I’m writing from the old mining town of Virginia City which is near to Lake Tahoe. So why not discuss the modern version of mining… the blockchain.
Bitcoin is backed by millions of computers around the world called “nodes.” Today, the Federal Reserve, VISA and MasterCard back the current currency system but only THEY have access to the data. THEY also control the system. Bitcoin is open source to everyone and NO ONE controls it. Bitcoin mining is highly uncertain like mining for gold. Miners solve complex math problems to verify transactions in a block performed by high-powered computers.
Blockchain seems to be that hot topic that everyone talks about but no one seems to understand.
The luck and work required by a computer to solve one of these problems is the equivalent of a miner striking gold in the ground. So the miners insure both privacy and security. For example, the miners make sure that bitcoin transactions are not being duplicated (aka “double spending”). So if you have $100 in your crypto wallet, the miners verify that you didn’t spend the $100 on a music festival ticket for $100 AND on buying a $100 skateboard online. If the miner solves the complex math problem, then a new block is added to the blockchain and the miner is rewarded a block reward in bitcoin. This is the only way that new bitcoins get issued.
The block reward is halved every 210,000 blocks, or roughly every 4 years. In 2009, it was 50. In 2013, it was 25, in 2018 it was 12.5, and sometime in the middle of 2020 it will halve to 6.25. At this rate of halving, the total number of bitcoins in circulation will approach a limit of 21 million, making the currency more scarce and valuable over time but also more costly for miners to produce.
(1) A party requests a transaction.
(2) The transaction is broadcast to all on the entire network.
(3) The transaction is validated using validation rules set up by the blockchain network.
(4) Validated transactions are kept in a block and sealed with a hash algorithm.
(5) The block approaches the blockchain for authentication and specifically the hash is authenticated.
(6) This process is very secure because if a hacker tries to change the hash algorithm, the block will be rejected by the blockchain. Only after every computer on the blockchain network validates the block via a hash authentication, then the block becomes a part of the blockchain.
Prior to the 2000 Dot.com collapse, startups were racing with time to go IPO (Initial Public Offerings) to gain huge exits for their investors. During that time as a 23-year-old tech entrepreneur and world traveler, I remember getting my Aussie ex-girlfriend’s mom Bernie all excited about buying Cisco, Microsoft, and Amazon stocks. Bernie ended up buying a ton of tech stocks in the frenzy, but she like many other amateur investors ended up selling it in the “tech bloodbath” that was to follow.
I lived in Geelong, Australia for two years while working diligently on my first software startup. If the tech market kept it’s franactic pace, I never would have jumped ship into real estate. After 9-11 and the tech bubble collapse, the herd of investors looked for safer places to park their money… namely real estate.
During the Dot.com era, companies raised massive amounts of capital from their IPOs and used it to try to buy traffic to jumpstart a network effect. Today, I see the same exact phenomenon occuring with two notable exceptions. The first difference is that the source capital is not coming from IPOs but rather from institutional investors and sovereign wealth funds. The source of the capital is 20:1 leverage with low interest rates. In fact, corporate leverage alone now exceeds $8.8 trillion usd. The second difference is a valuable lesson that VCs learned during the Dot.com debacle… the importance of getting to product-market fit quickly.
Silicon Valley has also formulated it’s “winner-take-all” strategy. Dot.com startup Amazon exemplified the “winner-take-all” approach of that era. Jeff Bezos believed that losing money could be the ultimate competitive advantage if you can raise enough capital to sustain it, as it prevents others from entering the space or gaining market share. When competitors are wiped out, then you can raise prices back up to profitability.
Examples of no-revenue companies are Uber valued at $120 billion usd and Lyft valued at $15 billion usd. It doesn’t matter to Uber that it lost $4 billion usd in 2018 and $4.5 billion usd in 2017. First, Uber raised over $22 billion usd. Uber has made a ton of money for it’s early stage investors in it’s recent IPO. Second, Uber’s traction is such that it will be “bailed out” by an acquisition. It’s possible that Uber will survive the market collapse that I forecast will be coming soon.
But here is the problem with a company like Uber… it lacks sustainable differentiation.
Network effects have no value if they don’t create monopolies. Uber will never make a profit in the rideshare business because it has no sustainable differentiation over competitors like Lyft. Raise rideshare prices and customers migrate over to Lyft. To win, Uber must beat Lyft and this doesn’t seem feasible or realistic. Alternatively, Uber needs to use it’s capital to create secondary models in markets such as supply-side logistics (aka Uber trucking). As a side note, I think Uber is trying to scare riders with “sexual assault” stories with the goal of allowing Uber to record driver / passenger conversations (obviously valuable data and a major violation of consumer privacy rights). If I were Uber, I would use Uber’s higher market valuation to buy Lyft. All the drivers who drive for both Lyft and Uber will then be working for the same company!
