The first track that Stevie Nicks (and Lindsey Buckingham) ever released, from their initial, and unjustly ignored, debut record. The thing that strikes me 30 years after its release is not only how damn amazing, and amazingly unique, Stevie’s voice is, but how much this song, unbeknownst to them, would shape the later sound of Fleetwood Mac.
For about a year now I have been asked for ways to help our CEOs with incentives and rewards outside of monetary compensation. How do I keep my best talent and incentivize them outside of money? What can I do to have a leg up against other companies when hiring and retaining talent? We all know how challenging the environment is for early stage start up CEOs and that employee recognition is a critical part of morale, personal and company success and retention.
As a result and after about 100 conversations with all of the AOL Ventures and Bowery Capital CEOs we thought up the idea for a President’s Club. No doubt many people have heard of the President’s Club concept - send a group of high performing company leaders on an all expenses paid trip to celebrate their success. Big companies like GE, DoubleClick, Pfizer and others do this for their teams. It is exclusive, only for top performers and is generally a fun weekend with no business. But we never saw it done within a VC fund environment.
Naturally it is tough to do this as the CEO of an early stage company given things like cost and headcount. But we think it makes sense at a portfolio level and wondered why it hadn’t been done before in a venture fund setting. So today, we announce the Bowery Capital President’s Club. More info can be found here and we plan on announcing more about the program to our companies as the year goes on.
Thursday of last week we debuted Bowery Capital to the world. I was excited to finally put the past 6 months behind us and get back to work. One of the biggest things we talked about when raising the $33M was our thesis and how it will play out over the next 10-20 years. Above is a slide from our fundraising deck which I think most clearly articulates a big part of that thesis.
Since around 2011, we started to notice a sizable shift in the types of folks we were meeting and their seniority within corporations. Given our focus they were generally marketers and technologists and had started their careers in a junior position or maybe got to a bigger company via M&A. While we had known them for a bit, by 2011 we noticed these same contacts had started to manage people and control budgets. Not huge budgets or entire divisions like the CMO or the CTO would control, but enough dollars to be dangerous. What were they doing to warrant quick promotions and high-level placements? In a nutshell, not thinking about technology tools like their bosses of the prior generation.
These are CTO types like Randy Meech, who founded Patch while at Google, was acquired by AOL and three years later found himself running the Local / Maps division of AOL as their SVP of Engineering. When building Mapquest 2.0 Randy was highly influential in AOLs shift to new tools like Open Street Maps, Mongo/10 Gen, Mapnik, Open Layers and Nominatim.
These are also CMO types like Katherine Bahamonde who came to C Wonder after stints as an eCommerce marketer at Juicy Couture, Lululemon, Sears and Nike (she now serves as their CMO). Like Randy, she has also been highly influential to her company in re-shaping the role of eCommerce within the corporation and swapping older-generation products for new solutions like DemandWare, Magento, Acquity and others.
To summarize, we believe we are in the beginnings of a long shift in corporate hiring best practices in which marketing and IT decision-makers replace “risk and safety” with “growth and leverage” as it relates to spend. It’s this effort that is making the way for the rise of the digitally native CMO and CTO, a phenomenon to be fully realized over the next 10-20 years.
I was drawn to Fred’s post yesterday on returns and ridicule and have been a huge fan of this logic for some time. Fred mentions Bill Gurley and his interview with Om where Bill paraphrases the great Howard Marks and his quote from a 1993 investor letter: “Being ‘right’ doesn’t lead to superior performance if the consensus forecast is also right.”
For those that don’t know Howard, he is an absolute legend in the investment business going back to founding Oaktree Capital in 1995. Here are some other great ones from him throughout the years that have stuck with me:
“A hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.”
“Inefficiencies – mispricings, misperceptions, mistakes that other people make – provide potential opportunities for superior performance. Exploiting them is, in fact, the only road to consistent outperformance. To distinguish yourself from the others, you need to be on the right side of those mistakes.”
"The thing I find most interesting about investing is how paradoxical it is: how often the things that seem most obvious – on which everyone agrees – turn out not to be true."
[On why some money managers are not successful] “Unconventionality – Along similar lines, there’s the risk of being different. Stewards of other people’s money can be more comfortable turning in average performance, regardless of where it stands in absolute terms, than with the possibility that unconventional actions will prove unsuccessful and get them fired… Concern over this risk keeps many people from superior results, but it also creates opportunities in unorthodox investments for those who dare to be different.”
"In dealing with the future, we must think about two things: a) What might happen and b) The probability that it will happen."
“There are two primary elements in superior investing: a) Seeing some quality that others don’t see or appreciate (and that isn’t reflected in the price), and b) Having it turn out to be true (or at least accepted by the market).”
