There Ain’t No Such Thing As a Free Lunch

TANSTAAFL.  People should remember that.  Nothing in life is free.  Everything has a cost and an opportunity cost.  Facebook isn’t free.  You supply them data and they resell it and make a lot of money off of you.  Google isn’t free.  They do the same.

Whenever you are promised something free from a business, they are figuring out other ways to monetize it.  The same goes for promises of “free college” or “free healthcare”.  Somewhere someone is paying.  Nothing that anyone spends energy working on and providing to you is free and if it is then it’s worth less than a Cracker Jack prize.

Robinhood built a large business off of the concept of free.  They are a retail brokerage that works on your phone.  As they walk the line to go public, the way they actually monetize their customers is starting to be understood.  To make a long story Continue reading "There Ain’t No Such Thing As a Free Lunch"

Was It The Banks Fault?

As you go to the polls today, it might be helpful to read this post by Professor John Cochrane.  It talks about the financial crisis ten years later.  The financial crisis spawned a lot of really bad legislation and policy.  It also created a lot of falsehoods that permeate the dialogue and discourse.

Cochrane lays it bare.

He talks about the causes, and the fixes.  He talks about leverage and being over leveraged.  It’s a calm and academic breakdown.  You should read it because you won’t find David Stockman talking about a 40% decline in the stock market and you won’t find a permabull case for Dow 50,000.

The reason I started blogging was because I knew Dodd-Frank was a terrible response to the financial crisis.  Sarbanes-Oxley was a less terrible response to Enron, but Dodd-Frank was exactly the wrong thing to do and doesn’t protect us at all Continue reading "Was It The Banks Fault?"

Berkshire Enters FinTech

Berkshire Hathaway disclosed it made two fin tech investments.  Good to see it.  They invested in some payments companies which makes a lot of sense.  They are also investing in two big emerging markets, India and Brazil.  Makes sense since financial services are not nearly as developed there as they are in more “organized” countries.

The hard thing for Berkshire when it comes to investing in a lot of fin tech firms will be check size.  They are so massive, it’s just not worth the time to do small deals.  One company that might be an interesting play for them is PayPal.  With a market cap of $100B, it’s one they could find enough room in.

We saw huge opportunities to invest in seed stage companies that were revolutionizing fin tech a few years ago.  We have been doing that.  One company our fund is invested in is PipIT. Continue reading "Berkshire Enters FinTech"

Return On Investment

One of the claims made by people is that the millennial generation doesn’t care about return on investment.  I think that will be a short lived phenomena.  ROI is one of the unbiased metrics you can use to analyze a portfolio.  People who don’t care about ROI are people who don’t need ROI.

Here is a case in point. I went to Ycharts and charted Altria which is a tobacco company, the S&P, and an index of solar stocks for the last ten years. I picked solar because it’s a “feel good about yourself I don’t care about return category”. Here are the results.

MO Chart

MO data by YCharts

I am sorry. If you were 21 in 2008 and put money into solar and then looked back ten years at 31 you might wonder if you should have a chat with your 21 year old self.  Imagine if you are Continue reading "Return On Investment"

Alumni New Venture Challenge

At Chicago Booth they have had the New Venture Challenge (NVC) for a long time now.   A friend of mine who is a local VC here in Chicago once told me you’d have a pretty good fund going long the winner of the NVC year after year.

In a brand extension, Booth has created the Social New Venture Challenge (SNVC) and the Global New Venture Challenge (GNVC).  Critics might say it dilutes the brand but the truth is innovation can happen anywhere, not just the full time MBA program.  Booth attracts some pretty high quality people in all of its programs.  You might say you’d have a pretty strong network if you just networked with people who graduated from Chicago Booth.

Since my classmates and I started Hyde Park Angels in 2007, entrepreneurship has become one of the top concentrations at Booth.  It used to be finance.

The school Continue reading "Alumni New Venture Challenge"

Regulation As Sport; Regulation As Political Tool

I was pleased to see the above tweet by Paul Graham. I don’t know Paul at all. I respect what he has done with Y Combinator and other efforts in and around entrepreneurship. I hope that he and other people like him are quickly coming to the realization that the hearts and minds of regulators isn’t in the best interest of people, but in the best interest of the regulators.

His tweet is exactly why you got Brexit.  It’s not because of racism or nationalism.  It’s also one reason Trump was elected president.  Aggressive US regulators killed off whole sections of the American economy dooming people. Not only that, but parts of the government Continue reading "Regulation As Sport; Regulation As Political Tool"

How Amazon’s Higher Wages Could Increase Productivity

Justin Sullivan/Getty Images

Amazon recently made headlines by announcing that it would voluntarily increase its minimum hourly wage to $15. With a federal minimum wage of only $7.25, this pledge might seem like a curious decision — especially for a company as laser-focused on cost containment as Amazon. But thinking only about the costs involved in raising wages misses a key issue: pay hikes can also boost workplace productivity.