Uber is an example of a unicorn… defined by venture capitalist Aileen Lee as a startup who exceeds a $1 billion market cap. The number of unicorns has been on the decline since 2014. So here are the numbers… 42 unicorns in 2014, 43 in 2015, 16 in 2016, 33 in 2017, and 35 in 2018. In addition, a recent study by the National Bureau of Economic Research argues that the average unicorn is 50 percent overvalued.
Silicon Valley’s “winner-takes-all” approach works great in bull markets. However, I believe that the “winner-takes-all” fails miserably in bear markets. In a bear market, startups with free cash flow will survive. Ironically, free cash flow during bear markets may win the “winner-take-all” as no-revenue companies fight for their survival.
I think the groupthink in the Bay Area is missing another major blind spot. Prior to the Dot.com bubble, IPOs for tech companies took an average of 4 years. Today in our current “app bubble,” it’s taking 11 years for tech startups to IPO. Ladies and gentleman, this is a math problem. If you visit the history of American financial markets, bull markets tend to last either 5-7 years or 11-14 years. If IPOs for tech companies take an average of 11 years, this is like playing Russian Roulette. Better to look for 5-7 exits and being mindful of the economic credit boom and bust cycles.
So I am sharing my insights as to why VC tech investing is super risky in 2019. However, I don’t see the makings of a real estate collapse. Keep in mind that after the Dot.com Recession, tech workers lost their jobs and it temporarily effected the real estate market. But from my perspective, real estate “megacrashes” like 2007 have economic indicators such as subprime lending, mortgage fraud and over-construction. In a nutshell… I am expecting a 2000 Dot.com crash and not a 2007 real estate crash (well unless the currency collapses).
In 2001 with my first software startup on the ropes and hanging on for dear life, I shifted my focus to real estate investing. After the “app bubble collapse,” I’d bet that people go back to speculating on “hard assets” such as homes. In others words, I am expecting a two year bear market proceeded by a 5-6 year record breaking bull market.
From this discussion, it’s pretty clear how risky venture capital investing can be. Even if you pick the right founders in the right market, you’re still rolling the dice on market timing and competitor risks.
If you’re tech investing in 2019, find experienced founders who can quickly get to product-market fit, change your paradigm from “winner-take-all” to free cash flow as a near term survival strategy, and do your best to time the markets (which can be nearly impossible to do). Beware!
When living in a brand new apartment complex in Tacoma (WA) over fifteen years ago, I frequently visited their state-of-the art movie room with surround sound and theater seating. In this cinematic setting, I could really feel, hear, see and experience the movie “The Secret.” In fact, according to “The Secret,” you unlock the Law Of Attraction by feeling a desired outcome as if it already existed. For the last 27 years of my life, I’ve also been a huge disciple of SMART (Specific Measurable Actionable Relevent and Time Sensitive) written goals.
But here’s the problem. Have you tried written SMART goals and/or invoking the Law Of Attraction but have NOT gotten results? In today’s post, I will share with you a better approach based on neuroscience that works better than written SMART goals and/or invoking the Law Of Attraction.
In the last ten years, widely held old paradigms in neuroscience have been disproven with scientific research. For example, it was previously believed that we had a subconscious mind in our brainstem (aka the Reptilian brain). This is the bottom of the brain area. Neuroscience has now discovered that conscious corticals and subconscious corticals occur in the same regions of the brain. In other words, there is no such thing as a subconscious area of the brain.
Let me explain how the brain actually works. As humans, the auditory cortex, the somatosensory correx, the visual cortex and the smell cortex all wire together as they fire together. The brain through neuroplasticity gets shaped and reshaped through sensory experience AND imagination. As a side note, modern fMRIs show that the various cortexes fire from just visualization and imagination. During subconscious dreaming, whatever we focus on gets the reinforcement attention. We tend to give attention to stimuli that match our self-identity. For rewiring your “self-identity” spindle neurons, the best system is to review your Habit Goals (to be explained below) right before sleeping and right after waking.
In addition, neuroscience now shows that feelings don’t come from the limbic system. It turns out that there is no limbic system. For example, it used to be believed that fear and the “fight or flight” reaction derived from the amygdala in the limbic system. Neuroscience now understands that the amygdala executes the signals coming from the cognitive areas of the brain. In other words, the emotion of fear is a cognitive activity. Interestingly, we don’t even know that the emotions experienced by other animals resemble the human emotions because animals and humans process cognitive functions differently.
Finally, neuroscience has discovered spindle neurons that form our self-identity ego. Humans are born with spindle neurons and the 200,000 to 400,000 spindle neurons fully develop by the age of 8. The spindle neurons function like a symphony conductor. The sensory input is like the brass, the emotional inputs is like the percussion, the thinking inputs is like the woodwinds, and the subconscious cortical inputs are like the strings. The self-identity spindle neurons are the sum total of the combination of emotions, thinking, subconscious habits and sensory data collected by the age of 8.
