Thinking About Thinking

College Optional

Posted in Philosophy, Venture Capital by larrycheng on August 26, 2009

I have always believed that a great education is invaluable.  The ability to learn new things, grasp new concepts and retain information are all important ingredients of success.  But, how valuable is a college education – which is only one form of education?  In the business world, I think a college education is extraordinarily nice to have, but not a must have.  I’d certainly recommend that everyone get a college education, but if for some reason you can’t or you didn’t – perhaps your best bet is to go find a career in business.

Reinforcing that point of view is the sheer fact that there are many successful CEO’s that do not have college degrees.  Some of these include but are not limited to:

  • Richard Branson, CEO, Virgin Group
  • Michael Dell, Founder and CEO, Dell
  • Barry Diller, CEO, Interactive Corp
  • Bill Gates, Founder and Chairman, Microsoft
  • Paul Allen, Founder and Chairman, Vulcan Group
  • Dean Kamen, Founder and Chairman, Segway
  • Mark Zuckerberg, Founder and CEO, Facebook

You could say that they are outliers, and you would be completely right.  They are outliers in their lack of formal education – but also outliers in the magnitude of their success.  Even if you look at my portfolio of six emerging technology companies, two of the CEO’s do not have college degrees.  And both of those companies are going gangbusters.

At the end of the day, I’m not sure that the traditional college educational process of reading a textbook, listening to a lecture, and then taking a test is a process that is often replicated in the real world of business.  Sitting in a classroom listening to a teacher every day for four years in so many ways is exactly the opposite of what someone with an entrepreneurial DNA should want to do.

After seeing many talented executives come in without a college education, there seems to be a blueprint to succeed if you don’t have a college degree:

  1. Learn how to sell.
  2. Find a problem you’re passionate about solving.
  3. Be courageous and more willing to take risk.
  4. Make a lot of friends.
  5. Develop instincts by failing quickly.

And perhaps the most fundamental thing you need to learn to succeed in business whether you have a college education or not is to learn how to take $1.00 and turn it into $1.10 (without lying, cheating, stealing, swindling, etc.).  I don’t mean that in a theoretical way.  I mean literally, take a dollar bill out of your pocket right now, and figure out how to get someone to pay you $1.10 for it a week from now.  Usually that means you take the $1.00, go buy some stuff, package it up in a value enhancing way, and see if you can sell the end result for $1.10 to someone other than your mom.  If you can do that with $1.00, you’re off and running.  The same principles that enable you to turn $1.00 into $1.10 are the ones that will apply for turning $100 million into $110 million.  That ability is what some call business instincts – and instincts aren’t always learned in college.

Leave Something On The Table

Posted in Philosophy, Venture Capital by larrycheng on August 19, 2009

One of the best lessons I learned early in my career about negotiation is simple: always leave something on the table for the other party. 

To many, being a skilled negotiator means expertly and ruthlessly optimizing your self-interest.  Negotiating is about winning, or even better, beating the other party.  Satisfaction is knowing that you have left nothing on the table – you got everything the other party was willing to give and one more pound of flesh thereafter.  You have squeezed out every last dime.  I do not agree with this approach.

I think we all have to decide whether our primary objective is to win the negotiation or to win the relationship.  You can choose to go through life leaving a trail of dust comprised of those you interact with – seeing people as transactional resources to be drained at every opportunity.  Alternatively, you can go through life being fair and reasonable, not losing sight of the other party’s needs and appreciating that a good deal is one where both parties probably have given a little more than they wanted going in.  Both parties have left something on the table because they value the relationship as much as anything else. 

I really respect and prefer to work with those who adopt the latter approach.  I would say that all of my portfolio company CEO’s are of this mold.  They are people for whom a handshake still means something.  There is some old fashioned sensibility about them which is a high compliment in my mind.  They have the character to start off a negotiation with, “What’s important to you?”  There is no front-end posturing because that’s not necessary among friends and colleagues.  And they ultimately hope that as many people as possible become friends and colleagues over time. 

I’d like to think that operating in this manner, while perhaps not necessarily optimizing every short-term economic matter, does enhance long-term fiduciary value.  I guess it’s hard to know until you’ve seen a full body of work – but at least the ride will be an enjoyable one. 

The 10 Worst Moves By Red Sox GM Theo Epstein

Posted in Uncategorized by larrycheng on August 17, 2009

Since it’s the dog days of summer and the Red Sox are wilting, I need to drown my baseball sorrows by evaluating Theo Epstein’s 10 worst moves as Red Sox general manager.  VCs are often defined by their winners, rather than their losers.  Unfortunately, life isn’t so easy for baseball GMs.  Without further ado:

  1. Freddy Sanchez (.300 career batting avg, all-star), traded with Mike Gonzalez for Jeff Suppan, Brandon Lyon, and Anastacio Martinez. 
  2. Matt Clement, free agent pick-up.  4 years, $40M.
  3. J.D. Drew, free agent pick-up.  5 years, $70M.  He’d be #1 or #2 except he actually plays once in awhile. 
  4. Julio Lugo, free agent pick-up.  4 years, $36M. 
  5. Edgar Renteria, free agent pick-up.  4 years, $40M.
  6. Doug Mirabelli, traded away Cla Meredith (3.57 career ERA) and Josh Bard (.261 career batting avg). 
  7. Eric Gagne, traded away David Murphy (.280 career batting avg) and Kason Gabbard. 
  8. Bronson Arroyo (4.35 career ERA), trade for Wily Mo Pena. 
  9. Jeremy Giambi, traded away Josh Hancock (4.20 career ERA). 
  10. Daisuke Matsuzaka, 6 years, $52M plus $51.11M posting fee.  Tough call, but not looking good.

