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The Gatsby Funds

In my younger and more vulnerable years, I must have read The Great Gatsby a dozen times.  Maybe more.  And I loved and identified with the humble narrator, Nick Carraway.  His thousand mile journey to New Haven from Minnesota was much further than my hundred mile one from Brooklyn, but we shared the same occasional outsider's bewilderment at the antics of the eastern elite.

And yesterday, as I sat out on the deck of the Rosewood Sand Hill gazing up at the thin wafer of the moon rising out of the verdant hills and ascending the sanguine sky I wondered what Nick would've thought of this place.  Because sometimes I wonder if Silicon Valley is the modern version of Fitzgerald's Jazz Age playground.  Call it East Egg 2.0.  

But there are days on which it feels like there's a hush about the place; the raucous energy is muted and the punchbowls seem to have gone missing.  Sure, the future's still under construction here; the quiet is punctuated by the staccato tap-tap of programmers and designers working on the new new thing as cooling fans whir in the distance.  But there's a whiff of introspective stillness like that to be found on crisp autumn evenings after the grand shore places have closed for the season.

And maybe that stillness is the melancholy realization that the receding tide will beach some of the dinghies in the harbor.  Some even suggest that the venture business should shrink by half.  But which half?  There's a pandemic of bellyaching about "the venture asset class" among LPs, but I suspect that most investors will keep coming back . . . remember, most Americans hate Congress, but love their Congressman.  I think the venture business is the same way.  

But I'm always asking myself, "what do I need to believe to believe that a particular fund will be successful?"  There are a lot of good investors out there with compelling stories; in fact, there are probably more than I could invest in if I had three lifetimes.  But there's a whole other swath of the business for whom heroic leaps of faith are necessary; the arithmetic of their funds doesn't quite work, or they need too many outcomes to come out just-so, or the IPO market needs to be bubble-icious once more.  Like Jay Gatsby's, their reality is an idealized and stylized rendition of a sloppy present; it's not necessarily a false rendition . . .  just a hopeful one.  And it occurred to me as I pondered the imponderable future that the last few paragraphs of the book capture the challenge facing these funds, The Gatsby Funds, better than I ever could:

And as I sat there brooding on the old, unknown world, I thought of Gatsby's wonder when he first picked out the green light at the end of Daisy's dock. He had come a long way to this blue lawn, and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.

Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that's no matter - tomorrow we will run faster, stretch out our arms further . . . And one fine morning -- 

So we beat on, boats against the current, borne back ceaselessly into the past.

Founder Visas: A Good Idea

I hate to admit it, but I'm not a fan of Indian food.  And it’s not just Indian food, it’s almost any ethnic cuisine.  You see, my immigrant parents aimed to fully assimilate: I’m named Chris, because that was the most popular boychild name at NY Hospital in 1972, I was encouraged to play baseball because it was the National Pastime, and nobody likes apple pie as much as me.  Nobody.  And since my parents emigrated from different countries - thrown together by fate in Bryant Park on a sunny afternoon in 1970 - there was no "local cuisine" at home.  For better or worse, my tastes were more influenced by the cuisine of Oak Brook, or Northfield, Illinois than by the food of anyplace else.

But there I was, eating lunch at Saravana Bhavan in Sunnyvale (ahh, the things we endure on our spouses' birthdays!) when I started noticing the t-shirts from local start-ups and NASDAQ 100 companies that stood out like a dense chain of barren, monochromatic islands among a colorful, undulating sea of saris.  I wondered how many of these foreign-born tech-sters would still be here in one year's time?  Three years?  Five years?  Because in case you haven't noticed, America is facing a brain drain unlike any in our history. 

America?  With a brain drain?!?  Whoa!  Now, there are a ton of reasons for it, but a key one of them is the byzantine complexity of our immigration laws.  (Check out Manu Kumar's compelling success story to get an idea of the challenges faced by immigrant-entrepreneurs.)  But hey, immigration laws are complex because people bemoan the loss of jobs to immigrants; that's a debate that's been going on since the earliest days of the Republic and it's not one that I'll get into here.

But I will say that I'm a huge fan of Paul Graham's Founder Visa idea.  Why not allocate 10,000 of today's existing visas specifically to people who want to come here to start companies?  I get the whole H-1B controversy, but if someone's here to plant and nurture an entrepreneurial seed in the most fertile soil in the world, let's let them try before they go do it elsewhere and we find ourselves in a Dust Bowl.  Anyhow, if someone is trying to start a business, they won't be competing for jobs; the Founder Visa envisions prohibiting these cats from working for existing companies.