The problem with invoking the Law Of Attraction and/or SMART goals is that it insufficiently rewires the spindle neurons that have been hardwired by the age of 8. Written SMART goals won’t rewire your “self-identity” spindle neurons. Feeling like you’ve manifested your desired outcome (by invoking the Law of Attraction) is not enough to rewire your “self-identity” spindle neurons.
I’ve developed a goal-setting process called Habit Goals that might help you rewire your spindle neurons and allow you to put your attention during subconscious reinforcement memory and learning in alignment with your desired outcomes.
Liz Demarco used my Habit Goal method to lose 35 lbs. Robin Lee described a transformation in her relationship with money. Bobbi Schwartz says that Habit Goals allow her to sleep better and make her happier and more joyful. Heather Perdelwitz says the Habit Goals helped her to replace victimization with 100% radical responsibility.
Why do you have a business? Perhaps, your “why” relates to having more money to travel or funding a cause that you’re deeply passionate about.
Watch this step-by-step video on how to develop your Habit Goals to master the art of rewiring your spindle neurons.
What would it cost you if you continue to fail to achieve your goals? Are you frustrated of falling short? Who are you hurting by your inability to attain results?
You cannot afford to skip the link that I posted above. The Habit Goal system could be the missing master key to transform your money, relationships and health.
It seems a little unfair that founders may only get 1-2 experiences in term sheet negotiations whereas the VC has a wealth of experience. From a VC perspective, we’re looking to mitigate our risk through preferred shares.
If I invest $1 million into your company for 25% equity, what happens if the company exits for $2 million? Without liquidation preferences, I’d only get back $500,000 back (25% of the equity). With 1x liquidation preferences, I get my $1 million back.
Liquidation preference allows the VC investor who owns preferred shares to be paid “in full” prior to any of the common share investors (founders and employees) getting paid off. With a 2x liquidation preference, the VC gets the first $2 million and the common shareholders get $0.
I came from a real estate hedge fund background and we focused primarily on hard money lending. Higher levels of liquidation preference reminds me of a hard money loan. With a 2x liquidation preference, I have something like “the collateral of a house.” If we fire sale the startup for $2 million, I can still double my money.
It’s important to note that liquidation preferences typically apply to M&A exits or bankruptcy proceedings, but not to IPO exits. On most term sheets, the preferred shares convert to common shares in the event of an IPO.
Here are some tips on a few things to check on your term sheet.
Review your term sheet to double check that your conversion from preferred shares to common shares is on a 1-to-1 basis.
It’s uncommon to have participating liquidation preferences, which means that the VC preferred shareholder still owns a part of the company even after getting paid-out their liquidation preferences. This is like eating your cake and having it too. The typical term sheet has non-participating liquidation preference which means that the investor has to choose between exercising their liquidation preference or converting their preferred shares to common shares.
Seniority of liquidation preferences. It’s common for later round investments to have seniority in liquidation preferences over earlier rounds. You’ll want to understand exactly how the waterfall of payouts is constructed. Seniority alternatively could be Pari Passu.
I’ve also been involved with Hollywood feature film funding. Liquidation preferences for a VC remind me a lot of the film waterfall. Typically, the P&A (Print and Advertising.. the cost to market the movie) gains seniority in liquidation preferences. The seniority may not even be equal amongst the P&A investors. Something like 40% to 50% of the P&A goes to media buy spends (like tv commercials). If I were investing in a film, I would want to be like Disney or Fox and own the media buy company. I’d want the profits from the media buy, merchandising and distribution fees to exceed whatever money I have invested in the movie.
If you’re a start-up founder, you’ll want to master the financial structure of your term sheets. Don’t end up like the average movie producer who made more than $100 million in box office sales but ended up making nothing after all the liquidation preferences were paid out.
At Ryco Capital, we primarily focus on investing in software in Media, Ad Tech, Real Estate and Blockchain. Software for influencers specifically lies near and dear to my heart.
In my last blog post, I shared some concerning indicators in the economy that lead me to surmise that a Stock Market crash is coming in 2020 or 2021. Because capital vanishes as well as big tech exists in a bear market, it’s more difficult to find 100x opportunities. So here is how I see the world.
Imagine a world where the Dow Jones drops 40%. Wall Street panics… a big name investment bank goes down. Crypto and Cannabis take major dives as well as emerging technologies such as AR/VR and 3-D Printing. The FED vows to make historical cuts to interest rates to recessitate and pump up the economy.
How do you invest in a world like this?
Post stock market crashes are typically the best time to buy stocks at a discount. In my working thesis, we’ll invest in distressed manufacturing companies at huge discounts. During times prior to anticipated market uncertainty, I’d prefer to focus on free cash flow. As explained in a prior blog post, it make sense why VCs don’t focus on free cash flow and rather why they take a “winner-take-all” approach in big markets.
