend at Bain Capital. I said what much more informed candidates today would never say, “I am very interested in venture capital and wonder if there are any opportunities at Bain Capital.” That statement is the equivalent of looking for a job at an ice cream store because you like frozen yogurt. My friend politely informed me that Bain Capital was not a venture capital firm (at that time), rather they were a leveraged buyout (LBO) firm. Not knowing the difference, and considering they still wanted to interview me, I went along for the ride. For the next few months, I went to several interviews at Bain Capital’s pristine offices in a downtown Boston skyscraper. I started to learn about what LBO firms do. I was impressed.
At around the same time, I randomly saw a job posting on a website called CapitalVenture.com about a role at Bessemer Venture Partners. I had never heard of Bessemer, but they said they were the oldest venture capital (VC) firm in the country. That sounded good to me. I decided to apply and for the subsequent few months, I went to several interviews at Bessemer’s “office” in Wellesley, MA. Their office was a converted two story home. I am pretty sure I interviewed in what would have been the guest bedroom, the master bedroom, the library, the kitchen, and the kids’ rooms. Nearly every step I took in that office, the floors creaked because the house was old. It was no Bain Capital in appearance. But, I started to learn about what VC firms do. I was also impressed.
I came to appreciate that Bain Capital and Bessemer Venture Partners had commonalities and differences. These traits would be true more generically of any LBO firm relative to any VC firm. Their commonalities were clear: they both invest in businesses, help shepherd businesses, and ultimately aim to generate good financial returns for their investors and the other shareholders of these businesses. Their differences came in how they generated financial returns.
Bessemer, as a proxy for the VC industry, did well on investments if those companies grew, and grew aggressively. They bet on being right on trends, technology leadership, and new markets emerging. Bessemer pushed me hard on my risk tolerance during the interview process. Bain Capital, as a proxy for the LBO industry, principally relied on sound financial engineering to generate returns. They emphasized things like terms on debt, balance sheet structuring, and predictability of cash flow. They pushed me hard on my quantitative and modeling skills throughout the interview process. I came to appreciate that the VC and LBO worlds were two very different worlds.
The question the political world is grappling with this week is whether Bain Capital created jobs during Mitt Romney’s tenure. I hope that through that discourse, the difference between VC and LBO firms comes out. I am convinced that successful venture capital firms create jobs as a byproduct of their investment practice. The companies VC firms invest in have to grow to be successful, and a byproduct of growth is jobs. I also believe that while LBO firms don’t have to create jobs to have a successful investment, the great ones like Bain Capital probably have done so in meaningful ways over the long run. I don’t have any numbers, but that’s my belief.
What I am sure of for both firms is that they have been successful over long periods of time because they have generated good returns for their investors. In Bain Capital’s case, their investors probably include many state pension funds, corporate pension funds, university endowments, sovereign wealth funds, and insurance companies. It would not shock me at all if a surprising number of the readers of this blog have at least someone in their extended family who has benefited in some way from indirectly (and probably unknowingly) investing in a Bain Capital fund or working at a Bain Capital company. That value can not be under emphasized when it comes to understanding the contributions of any investment firm.
Back to my personal story. I remember the day that I turned down the offer from Bain Capital. I called the same friend and said with surprise in my own voice, “I feel like I’m turning down my dream job, but I’ve decided to go to Bessemer.” When people asked me how I could possibly turn down Bain Capital, I told them the truth. Working at Bessemer and doing venture capital investments just sounded like more fun to me. What could be more fun than coming to work every day and investing in companies that are trying to change the world in some way? And, with that call 14 years ago, I started my venture capital career. I certainly respect the work of LBO firms like Bain Capital, but have had such a great time in the venture capital world. The last 14 years have absolutely flown by. I guess time flies when you’re having fun.
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.
Despite the fact that often times the majority rules, that doesn’t mean the majority is right.
The most poignant example comes from a premier venture capital firm I once worked for. One of the opportunities they gave their investment professionals was the opportunity to invest personally and on a discretionary basis in each round of each financing the firm participated in. You didn’t have to invest, or you could “max out”, or you could do anything in between. There was a maximum amount you could put into each round based on your level in the firm.
Most interestingly, after each financing round closed, they would publish to the entire investment team how much each person invested for their discretionary investment in that round. There is no better way to tell how a person feels about an investment than to see the size of their personal check. It was the most honest moment of the entire investment discussion. There were certainly cases when everyone in the firm maxed out their personal investment (e.g. the “max out scenario”). And, there was a similar frequency of cases when nearly everyone didn’t participate except the individual partner sponsoring the deal (e.g. the “zero out” scenario). These decisions were always made after individuals would talk to each other behind the scenes to discuss how much they were going to put into each investment – they were rarely made in isolation.