Given Amazon’s well-deserved reputation as a data-driven (and long-term oriented) company, you can bet that Amazon’s management team has done the analysis and figured out that paying employees more is, from a business perspective, more benefit than cost. They’re not the first company to make a decision like this — most notably, Walmart set a minimum wage of $11 earlier in 2018 — and we hope others come to realize that paying workers more can be a matter of enlightened self-interest.

Continue reading "How Amazon’s Higher Wages Could Increase Productivity"

The Fed And Valuation

In case you missed it, the Fed raised rates another quarter point.  In case you missed it, unemployment rates are at record lows all around the country and with all ethnic groups.

What’s that mean for startups?

Supply and demand effects from interest rates going up are going to filter through a lot of different parts of the economy.   They will affect things that are not just quantitative.

Great startups are often created in times of duress.  Resources are cheaper.  Problems are laid bare.  In good economic times the tide is in and everyone looks pretty good.  Customers might not be as focused on cost cutting or finding new solutions to problems.  That’s not to say we should always be in duress or hope for periodic downturns just to get great startups going.  But, it’s a fact.

It’s gonna be tougher to recruit.  Founders are going to have to

Continue reading "The Fed And Valuation"

What An Opportunity

Yesterday, a group of venture capitalists, angels (HPA, Irish, Chicago Arch) and I toured the University of Illinois and networked with the entrepreneurial efforts going on down there.  What they are doing is nothing short of amazing.  A lot of VC’s figured out how to plug into Illinois and I suspect there will be a lot more deal flow and check writing that goes on between Chicago and Champaign.

If you are reading this and you are being recruited for athletics at Illinois, consider the fact that if you don’t make it as an athlete you can do better and build a sustainable career as an entrepreneur.  The students there are building products and companies that will change the world.  Think outside the box when it comes to your recruitment.  Someday it all ends and you have to find something else to do.  You might not have the idea for Continue reading "What An Opportunity"

Who’s The Biggest Anarchist of All-Time?

I was walking through town and had a University of Chicago pullover on. Someone asked me if I went there and I said I was with the capitalists in Chicago Booth. He said he studied math but was an anarchist. I mentioned that the biggest anarchists in human history were capitalists.

By the way, just because you went to Booth doesn’t mean you are a believer in free market capitalism. Plenty of socialists and crony capitalists went to Booth as well.

People don’t see capitalism that way but it is. Free market capitalism can be messy but it works better than any other human system to lift people’s standard of living and build wealth.

Adam Smith, John Locke, JS Mill, anarchists for their time. The signers of the Declaration, anarchists.

We tend to think of anarchists as some of the infamous people from our time. But, anarchists actually put in Continue reading "Who’s The Biggest Anarchist of All-Time?"

Goldman Pulls Out of Crypto

Goldman Sachs announced they weren’t going to put together a big crypto desk after all.  Predictably, the value of all crypto’s fell.  This is a tell in a lot of ways.

First, crypto markets have basically been tanking since CME/CBOT listed their respective futures contracts at the end of last year.  Futures allowed holders to manage risk and the risk premium that was in the cash contract is slowly finding its way into the futures contracts.  Futures have a way of letting air out of balloons.

Second, it shows that the institutions still aren’t there when it comes to buying, selling and transacting in crypto.   They certainly are interested but because the SEC/CFTC haven’t laid down any hard and fast regulation, they really can’t jump in.  No institutional flow limits Goldman.

Third, it also shows that Goldman couldn’t set up a network.  A lot of the flow for the Continue reading "Goldman Pulls Out of Crypto"

Drinking from a Firehose

The pace of news announcements over the last week shows the blockchain sector hasn’t received the August doldrums memo. Overall crypto markets improved, with Bitcoin hovering near $7000. Many other cryptocurrencies have seen more modest recoveries. NEO, often touted as China’s Ethereum, ends August with a 40% decline, the worst performing “large cap” currency of the month.

Behind the scenes, we’ve seen much development progress. Filecoin, which had one of the largest ICOs of 2017, published its quarterly update with its first demos. The World Bank exceeded its $73M target for its first blockchain settled bond, raising $81M from investors that included Northern Trust. Enigma, which spun out of MIT and raised a $45M ICO last year, announced 8 launch partners for its encrypted “secret contracts” platform. Privacy is one of the hot topics in the cryptocurrency world, with several different approaches including Monero, ZCash and Blockstream’s Confidential Transactions. I’m Continue reading "Drinking from a Firehose"

Crypto, Identity & the Need for Self-Sovereignty

Last week I wrote about how geopolitics can impact demand for public blockchain cryptocurrencies such as bitcoin. Cryptocurrency can serve as a (relatively) stable store of value when local currencies are devalued or taken out of circulation – most recently witnessed in Turkey.
In Venezuela, where citizens have flocked to bitcoin in light of hyperinflation, the government countered by announcing a state-controlled cryptocurrency called the petro. President Nicolas Maduro claimed to have raised over $700M for the oil-backed coin in February, although that account has not been verified. The petro also does not trade on any exchanges. Last Friday, he announced new economic measures as the IMF warned that Venezuela’s inflation could hit 1 million percent by the end of 2018:

Are Companies Responsible for Employees?