Influencers use a tool called a “product launch” (first created by Jeff Walker at Product Launch Formula) to sell their digital products during event-driven launches. An influencer may have different types of opt-in funnels such as a “Waiting List” funnel. For example, you may sign up for the lead magnet on my website, but only the opt-ins for my product launch can be considered for the “launch list.” The calculation of Earnings Per Lead is Launch List / Total Marketing Spend.
Free cash flow is not enough. In addition to free cash flow, you want the Earnings Per Lead to be greater than the Cost Per Lead. Furthermore, you want the Earnings Per Lead to be continually increasing by using an Ascension Model to push up the Customer Lifetime Value (CLTV).
Let’s say you sell a software subscription. Your first ascension model campaign maybe a free content strategy such as a blog and podcast. Next you’ll want a DIY Software Saas. To increase CLTV, you’ll want to add Monthly Workshops to support Certified Ambassadors. Then you’ll want to create an annual Dreamforce type of conference. In addition to free cash flow, you also want an Earnings Per Lead that is ever increasing it’s CLTV. Whatever company has the greatest Earnings Per Lead can pay the highest Cost Per Lead and win the Game Of Thrones (winner-take-all).
In my working thesis, when investor’s panic and the economy collapses into a recession, companies will downsize and cut their marketing budgets. According to INC, influencer marketing has a return on investment of about 11x compared to other forms of paid digital media. During a market correction, I expect distressed companies to increase their influencer-based direct response marketing where their Earnings Per Lead exceeds their Cost Per Lead.
How does influencer marketing work? An example may be helpful if you’re not familiar with this space. Revolve runs an influencer campaign called #revolvearoundtheworld for their millennial customers. It’s been a huge success. For companies targeting millennials, influencer marketing is almost an absolute necessity as 84% of millennials don’t trust traditional advertising according to an article by Brookings. This article also points out that 1 in 3 adults are millennials and that 75% of the workforce will be millennials by 2025.
BI Intellgience predicts that influencer marketing ad spend will reach between $5 billion and $10 billion in 2022, a five-year compound annual growth rate (CAGR) of 38 percent. Companies are already converging their influencer marketing along with their video and social media marketing strategies. The trend is moving towards long term relationships with influencers who share similar values to their company. Interestingly, celebrity marketing is being eaten way by influencer marketing.
Software is making influencer marketing more accessible to smaller companies and individual brands. Influencer marketing differs from Google AdWords or Facebook ads in that they require managing the relationships with influencers (who are people after all lol). Nevertheless, let me dive into some of the predominant influencer software platforms emerging today.
Everflow. Everflow is an affiliate management Saas with more features than Cake, HasOffers, Linktrust and Hitpath but at an extremely low cost of only $200/month (as well as a great interface although some disagree). Everflow’s targeting and blocks allow you to eliminate irrelevant traffic sources and focus on the sources getting your target measurements.
Brand24. This is a social monitoring platform for small and medium size businesses to track “social conversations” about your brand. It’s used to prevent PR crisis, find brand ambassadors, gain consumer insights, and maintain a good online reputation.
BuzzSumo. This is a powerful tool that allows you to research your target audience, get ideas from other content creators and find other influencers to help promote your ideas. By the way, I use BuzzSumo for this blog.
Upfluence. Upfluence is all-in-one influencer marketing platform that allows you to market through influencers including keywords, geolocation, engagement rates, audience demographics & more – influencer outreach through bulk emails – multiple campaign management – analytics & mentions monitoring.
Rocketium. A simple and effective way to create video marketing for influencers.
Investors remain anxious about the trade war between the US and China as well as Brexit. Deutsche Bank’s chief economist, Torsten Slok, predicts slow growth for China and Japan which projects to appreciate the US dollar. If the UK Labour Party wins with promises to nationalize utilities, this could send trembles throughout the global economy.
DISCLOSURE: Nothing on this blog is meant as investing advice… just mere educational pontification on my part. Oh ya… and all the photos on this blog are taken by my iPhone.
According to the International Monetary Fund (IMF), the global economy has been downgraded to a “synchronized slowdown.” Housing price crashes are occuring in Australia, Sweden and Canada.
Corporate valuations are not yet overinflated like we normally see in most market corrections with a price-to-earnings (PE) ratio of 15 and 4.5% dividend yield on the FTSE 100. However, the PE ratios can increase if corporate earnings decrease and reduce share buybacks. Corporate earnings forecasts are projected to be lower in 2020.
Because of worries about the US/China trade wars and Brexit, corporations are returning earnings to shareholders through dividends, buying back shares to reduce the PE ratios, and focusing on cost-cutting versus future reinvestment. This five year pattern could possibly affect earnings growth in 2020.