"Certain common threads run through the best investments I’ve witnessed. They’re usually contrarian, challenging and uncomfortable – although the experienced contrarian takes comfort from his or her position outside the herd. Whenever the debt market collapses, for example, most people say, ‘We’re not going to try to catch a falling knife; it’s too dangerous.’ They usually add, ‘We’re going to wait until the dust settles and the uncertainty is resolved.’ What they mean, of course, is that they’re frightened and unsure of what to do. The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left. When buying something has become comfortable again, it’s price will no longer be so low that it’s a great bargain. Thus a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron. It is our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling – and if our view turns out to be right – that’s the route to the greatest rewards earned with the least risk."
On the first business day of 2013, the bankers at WR Hambrecht+Co. submitted a memo to the SEC arguing for more streamlined methods of going public for smaller companies. Their motivations as deal advisors are clear but their opening point is valid: pre-tech bubble companies tended to raise money…
I’m fascinated right now with where the CVC business will go in the next 5-10 years relative to the increase in activity in new CVC units getting off the ground. It remains an amazing experience to get asked how AOLV operates and what lessons we have learned, but it begs the questions, will this component of the asset class continue to mirror the cyclic nature of the industry as a whole or is this time different? Will corporations adopt new CVC models only to re-think them years later after being victims of their own success or keep their new CVC unit as a foundation for future growth? Some folks appear to take very structured approaches to ideating on the key needs and aims of CVC units for the long term while others continue to simply issue PR releases largely at the barking of folks internally who think their company is not innovative enough (we’ll just figure out structure later!). What follows are the two buckets of elements that always seem to come up in my discussions and some thoughts on how we’ve strived to solve for them.
Structural Elements: Questions to ask yourself
Are you a corporate division or an independent partnership? Do you think like a portfolio manager or are you making investments ad-hoc? Does compensation resemble a typical agreement such as that between limited and general partners in venture funds, or are you paid just as corporate employees? Are you focused on maximizing returns on investment or on strategic value to the corporation, or are you a blend?
How we’ve strive to solve for these:
In today’s climate, and in our view, the success and failure of these elements correlates strongly with how much control and trust the parent company is willing to give up. Allowing for a partnership with a set amount of capital to be created that grants carry economics to the investment professionals and blends elements of strategic and financial returns seems the most optimal way to go structurally. The investment team is incentivized appropriatelyand can invest with some measure of real thesis relative to fundsizing. In turn the parent company acquires a blend of treasury ROI(cash on cash + IRR) and strategic ROI (brand, PR, BD, potential M+A,hiring, etc). As an aside, and from a raw structure standpoint, therereally is no more perfect a model than the old XTV that Lerner andGompers wrote about in 2000. Assuming their assumptions are correct,the fund blended treasury ($30M in - $219M out + 56% NET IRR) andstrategic (Documentum + Document Sciences are great examples of thestrategic) in a way no one else has publicly demonstrated.
Organization Elements: Questions to ask yourself
Who is your investment committee and how rapidly can you respond to investment opportunities? Do you have full autonomy when it comes to monitoring, exiting, or liquidating companies? How are you providing value to your investments and how well do you know your parent company and its employees?
How we’ve strive to solve for these:
Your parent company can be your best friend or worst nightmare and again largely it comes down to trust and control. Operating an autonomous investment committee seemsmost appropriate provided the parent understands exactly what it isthe investment team is doing structurally. At the end of the day the parent company does not do this for a living nor is it their specialty and so it makes more sense for the investment team of investment professionals to make the investment decisions and monitor their investments. Beyond this element perhaps the single biggest knock on CVC is that there really is no value creation above and beyond a traditional fund and that CVCs are not really able to exploit complimentarities with their existing lines of business that give them an edge. For the most part we don’t agree and about 60% of our investments have active relationships with AOL (some are too early or we messed up) due to the fact that we really honed in early on the two problems that cause this: communication and improper time management.
On communication, CVCs really need to know the needed services, rentable technologies and other elements that help get your portfolio into the parent and start a relationship. If it doesn’t correlate at all then no matter what the deal will be tough to do even if you were an independent fund who knew the CEO of the company. On time management, corporations simply don’t move quickly. We don’t take external meetings 2 days weekly (not joking) and exclusively focus on helping our portfolio companies in general and with AOL relationships. Things always get stuck in legal, transferred to another division, changed around from a structuring standpoint and it is the CVCs job to mitigate and assist on this to get to the end goal.
“And what if that actually made you better able to recruit some of the best people in the world who want to join you precisely because they know that you are sincerely thinking about what’s best for them, not just for the company they’re about to join?”—Calipari’s Recruiting Style via Entelo