And indeed, the impact of these immigrant-founders on the economy is profound.  If entrepreneurship is as American as apple pie, then it's got a coconut burfi, a fortune cookie, some strudel, and a maybe a cappuccino or Tim Hortons double double on the side.  Some estimate that a quarter of all US start-ups are founded by people born elsewhere while over half of Silicon Valley's are launched by immigrants.  These companies aren't just creators of hundreds of thousands of jobs; they're part of the very idea of America, the America where anything is possible.

And that very idea of limitless possibility animated prior generations of immigrants as they helped forge a mighty nation.  Their memorial was the New Colossus that stands in New York Harbor.  And like those immigrants of yore, this generation of nation-building immigrants deserves a monument.  Wouldn't it be fitting for their symbol to be a virtual one, not a physical one?

So, you Twitter-heads among the readership: send a tweet using the #StartupVisa hashtag and include @2gov (or register on 2gov.org - see Eric Ries's post here for instructions).  Lend your voice to the clamor seeking to preserve one of the pillars of American entrepreneurship.

Getting Out of the Doghouse

Hey, finance professionals: we've got a problem.  Really we do.  In case you haven't noticed, the Great Recession of 2008/9 has a Villain (with a capital V) and it's you and me.  I know, I know, we did nothing wrong; we're generally decent, hard working, well-intentioned souls who humbly ply our trade in a peculiar, esoteric, and well-paying corner of the economy.  But we don't actually produce anything tangible, which makes us an easy target when a lot of people who do actually manufacture real "stuff" are out of work.

And, indeed, the demagogues swirl like turkey vultures seeking carrion.  Who is blameworthy for the sad state of affairs in this country?  The cry rises from the frenzied mob: Banks!  Private Equity Firms!  Mortgage brokers!  Investment banks!  Venture Capitalists!  Money Managers!  MBAs!  (Barney Frank busies himself handing out torches and pitchforks while Timmy G and the Treasury crew ready the shackles.)

But even our friends are enemies in this battle: over the summer I helped a cousin work through a mortgage refinancing.  Some Excel whiz-bangery did little to clear up a confusion born of too many options marinated in too many layers of uncertainty.  "Forget the spreadsheet; what's the best choice for me?" asked my cousin.  "It depends," I replied, dusting off an all-purpose answer.  "What do you think the future holds?  How long will you live there?  Are rates going up or down?  What will your tax situation be?" etc., etc.  "It's all so confusing," was the reply.  Then, my cousin's tone changed to bewildered frustration: "you finance people have made this stuff so complicated, and each choice seems like another opportunity for people to get ripped off."

And then it hit me: the average person doesn't want life to be an HBS case.  The Socratic method may work well in air-conditioned, wi-fi enabled classrooms with sage professors guiding a meandering discussion, but people live in the real world where decisions have consequences and costs -- sometimes big ones, sometimes immediate ones.  And all of the optionality increases anxiety, not to mention adding complexity to once-simple account statements.  I know some pretty smart people who just don't understand their cell phone bills.  The dis-utility of complexity has exceeded the utility of choice optimization. 

But we can help, finance people!  And burnish our tarnished communal reputation at the same time!  Here's my modest proposal: what if everyone in finance, insurance, and real estate committed to doing a few hours a month of pro bono work?  Maybe we could participate in "office hours" for half a weekend day once a month?  We could use bank branches; after all, the government owns a lot of 'em now.

Sure, you'd have to pass some good Samaritan protections so that lawsuits wouldn't ensnare the well-meaning, but imagine the good (and goodwill) that would arise from an army of savvy people helping oldsters understand their cable bills, helping young couples think about their mortgage options, helping college graduates set up their 401k plans.  Anything that has to do with money and is even remotely intimidating would be fair game.  (Of course, it would have to be a marketing-free zone.)

You could even make it a continuing education requirement for the first five years after attaining professional licensing or designation like a CPA, CFA charter, Series 7, CLU, or CFP, with subsequent participation encouraged.  I suspect the idea of ongoing participation could elicit some chortles on the 5:26 out to New Canaan, but remember, guys: that cat next to you from Ropes & Gray's New York office could be coming back from a day at the NYC Family Court Legal Service Project.

My old buddy, the Prof, suggested making some threshold of pro bono activity a requirement for FDIC insurance.  He even had the idea of creating the equivalent of "patient advocates" for thornier cases.  Maybe we could establish industry-funded fellowships to support laid-off or on-sabbatical professionals.

You could even imagine some kind of clearinghouse for people that incorporated the best of Web 2.0: feedback ratings, maybe even a "bid system" for appointments or specialists.  Think of it as a mashup of Craigslist, eBay, Google Maps, and us.  You could even throw in Twitter for good measure.  We can fix this, we have the technology.

Now the last thing I want is to create more bureaucracy and regulation.  But we have to realize that the regulation train has left the station and is bearing down on us at full steam.  And indeed, there are a lot of folks in the chattering classes who would portray finance professionals as the looters that smashed the storefronts of the economy, cynically plundering from the earnest masses.  Maybe the best thing we can do for ourselves and the economy is to pick up a broom and start sweeping up the mess.  