Historically, a signal of a coming recession is the inverted yield curve which occurs when the two-year Treasury yields more than the 10-year Treasury. When the bond market is in trouble due to inflationary concerns, the party may soon be over.
“We are dealing with a fiscally unstable long-term outlook in which inflation will take hold,” says another former FED chair Alan Greenspan. “There are two bubbles: a stock market bubble and a bond market bubble.”
Inflation would trigger massive defaults in the record $8.8 trillion corporate debt markets.
Low inflation driving interest rates and unprecedented levels of debt combined with Trump tax cut stimulus has created one of the greatest bull runs over the last 10-years. Many of the catalysts mentioned above could bring down the house of cards.
It all reminds me of the 2000 tech bubble. Some experts like chief investment Officer Scott Minerd at Guggenheim Partners expect a 40% hit in S&P 500. That’s comparable to the loses in the 2007-2009 Great Crash. After the stock market tanks and people lose their life long savings, expect a return to “real assets” like real estate.
When the market crashes, I’m expecting the Fed to overreact, lower rates and flood the markets with “bail-out liquidity” which will lead to a housing bubble pop an estimated 5-7 years after the recovery. All the signs of a real estate bubble will re-emerge… subprime lending, mortgage fraud, and overbuilding in construction. In my opinion, the next real estate market crash will be the biggest crash in the history of America.
In addition, expect massive overregulation in cryptocurrency and hemp/cannabis after the next crash. Many of the scammy ICO (Initial Coin Offerings) will go under and the SEC will look to “save the day” by instituting regulations. Cannabis/hemp markets are currently valued incorrectly. Investors pour money into cannabis and hemp mistakenly thinking that these are scalable tech companies, whereas cannabis and hemp are commodities. It will be common knowledge after the next crash that 145 PE ratios in Canadian cannabis companies are insanely speculative. When it comes to cannabis and hemp, the only metric that matters is free cash flow.
Based on my personal pontification about the market, I am being way way more careful in deciding what to invest in. Media Tech, Ad tech, tv and film content, and the entertainment sector content historically are less affected by recessions although leverage and acquirers could vanish. I’d expect influencer marketing platforms to increase during tough times, as companies want more “bang for their buck” in customer acquisitions. I’m interested in real estate services software solutions in anticipation of a housing bubble albeit it being short-lived. Interestingly, I am more interested in real estate software than real estate itself.
Sometimes the best thing to do when anticipate a market crash is to sit on the sidelines and wait it out. Another view point is to focus more on companies with the potential for free cash flow that can “ride out” the storm.
I was born into poverty and surrounded by a lot of emotional abuse as a child. My hometown in Waianae (Hawaii) has more than 70% of the population on welfare. Less than 10% of the high school graduates go to college, and more than 65% of the teenage girls become single moms before graduating high school. In fact, working at McDonalds in my hometown is considered a career path.
Entrepreneurship is the ultimate challenge in personal self-development. In the start-up world, whatever you don’t know will cause you to fail. I want to share with you eight hard-learned lessons from failing over and over on my journey from poverty to financial abundance.
Money Sabotage #1: Lacking The Neuro Self-Identity Of Wealth. Humans are born with spindle neurons and develop 200,000 to 400,000 spindle neurons by the age of 8. These spindle neurons work like a symphony conductor orchestrating over the sensory cortexes (the woodwinds), the self-state stories (the strings), the frontal lobe consciousness (the brass), and the emotions (the percussions). The spindle neurons formulate your ego and self-identity based on the collective data signals in your brain accumulated by the age of 8.
By the age of 8 when your spindle neurons become fully developed, your brain has already created a self-identity that will predetermine whether you’ll be rich or poor throughout your life. But following this blog will teach you how to neuro rewire your brain!
Money Sabotage #2: Hard Work. Perhaps, your parents taught you that money only comes via hard work. Many people so firmly believe in hard work that it may be very upsetting and controversial for many people to point out that money does not come from hard work. Money is an energy that comes from your self-identity (which is hard-wired in your spindle neurons by the age of 8).
If you want to become wealthy, start by dressing for success. Next, buy the kind of car that successful people drive. Finally, buy a home in an area where successful people live.
In addition, view hard work in terms of work hour units. If you work really hard, you’ll be able to maybe to crank out 100 work hour units per week. Unfortunately, if you’re competing with another company with 40 employees working 40 hours per week. This competing company will be crushing you with 1600 work hour units per week. Making money is about recruiting, hiring and keeping a high performing team who aligns with your core mission.
Money Sabotage #3: Not Surrounding Yourself With “Sapphires.” People may have even more resistance to this money sabotage than the last one. Sapphires are people who make you feel energized, inspired, fulfilled and happy. Because money is made from total working hour units, your business will fail if you don’t hire Sapphires.
To attract Sapphires, you first need to become a Sapphire. If your spouse, friends, or family are not Sapphires, this may cause your company to fail. This maybe controversial but it’s completely true.
