Thinking About Thinking

If A Board Meeting Was Like The State Of The Union

Posted in Venture Capital by larrycheng on January 28, 2010

The CEO would make his way to the board room through a processional in the company’s hallways, flanked by clapping employees, shaking hands and giving thumbs up to the staff along the way.

The meeting would start with the CFO announcing the entrance of the CEO, and all board members standing and applauding.

The CEO would stand at the head of the table, with the CFO and CTO sitting in oversized chairs on a raised platform behind him.

All powerpoint slides and the projector would be replaced with a teleprompter.

When the CEO talked about cutting spending, lowering the burn and a hiring freeze, investors on both sides of the table would stand up and applause.

When the CEO talked about changing the healthcare plan to cover all employees and shareholders, the investors on the left side of the table would stand up and applaud while the other investors sit stoicly.

Thereafter, the CEO would have to remind all investors that their job is to represent the shareholders, not their own partisan interests.

Rather than talking during the meeting, the CTO and CFO would convey their opinion by smirking, giggling, and giving standing ovations as the CEO spoke.

Meanwhile, outside legal counsel, sitting in the first row facing the CEO, would never applaud and would be generally expressionless throughout.

At the appropriate time, the CEO would give a carefully calculated shout out to his wife who is sitting at the outer edge of the board room next to some carefully selected key partners and customers.  She waves at the mention of her name.

The CEO closes the meeting by saying God Bless this company.

Time Horizon Does Matter

Posted in Philosophy, Pop Culture, Venture Capital by larrycheng on January 28, 2010

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?