Professor Richard Thaler just gave his Nobel lecture. He is a pioneer in behavioural economics. Often times, behavioural economics flies in the face of classical economics. However, there are some pieces of behavioural economics that are really interesting to think about when it comes to startups.
Here is his lecture.
In the lecture, he talks about a few things that I think could really help startups. The Endowment Effect is particularly powerful. This bias occurs when we overvalue a good that we own, regardless of its objective market value (Kahneman, Knetsch, & Thaler, 1991). It is evident when people become relatively reluctant to part with a good they own for its cash equivalent, or if the amount that people are willing to pay for the good is lower than what they are willing to accept when selling the good. Put more simply, people place a greater value Continue reading "Create An Endowment Effect"
This week, the FCC rolled back the Obama regulations on “net neutrality”. The deeper we get into the 21st Century, the more different pieces of legislation proposed by both parties start to resemble Ayn Rand’s descriptions in Atlas Shrugged.
Net Neutrality is a convenient way of saying “one price fits all”. Whether you agree or disagree, I’d encourage you to open your mind up to both arguments.
One thing that nobody really knows is if and when a new technological solution will be on the horizon that will leap over existing infrastructure and deliver the internet to us in a whole new way that is more efficient, faster and cheaper than it is done today. HFT traders used to use broadband pipes but now use microwave technology now because it is faster.
A lot of startup firms are doing ICO’s. There seems to be no end to them. If you are just waking up and don’t know what an ICO is, it’s an initial cryptocurrency offering. What’s that? A company creates a token and literally auctions them off in a manner similar to an IPO. There is no dividend, claim on the future profits of the company embedded in the token. The token is simply a ticket to use the blockchain it is associated with.
There are a lot of reasons for the success of the ICO market. Over $3B has been raised. Without delving deeply into the details, here are a few generalizations:
It’s hard to raise venture capital money and there is a fixed supply of venture capital money.
One commonality I see in a lot of seed stage companies is a mistake immediately after closing fundraising. I have heard and read it from other VCs as well so I suppose it’s not new. However, it’s something that cannot be stressed enough.
Focus on activities that bring you revenue at an early stage.
I know the old way was “build the network, worry how to monetize later”. For some businesses that can be true. They are few and far between. In the spots we invest, B2B Fin Tech, a focus on revenue is paramount.
Because you are generally solving a problem that people will pay for. It’s a big enough problem that you can do over and over again. If it’s really big, you can build a gigantic valuable business out of it.
If you don’t know, it’s really hard to raise a new VC fund. One thing that happens when you raise is you get contacted by “brokers”. These brokers don’t have the interest of the general partners at all. They’ll give you a call or email you and tell you some song and dance about how many family offices they work with. They will go on to tell you about all the fancy conferences they have and that they will put your fund in front of hand-selected family offices and do everything but guaranteed those offices will invest.
Then, they tell you the cost of those services. It’s usually around $40K minimum. Sometimes, it’s pay for a family office conference at some club. The cost is minimum $2500.
If you buy stock and accumulate a position, the old tax law let you sell the most recent stock you bought and pay the least gain. In accounting terms, this is known as LIFO, last in first out. It might even be the case that you Continue reading "The Foibles of Tax Bills"
Free markets are a rarity today. I mean truly free markets. The stock and commodity markets are about as close as you get. If you haven’t read Professor John Cochrane’s blog post about The Hard Road to Free Markets you should. He starts off,
The fundamental reason so many markets are not free, and so dysfunctional, is that the voters of our democracy don’t really want freedom. Freedom will come when we want it, when we insist on it, when the average voter sees a free market solution rather than endless controls as the answer to real-world problems. The sad paradox of free markets is that free markets do not need people to understand them to work. But democracy does require voters to understand how things work.
Humans tend to think in terms of lines. Point A to B to C. Great innovation draws a new line. This occurred to me when I was reading Seth Levine’s post on how startups grow and thought about this. While it’s intuitively obvious that innovation jumps the track and builds a new track, I don’t think it’s exactly clear when it’s happening. Of course, the best innovation is when you look in the rearview mirror and wonder why you didn’t think of it. Post an innovation being successful we wonder why we never had it before.
I am a huge fan of Russ Roberts Econ Talk podcast. I listen to them when I am commuting. He covers a lot of ground in his podcasts. I thought this one was very interesting. It’s about permissionless innovation.
When I read the Techcrunch article on the early stage finance drop it resonated with me. It is where we invest in as a fund, and it’s what HPA did when I co-founded it way back in 2007. Virtually all of my investments since 2007 that haven’t failed are still in process. Most are doing quite well, but you don’t ring the cash register until they actually exit. Fred Wilson blogged about it and his points also hit home with me. Especially this,
When I talk to my friends who do a lot of angel investing, I hear that they are being more selective, licking some wounds, and waiting for liquidity on their better investments.
When I talk to my friends who started seed funds in the past decade, I hear them thinking about moving up market into larger funds and Series A rounds.
There are three ways to trade futures coming on Bitcoin. The most under-reported one is Ledger X. It’s not a true future, but a swap. Technically they call it a SEF, or a “swap execution facility”. Most of the time, swaps are exchanges of cash flows of an underlying financial instrument. In Bitcoin swaps, it’s really only a long vs a short since there is no underlying cash flow.