Senator Elizabeth Warren doesn’t think they are and she’s proposing a new bill to put in regulations that would make sure they are.  She wants to establish a new “federal corporate charter” for companies larger than $1B.

Clearly, she detests and abhors Milton Friedman.  I wish Friedman were alive to debate her. He would do so and relish the opportunity.  He would eviscerate her points one by one with logic, smiling all the way.

Here are her points:

In the four decades after World War II, shareholders on net contributed more than $250 billion to U.S. companies. But since 1985 they have extracted almost $7 trillion. That’s trillions of dollars in profits that might otherwise have been reinvested in the workers who helped produce them.

Before “shareholder value maximization” ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have Continue reading "Are Companies Responsible for Employees?"

Flights to Safety

Financial headlines over the past week focused on Turkey’s rapidly depreciating lira. Meanwhile many citizens there, ignoring President Erdogan’s calls to exchange gold and foreign currencies to local currency, tapped into the crypto market:
Bunyamin Yavuz, a cardiologist in Ankara, said he no longer trusts local banks and now buys XRP, monero, lumens, among other cryptocurrencies as part of his investment portfolio. Yavuz told CoinDesk his holdings now consist of 30 percent cryptocurrencies, 20 percent U.S. dollars, and just 10 percent lira.” – Coindesk (August 10, 2018)
Bloomberg News reported this morning that the Turkish lira showed more volatility over the past week than bitcoin had. This “flight to safety” to crypto markets has played out throughout the world over the past few years.
I was in India during demonetisation in November 2016. Overnight, Prime Minister Modi mandated that 500 and 1000 Rupee notes were to be taken Continue reading "Flights to Safety"

Here Is A Terrible But Irreconcilable Idea

Yesterday the news broke that Alderman Pawar wants basic income in the city of Chicago.  This is a horribly misplaced idea.  Interestingly, on the same day, former President Obama made a speech endorsing the idea of a basic income for everyone.

Let’s disregard the fact this is a socialist policy reminiscent of failed nations across the world.  Let’s also ignore that the US has many large government transfer payment programs that assist the less fortunate.  The cost is 65% of the federal budget, and growing.

Instead, let’s think about the core of the issue.  What’s the problem that is being solved?

Fear, for sure.  We are heading into a lot of unknown territory when it comes to innovation and jobs.  How are people going to earn a living in the future if our future is full of robots?  The answer is hard to digest.  We don’t exactly know.  However, Continue reading "Here Is A Terrible But Irreconcilable Idea"

Tariffs Are Dumb

I am not going to go into a super long explanation of tariffs.  The TL:DR is my headline. If you take a basic economics course from a professor that believes in free markets, they will illustrate the point graphically and theoretically.

I don’t know when a country has caved to tariffs.  No one has that sort of market power these days.  What happens is countries on both sides of the tariffs find some alternative or substitute.  There is some short term pain, but the market works itself out.

Saying “it’s not fair” is subjective.  A lot of things are subjective.  Harry Reid used to cry, “It’s not fair” all the time on the Senate floor.  Certainly, a lot of the trade practices that other countries inflict on the US don’t seem “fair”.  Canada’s use of tariffs and duties on the American lumber industry or American dairy industry seem excessive Continue reading "Tariffs Are Dumb"

Dog Days of Summer

As the United States celebrated its Independence Day on July 4th, several jurisdictions around the world, including South Korea, Bermuda and Malta, passed legislation to support crypto assets and virtual currencies. Of these, South Korea’s appears the most detailed by providing a classification scheme as a framework for regulation. This is the most sophisticated understanding of the blockchain sector I have seen to date from a government:

“The government has subdivided its industry classification scheme into three sectors, with ten further subdivisions under the guidance of the Korean Standard Industrial Classification ( KSIC ). The subdivisions include detailed considerations of blockchain-powered infrastructure for DApps such as EOS , Ethereum and NEO , blockchain-based cloud computing services, and cryptocurrency mining.The survey is also covering blockchain systems integration into existing industries, including the financial sector, security, insurance, copyright management, supply chain management, medical services, and software development.” — Cointelegraph, Continue reading "Dog Days of Summer"

What’s the Value of a Startup That Has Completed an ICO?

In the past year, $3B-$6B has been raised by startups using initial cryptocurrency offerings (ICO).  That’s a big number.  I don’t think that traditional venture capital statistics are capturing that number.

The hard thing is valuing a company in startup land.  It’s always been hard, and it always will be hard.  An ICO makes it harder.  Here is an example.

There are two kinds of valuations that I want to highlight: accounting valuation and economic valuation.  They are not the same and using accounting valuation will screw you up.  Governments and the media screw this up constantly.

Suppose you are a typical startup.  You pitch some VC funds that invest at seed and you are pre-product.  What valuation are you going to get?  In Silicon Valley, you will get a higher valuation than you will anywhere else.  For our example, let’s say it’s $5MM pre-money and you are raising Continue reading "What’s the Value of a Startup That Has Completed an ICO?"