If there’s a lesson learned from Theo’s free agent mistakes that in its own way applies to the venture business – it is to be willing to pay up for the sure thing.  Now you could say there is no sure thing, which is fair.  But the closest thing is someone like Mark Texeira who had 30–40 home runs and .380 OBP in his bad years prior to being signed by the Yankees (away from the Red Sox).  Alex Rodriguez in his bad years still hit 30 home runs with a .400 OBP prior to once again being signed by the Yankees (away from the Red Sox).  Theo seems to like to pay $10M-$15M/year for above average historical performance (J.D. Drew, Julio Lugo, Matt Clement, Daisuke Matsuzaka, etc.), but not $20M for spectacular historical performance.  Ironically, a great example of the latter category is Manny Ramirez, not a Theo signing, but also an example of a sure thing (when mixed with PEDs). 

That all being said, the Boston Red Sox have have won two World Series championships during the Theo Epstein era.  So, I am still a Theo Epstein fan.  Maybe like VCs, baseball GMs are defined by their winners after all. 

It’s Hard To Get The News From The News

Posted in Philosophy, Pop Culture by larrycheng on August 12, 2009

This post may be a statement of the obvious, but it’s an observation I had this morning.  As is typical, I skimmed the Kindle versions of The Boston Globe, The New York Times, and The Wall Street Journal on my subway ride to work.  I thought it was very interesting how the three papers described the audience at President Obama’s town hall meeting in New Hampshire last night. 

First up, The Boston Globe:

Obama’s audience at Portsmouth High School gymnasium was tame.  The bleachers teemed with Obama supporters…  The president wound up preaching to the choir, which applauded wildly at his calls for action on healthcare – at one point breaking into a chant of “Yes we can!”

Next up, The New York Times:

Unlike many of Mr. Obama’s town-hall-style meetings, usually filled to the rafters with supporters, Tuesday’s meeting included skeptics from whom he sought out questions.  At one point he asked that only people who disagreed with his approach raise their hands to be called on.  There were plenty who responded.

Finally, The Wall Street Journal:

Inside Portsmouth High School, Mr. Obama faced a friendly crowd, so much so that he sought out some tough questioners.

And just to round it out, I checked out Fox News once I got to work:

Obama faced no disruptions at his meeting, instead taking questions from supporters who soft-balled him opportunities to knock down criticism. 

….and The Huffington Post:

The encounter was so friendly, in fact, that by the end Obama was even asking for skeptical questioners to come forward – to no avail.

After reading all five characterizations, I am inclined to think that The Huffington Post had the most accurate portrayal with the Wall Street Journal a distant second.  The other sources seemed to emphasize parts of the interaction as perhaps unfairly representative of the whole. 

This reminds me of a thought about what it means to be accurate in what you say.  To portray a situation accurately, it’s not just about making factual statements – which I think all of these sources did to an extent.  Accuracy involves more than isolated facts, but complete representation with – importantly – fair and proper emphasis.  This is as true for representing the news in journalism as it is in representing the Bible from the pulpit or representing a company in a Board meeting. 


Memorizing v. Understanding

Posted in Philosophy by larrycheng on August 6, 2009

I went to a Red Cross CPR training class last night and it brought up some more thoughts on educational philosophies.  The methodology of teaching for the class was very much based on memorization.  The entire class was taught in the following pattern: If X happens, then do Y.  After you do Y, then do Z.  After Z, check for A – if A exists, then do B.  By the end of the class, after sufficient repetition, you pretty much had it drilled into your memory.  But, interestingly, the teacher made a passing comment at the end that everyone would forget most of the training after a few months.  Having taken the class before, I can attest to that fact.

It did occur to me on the way home that while we were taught the steps of administering CPR, we were never taught why we were doing the steps.  It was never thoroughly explained to us why you give 2 rescue breaths when you don’t see signs of breathing.  It was never really explained why you administer chest pumps in the first place let alone why you do it 30 times at a relatively fast rate.  We were taught to memorize the steps, but we were not taught to understand why the steps are needed or effective.  I really believe that had the latter happened, more people would remember the steps months later.  To oversimplify, in my experience, memorization tends to more consistently deposit information in short-term memory, but understanding transfers that information into long-term memory. 

In addition to recall, I think the utility of understanding something is generally superior to the utility of just memorizing something.  For example, any undergraduate finance student has learned a basic equation like: revenues – cost of goods = gross margin.  But, few seem to understand what gross margin tells you about a business.  What does a high gross margin mean?  What does a low gross margin mean?  What does it say about a business when the gross margin is growing over time or declining over time?  And to pay homage to the Internet bubble – what does a negative gross margin mean (many equity research analysts of that era seemed to forget this one too)?  Understanding what gross margin means is a different plane of knowledge than just memorizing the equation to calculate it.

This is not a pure critique of memorization as an educational philosophy.  I just don’t think memorization should be applied in such a way as to exclude or trump the teaching of understanding.  Both working together are key components to building knowledge.  With that said, I still highly recommend that people take a CPR training class because remembering anything from the class is better than not having any idea what to do.  I doubt the victim you’re helping will really care if you understand what you’re doing as long as you memorized the right steps!