CBOE and CME both announced futures contracts. Both are settled in cash-US dollars. Or, if you are a crypto-fanboy fiat currency.
A long time ago I had a meeting with Leo Melamed about listing Bitcoin futures. Leo is a good friend and invented FOREX futures. He is an innovator. We talked at length about it but it was pretty clear CME wasn’t going to take the risk at that time to Continue reading "Bitcoin Futures Are Coming. Are You Ready?"
Last night I went to the Economic Club of Chicago’s dinner with Ex-President Obama. I took my daughter. We saw some people we knew and we met some new people. Dinners like that can be interesting if you take the time to try and meet people.
Some of my friends wondered why I even would go to a dinner honoring a President whose policies I almost universally disliked and thought could be done differently. As an out of the closet libertarian, conservative Republican in Chicago it’s sort of like a gay person going to an Anita Bryant convention.
The reason, if you are going to be any good at anything you have to expose yourself to diversity, diverse ideas and listen. If you are going to truly understand the other side you better truly know people on the other side so you know where they Continue reading "Exposing Yourself"
Yesterday I had a conversation with Rajiv Nathan. He is a marketing consultant and does a lot of work with startups. It would be worth your time to reach out to him if you are thinking about marketing. We talked about a lot of things but one thing we zeroed in on was how really tightly focused a startup has to be at the beginning to be successful.
I started reading Tren Griffin‘s book, “A Dozen Lessons for Entrepreneurs”. The first chapter is about Steve Blank. He says that startups go through phases,
A startup is a temporary organization designed to search for a repeatable and scalable business model.
A company is a permanent organization designed to execute a repeatable business model.
It’s worth reading because virtually all the popular blockchains today are “proof of work”. That allows the chains to become trust networks among other things. Proof of stake is different.
One of the critiques of cryptocurrency from Finance professors is there is no claim on any future cash flows embedded in the currency. A US Dollar has a “claim” on the future cash flow of the United States via the US Treasury Market. The only thing backing up the crypto market is expectation and trust.
Proof of stake allows a crypto to have a base value in the future of a blockchain. I think it’s important to note that not all proof of stake coins would be successful because not all blockchains are going to be successful. However, the ones that are should have value
In September, I was part of a delegation that advised the G7 on the future of work, big data, and artificial intelligence. It was called the i7. It was the first time it had been attempted and it was Diego Piacentini’s idea that he put into action. The video will give you a snippet of what we did while we were there.
If you don’t know who economist George Stigler is, you should. He received a Nobel Prize for proving the concept of “regulatory capture”. We see it again and again and again in all industries. Finance is where some of the most regulatory capture is practiced. Dodd-Frank is a textbook example as it made regulations so expensive only the big banks could afford to compete. The George Stigler Center at Chicago Booth discusses economy and state. How does economic and public policy intersect and what should we be doing? What are mistakes to avoid?
When I was in Torino, Italy at the i7, we talked about a lot of different issues. At one session a very well respected computer science professor from an Italian university asked, “Should Google and Facebook face some sort of regulation that limits their ability to compete?” It’s a compelling question.
Many people think that clearinghouses can be replaced by blockchains. The answer is it depends. If we think about trade matching and having a transparent general ledger to show who traded with who and how many, blockchains can do that. But, that isn’t the core part of clearing a trade.
Some blockchains have smart contracts that auto-execute. They put in motion the things that have to be done in order for all the legal ramifications of the contract to be fulfilled. Clearinghouses do that too. In commodity businesses, clearinghouses inspect and approve of delivery facilities to make sure that the contracts cleared by their operations get fulfilled. But, that’s just one piece of the clearinghouse.
The core thing that clearinghouses do which a simple blockchain does not do is get rid of counterparty risk and charge margins to customers. The margin is
Yesterday I was privileged to have been invited to a University of Chicago class to judge some student teams that were working on startup ideas. It can be very interesting to listen to pitches in this format because you get a window into some things undergrads have to deal with.
It also helps me think about things.
Sometimes when I hear a pitch, I see a bigger idea or a different path. The best way to get that across is to ask a question not blurt out what you are thinking. Asking a question gives you some insight into how the entrepreneur is thinking.
This is a question that isn’t considered often enough. Investors ought to really think about the answer before they ask it. It’s a critical question that an entrepreneur needs to answer.
One thing we know in our line of business is this. If “hiring and expanding our sales/business development/marketing staff” isn’t an integral part of the equation, we become far less interested.
In Fin Tech, it’s all about sales. The technical aspects of product development are generally not very difficult. It’s understanding how to apply the tech to a problem in a new and different way that creates a bigger business. Then, it’s selling it. Just because you have a better mousetrap doesn’t mean everyone will knock on your door.
The exchange part of Bitcoin has always been sort of the wild west to me. No standardization. No real regulation. Most of the big time trading is done bilaterally. DRW’s Cumberland Mining in Chicago is the center of the universe when it comes to making markets. It doesn’t surprise me there are a lot of market makers in Chicago. It’s what we do. Retail goes to New York. Chicago is about professional industrial strength markets.
When I think about market structures, I always wonder who are the natural buyers and who are the natural sellers. It’s easy to think about who will speculate. It’s easy to think about who might come in and be a retail trader. Hot money flows through the trading world constantly and right now all the hot money is in crypto. By hot money, Continue reading "Can You Short Bitcoin?"