Risk and startups

Posted on by

Paul Graham has a fantastic recent post in his blog.  This is the kind of advice I wish I had heard when I was 21.

Yet, I can’t complain because the euphoric environment of 1999 allowed me and my partners at SelectMinds to take the plunge into startup world, when I was just 28.  It’s one of the best decisions of my life.

When we started SelectMinds, the reaction from my peers, most of whom had chosen more traditional corporate paths, tended to be "how can you handle the risk". Even then, I did not really thing what we were doing was terribly risky.  At the end of the day, all we were risking was the opportunity cost of mid-management salaries.  It was not a bet-your-kids’-college-account-along-with-your-house type of risk.

I hear a common perception when the topic is startups: Comfort with risk is the most important characteristic for an entrepreneur.  I disagree.  I think the most important characteristic (or skill) is comfort with ambiguity.  If I had to characterize my experience in a startup environment with one word, ambiguity would be the choice.

Dr. Amar Bhide has a wonderful book that looks at this issue.

Tim Hawkinson

Posted on by

Being not as busy as usual, this week I had the opportunity to visit the Tim Hawkinson exhibition at the Whitney Museum of American Art in New York City.

It is one of my most enjoyable museum visits in a while.  I had seen Hawkinson’s "Uberorgan" in the Atrium of the IBM building a couple of weeks ago.  It’s sheer size (so large that it could not be exhibited at the Whitney) and the intricacy of its mechanism (a signature Hawkinson feature) had impressed me quite a bit.

Visiting the full exhibition was breathtaking.  I find that I am generally drawn to art that is pattern intensive.  Hawkinson takes it a step further.  The patterns exist at both the physical level, as well as the at the mental processes that factor in to the creation of his brilliant pieces.

I’d highly recommend a visit if you are in or around New York before May 29th.

Search problems (or I love del.icio.us)

Posted on by

Blogging my previous entry today, I wanted to research the topic.  I remember reading about the concept in the past year or so, but can not remember where.  So, I went to Google and searched on the string "Balance Sheet Insurance".  It returned 146 links.  I scrolled through the first few but they were all on the topic of "balance sheets of insurance companies", which, coincidentally, happens to be a popular topic these days.  It, of course, has nothing to do with the concept that I was researching.

My fall-back in similar situations is to think of other search strings.  In this case, no alternative came to mind.

That is when I realized why I love del.icio.us (and tagging) so much:  It gives me the ability to categorize concepts in my own lexicon.  I would have tagged the article I read "balancesheetinsurance".

To give it a shot, I did go to del.icio.us, and tried the tag.  Unfortunately, no such tags exist yet.

The problem there is that del.icio.us is nowhere near the popularity and usage of Google or Yahoo!, and lacks the critical mass to be a mainstream search tool.

When it gets there, it will make our lives much easier.

Balance Sheet Insurance

Posted on by

I was reading Fred Wilson’s post today on ESORS and it reminded me of another interesting solution proposed for the securities industry:  Balance Sheet insurance

The idea is that the SEC requires companies to buy insurance against fraud/mistakes in their financials.  Which would, in turn, require insurance companies who price this risk to create their own audit model to evaluate different companies’ financials.  If you’re Enron, with an extremely complex set of accounting, your audit would be more expensive, increasing your premiums.  This system would create an incentive for companies to simplify their accounting and/or build a strong level of trust with the insurance community.

If a company was caught cheating or with a mistake in their financials, investors’ losses would be reimbursed by the insurance policy. So, if Enron blew up, the shareholder value would not be lost.

I think this is a brilliant idea.

What drives venture capital?

Posted on by

Gord_geckothumbGordon Gekko would answer that with one word: "Greed"

Is it true?  I honestly don’t think that it is the primary factor.  However, there is one phenomenon that makes me believe that it is a significant component.

Imagine a business that would create an equity portfolio of minority shares of start-ups.  Once it identifies a promising business, it takes a minority share in exchange for participation in the fund – in effect the entrepreneurs give up equity in their ventures for participation in a "basket" of equity in a similar set of ventures (becoming "limited partners").  For this hypothetical business to be profitable, it would value the ventures at a discount, compared to the rest of the portfolio, therefore creating shareholder value.

A set up like this would make an interesting risk-management product for entrepreneurs, who are typically extremely exposed to risks associated with their ventures.

Could such a business work?

The response I get from the VC community has been negative.  A common objection is that the VC’s smartly take advantage of the drive (or "hunger") of the entrepreneurs.  If the entrepreneur is able to hedge that risk, theoretically she is less driven to succeed, therefore hurting the VC fund’s portfolio’s performance.

This does not make sense to me.  If this argument had much merit, Jim Clark (founder of Netscape and SGI), a billionaire, would have no VCs interested in backing him.

I think the real objection lies in management fees, the typically 2% fee that a VC fund charges its LPs as compensation for managing the fund.  In the hypothetical set up described above, there is no fund, hence no management fee.

As the early stage funding market gets more efficient, I predict that the management fees would be under pressure.

What is a blog?

Posted on by

Wikipedia definition:   "A weblog, web log or simply a blog, is a
web
application which contains periodic time-stamped posts on a common webpage."

Tuesday evening, I had a discussion on this very topic with a few luminaries of the blogging world at a dinner organized by David Teten.  People’s various definitions included the following characteristics:

– Syndication – via RSS or or similar tools
– Connectedness – This was brought forth by Ross Dawson.  He thought links are the most defining characteristic of blogs.
– Dynamism – The frequent posting of entries

I personally think the line between a "website" and a "blog" is fairly blurry.  I’d love to hear different definitions of blogs, if you come across any.

Distributed Journalism

Posted on by

When I woke up this morning, NY1 was reporting on the two explosions at the British Consulate in New York.  I saw this as an opportunity for an experiment.  I immediately went to Flickr and discovered that a user has posted a set of 5 photos.  In fact, there were more photos of the aftermath (the closing off of Third Avenue) on Flickr, than the CNN, FoxNews and NY Times websites.

This is a great example of the effects of blogging supercharged with the right tools.  If Vimeo had been as popular as Flickr, I bet I could have found a video clip, as well.  If I were AP, I’d be worried.