What I learned from watching these personal investment decisions made over and over again was somewhat surprising. A great predictor of failure for an investment was when the max out scenario took place. If everyone loved a deal and backed up the truck on their personal investment, it was more than likely to not succeed. In fact, those deals often failed in quick fashion. The inverse was surprisingly true as well. More often than not, for those investments where the zero out scenario took place, they often became successes – sometimes the biggest successes. At the other firms I have worked at, various forms of this experiment have taken place and this observation holds true through different economic times, different investments, and different firms.
Why? How can it be that when a group of intelligent, seasoned investment professionals agree – they are often wrong? The answer is simple: investment partnerships are the perfect breeding ground for groupthink. Groupthink according to Wikipedia is: “a psychological phenomenon that occurs within groups of people…. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative ideas and viewpoints.” There are important cases in history where groupthink played a material role such as in Pearl Harbor and the Bay of Pigs.
The reason venture partnerships foster groupthink is best articulated by Irving Janis, a pre-eminent researcher on groupthink. He suggests that certain contextual ingredients make groupthink more likely including:
- High Group Cohesiveness
- Group Insulation
- Lack of Impartial Leadership
- Lack of Norms Requiring Methodological Procedures
- Homogeneity of Members’ Social Background and Ideology
Venture partnerships are often cohesive, insulated, and homogeneous groups – a perfect breeding ground for groupthink.
How do you protect against groupthink? I think you simply ask yourself two questions trying to be as impartial as possible:
- Ask yourself – could the dissenting opinion be right? Listen to and fully understand the point of view of the person expressing a dissenting opinion, especially if that person is the sole voice in the room. Fully consider their point of view as it may very well be the right one. Give it weight in your mind.
- Ask yourself – could your majority opinion be wrong? Have you arrived at your opinion without sufficient critical analysis? Are you basing your position on assumptions that you presume to be true, but that perhaps are not sufficiently tested or researched? Be humble, don’t think too highly of your own point of view.
Until you’ve understood how your majority opinion could be wrong, you should strongly question whether your opinion is right. Until you’ve understood how a dissenting opinion could be right, you should strongly question whether it is wrong. A great and simple test is whether you can argue both the majority and dissenting opinion well – irrespective of which one you hold.
The best venture partnerships understand this dynamic and take it into account in their decision-making. One firm I used to work at mandated a dissenting partner on all deals. Another firm always allowed for a single champion to carry a deal through rather than requiring partnership consensus. While groupthink may ultimately exist within the partnership model, it doesn’t have to be nor should partnerships let it be the deciding factor at the end of the day.
This is only one data point but I thought it was interesting. About a month ago, my wife launched a website called Activity Yard. It’s a website community where parents rate and review activities for their kids. The URL was submitted to Google and Bing on the same day in August. Out of sheer curiosity, I started to check the rate at which the two search engines spidered the site. Fast forward about 4 weeks, and the results are interesting – Google spidered 3,000 times more pages than Bing.
You can see in this image – Google has spidered “about 12,000″ pages on a site search of Activity Yard.
Now, here’s Bing’s result taken on exactly the same day (today). It only registers “4 results” for the same site search of Activity Yard. It would have almost been better if Bing’s result was at 0. Again, only one data point, but if this data point is directionally correct – Bing’s not even in the same galaxy as Google when it comes to spidering pace.
Historically, the measure of success in the venture business has been consistent top quartile performance at the fund level. Each firm generally compares their fund level performance to funds that started the same year or vintage, and if they beat the top quartile threshold put out by Cambridge Associates, they feel good about their performance. This got me thinking about whether being top quartile in other avenues of life would even be considered as “good” as we generally do in the VC/PE business. Here’s a little sampling:
From professional sports
- Major League Baseball Batting Average: There are 750 MLB baseball players making the top quartile threshold 188. That batter is Alfonso Soriano with the Chicago Cubs with an inconspicuous batting average of .270.
- NBA Scoring: There are 452 NBA players making the top quartile threshold 113. That player is Jordan Crawford of the Washington Wizards who averaged a respectable 11.7 points per game.
- U.S. State Populations: There are 50 U.S. states, with the top quartile spot being the state of Washington with 6.7 million people (with the top spot being California at 37 million).
- Country Nominal GDP: There are 181 countries listed in Wikipedia with the top quartile threshold occupied by Czech Republic with $192 billion (with the top spot being the US at $14 trillion).
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 is one letter I decidedly did not receive. Nonetheless, I thought it was pretty compelling that there is indeed a valedictorian of Harvard. Out of 1,600+ students in each class, there is one who ranks at the very top.