Random Thoughts from Denver Airport

So, I've got a more fulsome post (at long last) coming later this afternoon, but in the interim, I had to get some things off my chest:

[insert rant here]

First: if we're going to have national healthcare, particularly a program that's paid for by a small subset of taxpayers, we need to ban the sale of cigarettes yesterday.  Either that, or tax 'em at like $15 per pack.  Anything less creates a huge principal-agent problem.  While we're at it, let's do something about Mixed Martial Arts.  Do we really want kids watching this stuff on ESPN and then going out behind the trailer and practicing a sport whose usual loser's outcome isn't graceful defeat, but rather a hospital visit?

Second: Why is anyone surprised that the savings rate continues to climb (some say it might soon exceed 10%)?  Sure consumers are de-levering, but savings rate is also a function of people's expectations of future disposable income, no?  And disposable income is a function of income and tax rate.  People may have differing expectations on income, but one thing we can probably all agree on is that taxes are going up, up, and away.  As we used to say in Brooklyn: BOHICA.

Last: no matter how low my expectations get, United Airlines never ceases to underwhelm.  Once, I expected courtesy, then I hoped for indifference, now I just want to get home without interacting with any more of their employees or having them bark at us over the intercom.  How does an airline that treats its customers so cynically stay flying?  Remember the old phrase, "one bad flight attendant can bring down an entire airline?"  When did people stop caring?  It's that pesky principal-agent thing again . . .

[end rant]

Systemically Important

It's been thrilling to watch the Green Revolution unfold on Twitter.  It reminds me of those sweltering days of Tienanmen long ago.  You see, back then there was a Chinese immigrant-owned business over on Church Avenue and the fax machine in the back groaned nonstop as it disgorged furtively-sent messages on curly-thermal parchment.  Unofficial word of officially-banned events crept out of the top of the machine as a half-dozen men crowded around, anxious for news of home and breathless at each pause in the transmission.  Every break in the traffic gave smoke-stained fingers the chance to tear off the latest pages, place them on the backup fax (connected to a telephone jack in an apartment upstairs by a hundred feet of frayed cord), and relay the fresh news on to another clutch of emigres in Boston, Honolulu, Vancouver.

Such was the Fax Americana.  Technology in the service of information, democracy and freedom.

So here we are again, two decades later, watching voices from the other side of the globe cry out.  And with each Tweet, it becomes more evident that the United States has outsourced the public face of its foreign policy to Silicon Valley.  Of course, this is happening just as the bureaucrats in DC are contemplating a raft of regulations aimed at the types of firms that fund the companies that allow the administration to exercise soft power.  Ironic, no?

There's even talk in some quarters of venture firms being tangled up in yet more onerous regulations targeted at firms that pose systemic risk to the financial system.  Funny: the way I see it, the only systemic risk that Silicon Valley poses is to opacity and oppression everywhere.

Gratitude

A quick detour from Private Equity, if you'll indulge me (I'll be back on the PE train later in the week with a post on out-years risk).

In college, I won a roshambo to attend a cocktail party honoring William F Buckley.  Time with Bill was always part symposium on the evils of statism, part english lesson, and part comedy hour.  We kiddos around the room may not have agreed with all (or, in some cases, much) of what Bill said that evening, but we could all agree that WFB was a renaissance man and a gentleman.

Anyhow, Bill had just published a book on the topic of mandatory national service, Gratitude: Reflections on What We Owe to Our Country.  His call to service was based not only on a sense of responsibility, a sense of duty, but also on a belief in the soul-nourishing benefits of contributing to something larger: "Materialistic democracy beckons every man to make himself a king; republican citizenship incites every man to be a knight." Service to one's society summons forth "the better angels within our nature." (quotes cribbed from Ted Sorensen's NY Times review).

WFB believed that a mandatory year of service would help shape a national ethos, a sense of solidarity, an appreciation of common cause, an affirmation of civic pride; service was about community.

Yet in the two decades since the book's publication, society has become much more disparate and far-flung.  For many today, "community" comprises a hodge-podge of fellow-travelers in the digital ether; some spend too much time on their "social networks" that they ignore the old-school social network: those who live around them, in their neighborhood, their city, their state.  Sure, virtual communities are communities of interest, but your IRL (ahem, In Real Life) community really needs you to help make things better.  That's why I'm so supportive of President (elect) Obama's USA Service Initiative (and here).  Who knew that WFB and BHO who be so sympatico?  I'd love to see the idea of service made compulsory.