Money Sabotage #4: Not Solving A Drowning Point. Successful companies target a niche audience who is drowning in some pain points. If you don’t target and segment a niche audience, it’s nearly impossible to solve a drowning point. Is your company’s product a vitamin (a “nice to have” product) or a pain-killer (a “must have” product)? Successful companies always have pain-killer products.
Money Sabotage #5: Lacking Mission And Purpose. I’ll guarantee one thing in business… you will have set-backs. Without a clear visionary mission and purpose, you will quit your business when times get hard. Successful founders are driven by a mission that they are so entirely passionate about that they’d rather die than quit.
In addition, since successful companies have higher outputs of work hour units, success requires recruiting, hiring and keeping a team of missionaries. A team of mercenaries will quit when times get hard (which is inevitable). Stake your mission and attract missionaries to your evangelical purpose.
Money Sabotage #6: Lacking Both Visionary And Integrator. A visionary sees 5-10 years ahead and sets a clear vision of the company’s product, expansion strategy, and product-market fit. The visionary is the ultimate charismatic sales person and evangelists who recruit clients, strategic partners and employees. The visionary is a rainmaker. On the Meyers-Briggs, the visionaries are often the personality archetypes of INTJ, ENTJ and ENTP.
As a visionary, if you cannot sell then you don’t have a company. Learning how to sell is required before you start your company.
A visionary in most cases becomes their own worst enemy as the company grows. Visionaries tend to do an inadequate job in running the day-to-day operators. Visionaries need to hire an integrator to manage and oversee the execution of the day-to-day operations of the business including operational systems, accounting systems, HR systems, and legal systems. The visionary creates the grand roadmap and the integrator coordinates and oversees the people parts of the business to execute the details of the roadmap. On the Meyers-Briggs, the integrators are often the personality archetypes of ISTJ and ESTJ.
Almost in all cases, the visionary and the integrator are not the same person.
Money Sabotage #7: Lacking A Culture Of Self-Integrity. High performing teams have a culture of self-integrity. People do what they say they will do. The opposite of a culture of self-integrity is a culture of victimization where people blame everyone (or everything) else but themselves. Victims have no control over the world around them. The most important skill for a founder is to develop their self-integrity muscles. If the leader does not have self-integrity, how can there be a culture of self-integrity?
Money Sabotage #8: Lacking Leadership And Emotional Intelligence. Money comes from organizing people. People follow leaders. Some leaders may gain power and control through manipulation, brute force, being cut throat and controlling behavior, but you can’t retain the best of the best teams with this type of leadership. A founder of a company is in the business of people (clients, strategic partners and employees). Emotional intelligence and leadership are both absolutely required in making money.
Even if you grew up in poverty and/or in an emotionally abusive environment, you can still be successful if you eliminate these 8 Money Sabotages. If you don’t eliminate these money sabotages, your company will fail.
I have posts scheduled on this blog every Monday at 9:30 am PST. On the first Monday of each month, I will coach you on Success Habits. On the second Monday of each month, I will share my research and insights about the economy. On the third Monday of each month, I will share my thoughts about software technology with a lot of emphasis on blockchain and product development. On the fourth Monday of each month, I’ll take you behind-the-scenes at negotiations with startups from a VC perspective
As you probably can imagine, I get asked this question a lot. So let me take you behind-the-scenes on how I evaluate which companies to fund.
Venture capitalist usually set up limited partnership funds and file a Reg D form with the SEC. Typically, they raise capital from limited partners.
But here’s two major problem facing a new VC fund. Until you have a track record, you have no track record. Without a track record, why would any limited partner want to invest in you. In addition, with a limited track record, you’re asking limited partners to park their money with you for 10-years while investing in high risk startups.
The challenge is that only 10% of the VC funds end up getting 90% of the limited partner funding. Why is that? Because for a limited partner like an endowment to park money for 10-years, they want to earn internal rates of return between 70% and 90%. So they prefer to invest in the top 10% of VCs.
So what happens to the other 90% of VC funds that are not in the top 10% of returns? Well, they die. In fact, the average VC fund only gets a return of 18% to 20% IRR. It’s called “One fund (for 10-years) and done.”
I look for companies with the potential for 100x returns. If I invest a $1 million, I’d like your business to have the potential to get back $100 million in 5-7 years. A single “hit” with a 100x return can set-up a VC fund for life. For example, Accel Partners made over 1,000x funding Facebook’s seed round. Just one investment caltipulted Accel into the top 10% of VCs for life.
I’ve been pitched by over 1,000 companies this year. Only 3 companies seem to have the potential to fit my investing criteria.
What do other VCs look for? The VCs that are likely to be “one and done” tend to settle for 10x on a series A for companies with proven traction and 20x on a seed round. But VC general partners will likely not last beyond 10-years if they don’t hit a 100x company in their portfolio.
