Of Horseshoes and Hand Grenades
Woulda, coulda, shoulda. It’s the story of the investment world as told by the non-billionaires among us. I didn’t get involved in venture capital early enough to ask myself what I would have returned on a Microsoft or Apple investment if I had gone in pre-IPO in the 1980’s (Apple IPO was 1980 and Microsoft was 1986). I was focused and busy with my banking career back then and that skill base served me well and continues to be the mainstay of my expertise as I continue to peddle it in the expert witness world. I have written about my early connection to Jeff Bezos back when he was a lowly worker bee in the employee benefits area of Bankers Trust and I ran that area in the early 1990’s. Of course, he went on to join famous hedge fund D.E. Shaw, being ahead (or at least very early in it) of that game in the early 1990’s before driving across country with his business plan to Seattle, where he started Amazon. I feel like its fair for me to say that that was my first big fish that got away. $1,000 invested in his little start-up in the mid-90’s would be worth about $12 million today. By 1996 (twenty-five years ago) I was making enough money so that I would have put at least $50,000 to work with Bezos and that would have translated into $600 million had I stayed the course with the investment.
Aye, there’s the second rub. Not only would I have had to take the initial plunge, which is very much akin to throwing a dart at a small target from 100 feet away, but I would have had to be so blindly optimistic as to not so much as take money off the table when it went 10X at IPO in 1997 of yet again when it reached 100X. You get the picture. Prudent investors are forever cashing in their chips to diversify their gains rather than letting those gains roll forever forward. The concept of mean reversion tells us that the likelihood of something continuing to go up and up is the equivalent of thinking that trees grow to the sky, and we know that doesn’t happen…at least not very often. It is hard to say with any precision which is the lesser likely event, to have the perceptiveness and opportunity to find the golden ticket or to continuously not cash it in in favor of letting it ride over and over again for many years. It’s easier to do that second part if you are a founder like Bezos because your winnings are so big that you can take just a little and put it in the bank for your rainy day and let the bulk of the large founder’s position roll forward. It is also clear that entrepreneurs have a confidence level and insider view that makes them better long term investment holders.
Since 1996 it is fair to say that I was playing directly in the venture capital space. There were a small group of us at Bankers Trust that were driven to that activity based on our overall financial awareness, our excessive compensation levels that gave us lots of disposable income and the visibility we had on a broad array of venture ideas that sprang from this loosely affiliated group of connected professionals. We even joked about our investment frivolity by calling ourselves MarketTop Investors, implying that we clearly were so brash that we would likely invest when the market was peaking rather than the other way around. That name was the brainchild of my long-time deputy in those years, a very savvy investor named Josh Weinreich. Josh was as funny as he was savvy and here’s the unusual thing, he was as ethical and socially conscious as anyone I knew. That made him a strange and impressive blend on Wall Street. He was a street-smart guy with a conscience and there were not too many of those out there.
This morning a read a piece in the Wall Street Journal about a venture capital company called Sutter Hill (I’m not sure, but the name sounds too much like Sutter’s Mill and the reference to the 1848 gold strike in California) that parlayed a $190 million investment into a $12 billion bonanza for its investors. This is a mere 63X, but still very eye-popping for most of us who recognize how illusive those sorts of unicorns can be. The investment was in a company called Snowflake, which is about a large cloud computing platform, strangely enough one of Amazon’s second or third acts of success in its march forward. As is usually the case, Snowflake is the subject of a good deal of investor controversy as to whether this rocket ship can stay on course, but so far, two earnings reports into its public sector life indicate that it can. Time will tell, but I bet Sutter Hill is taking this opportunity to take a good deal of its chips off the table, as investors tend to do. This news is what brought me to think about woulda, coulda, shoulda. That and an email from a friend.
That friend pointed me to a new book (technically published in 2020) called Facebook, The Inside Story. In the first two pages of this unofficial “biography” of Mark Zuckerberg, the author tells the story of a young lawyer named Andrew Weinreich (first cousin to my pal Josh Weinreich) who started a company in 1997 called Six Degrees (as in Six Degrees of Separation, the John Guare play of 1990 that later became a hit movie starring Will Smith). The book tells the tale of Weinreich starting a company that truly began the social media revolution. As an early adopter of the notion they garnered an amazing 3,500,000 members in a time when the internet was young, smart phones didn’t yet exist, broadband was in its infancy and people were not completely ready to open their lives up online. Nevertheless, Josh Weinreich introduced our MarketTop group to cousin Andrew and sure enough, we all invested in this Brave New World concept. I put in $150,000 as a showing of my strength of belief in the concept and in Andrew, who was smart as a whip, just like his cousin.
We watched anxiously as Six Degrees got more and more traction and as the tech bubble grew and grew in the late 90’s. We used to use the example that if you wanted to get to Bill Gates, with Six Degrees your barber might know his barber and voila! As the market grew toppish in 1999, Six Degrees sold itself to an Internet accumulation company that was already public, an alternative path to realization that was faster than the overburdened IPO channel. We sold to Youthstream Media at a level of 12X our initial investment. That mean that my $150,000 was worth $1.8 million in Youthstream stock. The way those deals worked was that we all had a lock-up for one year that precluded our selling except for a collective 10% that we could sell right away. We were all happy to sign and take that deal….except for one guy. This was a guy I knew in the bank and had joined our group late, so I vouched for him. He would not sign unless he could sell his whole portion right away (I think he had invested $50,000). The only way to make the deal work was to allow him to use most of our 10% sale allocation and we would all hold our full positions for a year. None of us was happy with that, but bankers have a habit of pulling this sort of “little stinker” trick, so we let it go. I got more than a few comments about having vouched for the guy.
Over the next year, the NASDAQ died and the tech bubble burst. We watched our investment in Youthstream Media sink further and further such that when our lock-up expired those of us who sold had seen the value shrink by more than 12X. I cashed in my $150,000 investment, supposedly worth $1.8 million at purchase for $70,000 and took $80,000 as the first of many future venture capital losses. Woulda, coulda, shoulda.
Six Degrees was an idea ahead of its time. By 2004 when Zuckerberg started The Facebook in his Cambridge dorm room, the social media idea had matured and the rest is history. Had I invested that $150,000 in 2004 in Facebook, it would now be worth $2.9 billion. I had the right idea, but as they say, almost only works in horseshoes and hand grenades. Woulda, coulda, shoulda.