I’ve been pitched by some super promising companies but the problem was that the founders wanted something like 20% equity for $20 million. For a company with no revenue! Without getting into the details of pre-money versus post-money (which I’ll discuss in a future post), we’re in the vacinity of a $100 million valuation. To get a potential 100x return, the valuation would have to jump to $10 billion.
Even if successful, how many companies reach a $10 billion market capitalization?
So now that I’ve discussed the math problem for VCs, you’ll understand why VCs look at the market size as their #1 investment criteria. It’s not a secret that successful VC investments are 70% market and moat, 20% founders, and 10% product. However, the types of companies that realize 100x returns are likely to be in markets whose future size is presently unknowable. As a result, I believe that metrics like TAM (total addressable market) can be deceptive. In my opinion, VCs are simply taking wildly imaginative guesses when it comes to market size. Peter Thiel articulates another complicated factor in guessing. Thiel says, “Build a monopoly in a small market and expand into adjacent markets.” So a company may start in a small market but end up in a bigger total market.
Thiel also calls out the elephant in the room. What does every VC seek but will never admit in public? Hint… it starts with “mono” and ends with “poly.” 🤫 The greatest tragedy for a VC is to guess the right market but fund the wrong company. Silicon Valley is a winner-take-all world. Sustainable differentiation (aka “Economic Moats” as termed by Warren Buffet) is absolutely required to become the winner-take-all. Interestingly, Warren Buffett doesn’t like to use the evil “M” word either.
Finally, I’ve been around the tech scene in Seattle for sixteen years but now “snow bird” (well without the snow) between Las Vegas and San Francisco. I’ve often wondered why the Bay Area companies have dominated the 100x exits. Unlike most Bay Area VCs that only invest within a 20-mile radius from their Palo Alto office, I travel around the US and talk to companies everywhere.
So I’ve been able to compare the difference between founders from a variety of states. My observation is that the Bay Area has one thing that other areas don’t have… technical product managers who have experience in “100x Exit” companies.
Don’t get me wrong. I’ve met with experienced technical product managers (who do for example 5-Day Design Sprints) in other states but they just don’t have experience in companies that have had a “100x Exit.”
I am writing this post from Bar Harbor and Acadia National Park in Maine. If you’re looking to understand the blockchain, you’ll first need to know the difference between Proof-of-Work and Proof-of-Stake consensus rules.
Proof-of-Work (POW) was created by Satoshi Nakamoto as the consensus algorithm for the Bitcoin blockchain network. On the Bitcoin blockchain, miners authenticate transactions onto blocks on a “first-come, first-solve” basis. Essentially, larger miners with the fastest supercomputing servers “win” the Bitcoin reward by solving the transaction puzzle first.
Proof-of-Work (PoW) consensus rules allow decentralization and security at the same time, but at the cost of expensive server capacity and energy. As a result, the larger miners with faster supercomputing capacity tend to dominate the smaller miners… inadvertently reducing some of the decentralization value of the node networks. In a nutshell, PoW works for simple transactions like cryptocurrency but is too energy inefficient for more complex touring tasks needed to run apps.
The genius of Satoshi’s blockchain innovation was to make it prohibitively cost-inefficient to hack the Bitcoin network. In other words, hackers would have to inefficiently pay for the supercomputing costs of mining 51%+ of the block verifications if they wished to change the consensus rules. A proposition that makes no financial sense. Read my blog last month to understand details of how the blockchain works.
Ethereum founder Vitalik Buterin, however, plays “devil’s advocate” and claims that the risk to the Bitcoin blockchain security would be malicious attacks by governments or attention-seeking hackers.
“What about attackers who have a really large, extra protocol incentive, or just want to watch the world burn? Could be a government. Or hackers that want to have some fun. The critique here says we’re assuming we have these participants motivated by economic incentives. What if there are people who just want to break the thing regardless?” Buterin said.
Buterin is moving Ethereum 2.0 from a Proof-of-Work to a Proof-of-Stake (PoS) consensus model that will gradually be implemented over the next five years. He claims increased security, performance and scalability for an Ethereum built on the PoS consensus model.
The Proof-of-Stake (PoS) replaces “miners” (who create new blocks) with “validators.” Staking is when validators voluntarily put their own ether (the currency used to pay validators on the Ethereum network) into an “escrow like deposit” lock up utilizing smart contracts. So instead of a PoW “first-come, first-solve” reward system… the PoS grants transaction validations based on how much ether the validators lock up.
Buterin plays “devil’s advocate” on his own PoS system by explaining the possibility of Evil Smiley Face Guys who purposefully adds new blocks with incorrect transactions. So the new Casper PoS system including a “challenge period” where anyone on the blockchain can challenge the validator’s validations. If the challenger finds an error, the challenger will receive a portion of the lock up deposit that was due back to the validator.
“The challenger can submit a transaction that points to [the block in question]. That calculation runs on the blockchain. The blockchain’s like, ‘wait the actual answer is 256 and this guy submitted 250 so this guy’s wrong.’ The original guy’s deposit is destroyed and part is given to the challenger,” Buterin said.
Proof-of-Stake consensus systems can work as long as the platform is widely in use. On the Bitcoin network, new coins are issued in exchange for successful authenticating transactions onto the blockchain. Because only a finite number of Bitcoins will be issued, the limited supply encourages the value of Bitcoin to keep going up.
Because new ether coins do not have a limited supply, the value of ether has no underlying basis and fluctuates wildly based on market whims. If a better blockchain system came along causing everyone to jump on the bandwagon, the value of ether could theoretically collapse. Furthermore, because validators need to own ether to participate in validating transactions into blocks, a collapse in the value of ether will likely create a “panic” scenario where validators leave in flocks.
Perhaps, this is worse case thinking… but I’m just playing the devil’s advocate. Nevertheless, the likelihood of an ether collapse has a higher probability than a government or attention-seeking hacker attempting majority control over the Bitcoin Proof-of-Work system. In addition, a government or attention-seeking hacker could also manipulate the markets to create an ether collapse.
I’m writing this blog post from Wall Street (NYC) and it’s a good time to talk about market cycles.
Around 2002 six years prior to the Great Crash Of 2008, I read an article by Prof. Fred Foldvary who wrote in 1997: “the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.”
Foldvary’s prediction was based on a book that he wrote analyzing real estate crashes since 1800. The economics professor concluded that real estate crashes about every 18-years (give or take 3-4 year variations) with the exception of world wars (no real estate crash in the 40s) and currency collapses (there were two crashes in the 70s due to Bretton Woods).
The insight that the real estate market would crash in 2008 was invaluable… although I was not fully prepared for how the crash would effect my loan and realtor commissions as well as the negative effects on my construction company.
DISCLOSURE: Nothing on this blog is meant as investing advice… just mere educational pontification on my part. Oh ya… and all the photos on this blog are taken by my iPhone.
Unfortunately (or maybe fortunately for those that pay attention), the Fed does not seem to pay attention to the Austrian Economic School Of Thought. They should adjust for Credit Expansion and Credit Contraction Cycles and not just the consumer price index.
The Fed should pay attention to the rate of growth in nominal final sales to U.S. purchasers and look for deviations. The last three deviations from normal trends on nominal final sales measure of aggregate demand were the October 1987 stock market crash, the Asian Financial / Russian Rubble crisis (and collapse of Long-Term Capital Management) in 1998, and Fed’s liquidity injection to fight a fictitious deflationary collapse in 2002.
What the Fed did in those three deviations can be described as being irrationally exuberant over false indicators. The Fed over reacts to an economic crisis and over inflates liquidity into the markets that cause irrational exuberance in the real estate markets.
That the Fed uncannily does this in a consistent 18-year pattern is remarkable.
But I use these trends to my advantage. I look at investing like a NFL Football game. The first 4-5 years are Quarter 1 and would include the period 2009 to 2013. During this time, banks have collapsed and mortgages are not available. So goes my rule of thumb, “Buy real estate when no one can get a loan, and sell when everyone can get a loan.” I only acquire real estate in Quarter 1 and always sell in Quarter 4. For me, real estate is not a long term investment.
Other indicators are when purchase prices fall below replacement cost (the value that an insurance claim will repay) and when cash-on-cash returns over 24%.
SIDE NOTE— despite common belief to the contrary (and as a former top realtor this is almost sacrilege to say), your personal home is not an investment. You may have heard Robert Kiyosaki say this and it’s true. However, I still recommend you buy your dream home in a luxury area because of the prosperity identity that it provides. Read my last blog post for a discussion about the reptilian brain and limbic system.
In Quarter 2 (2014 to 2018) and Quarter 3 (2019 to 2023), it’s possible to make good money but also very risky to flip and land develop. From my experience, the risk comes from paying high interest rates IF utilizing hard money lending combined with delays from government interference, environmental issues, and permits. If you have the cash to avoid leverage with high interest rates, this could be a decent strategy. In Quarter 2 and Quarter 3, I prefer to be the hard money lender and invest in tech via my venture capital fund. Historically, keep in mind that we experience 1-2 stock market crashes in Quarter 2 or Quarter 3.
Finally, I’d be careful to invest in Quarter 4 (2023 to 2027). Indicators of Quarter 4 are zero-down subprime lending, mortgage fraud, and overbuilding by developers. Quarter 4 is the time to sit on the sidelines and wait. If you have long positions in companies, hedge your bets by simultaneously shorting these industries. You’ll need the help of a seasoned securities attorney to make sure that you’re 100% compliant with our laws.
Today… according to my perspective, we are in Quarter 3.