Serving together, working shoulder to shoulder with a fellow countryman, this is the essence of citizenship; it's intimate, it's loving.  Service and love are inseparable and they're part of the Promise of America. As always, Whitman nailed it:

COME, I will make the continent indissoluble;
I will make the most splendid race the sun ever yet shone upon;
I will make divine magnetic lands,
With the love of comrades,
With the life-long love of comrades.

I will plant companionship thick as trees along all the rivers of America, and along the shores of the great lakes, and all over the prairies;
I will make inseparable cities, with their arms about each other's necks;
By the love of comrades,
By the manly love of comrades.

For you these, from me, O Democracy, to serve you, ma femme!
For you! for you, I am trilling these songs,
In the love of comrades,
In the high-towering love of comrades.

Exercise Your Option: Vote

So the kids and I have this ritual on Saturday mornings: over to East Palo Alto to hit the Mac Shack for Egg McMuffins and then on to Starbucks to pick up some kind of grande dolceamericano venti halfcafnowhip with three shots for the wife, who’s back home getting a little extra snooze.  I have no idea what I’m ordering, but I order it nonetheless.  And I order in hopes of building some political capital with the honey.

Unfortunately, my capital depreciates like Lira.

(I should note that, after a few of these weekend frolics, the good folks of the Amex Fraud Department gave me a call to see if my card had been “compromised” because of all the activity in a hardscrabble zip code.  I appreciated the call but had to explain to them that that’s how I roll; I’m down with the EPA.)

So there I am at Starbucks, and ahead of us in line is a landscaper ordering a coffee for himself and a hot chocolate for his little boy.  And he’s ordering en Espanol, which I dig, since I love the rhythm and cadence of language, any language: the syncopated rat-tat of Spanish, the melodious sing-song of Caribbean French, the staccato chop-chop of the Slavics.  These folks are the singers of our songs, the songs of Our Republic.

Then my man is done ordering, and the barista asks his name and, for the first time, he speaks in halting but certain English.  In a startlingly full-throated voice he reports, “My name is DEM-OH-CRRRACY . . . my name is AH-MERRR-ICA.

Right on, brother.  Right on.

[Back to PE with An Open Letter to Portfolio Company CEOs later this week.]

America the Blackboard

After thirty-six years of living on the East Coast, I packed up my possessions and followed the footsteps of pioneers, gold rushers, dust bowlers, and dot-commers in search of the West of the Imagination.  In fairness, it’s a stretch to say that I packed since the rest of the family got stuck with the stuff while I set out on the annual PE pilgrimage, going from one annual meeting to the next in search of enlightenment and meaning.

As my punishment for sidestepping the heavy lifting, the family got to fly west while I was demoted to driving.  Across country.  Alone.  In a minivan.  With two guinea pigs.  It probably doesn’t get any worse.  Aside from a nice dinner in Evanston with some truly Super LPs, the trip was a grind: interminable stretches of open road punctuated by fast-food rest stops and one-night cheap hotels.

To pass the time during the mad dash across the endless expanse of the Republic, I played “wave to the portfolio company,” the LP version of license plate bingo.  Initially, I’d hoped to take a leisurely journey and visit a bunch of companies along the way, but as the summer slipped away and the trip’s timetable tightened I settled for a hand-marked map and some dog-eared quarterly reports that I’d review each night; my hoped-for visits had turned into well-researched I-80 drive-bys.

It was still worthwhile, though.  With many hundreds of underlying companies, it can be tough to keep up with those firms not lucky enough to be the “impact companies” that take center stage at annual meetings or those unfortunate enough to be the “problem children” that occupy our Advisory Board time.  It was cool to contextualize (if perhaps from a couple of counties away) the businesses that we read about quarter after quarter in increasingly audited, but decreasingly informative, reports.  Those companies – with their ups and downs – represent the pulsating, vital, thriving quintessence of the economy.

I’m lucky to be able to watch these companies strive and struggle and (hopefully) succeed.  It’s almost as if we LPs get to be Olympic judges sitting in the best seat in the house, watching the action unfold right before us.  Except that we’re not just judging one event; instead, we’re taking stock of the entirety of the Games.  We get to gaze into the chaotic innards of the economy, and it’s thrilling, frightening, inspiring.

* * *

Since I sometimes seem so crabby about the PE asset class, people naturally ask me how I get up in the morning and put on my LP hat?  The answer is simple (and it’s not just that I’m a curious dilettante): I’m privileged to know some really distinctive people who invest in endlessly interesting businesses.  And I like to believe that these GPs are catalyzing change, helping their companies become more innovative, more competitive, more streamlined, more essential.

And that’s the beauty of private equity done right; you constantly feel the blowing of the Perennial Gales of Creative Destruction.  And these winds of change are everywhere: from the whippy lake squalls of the industrial Midwest where manufacturers reinvent themselves daily, to the humid and earthy gusts of the heartland where agriculture is exciting again, to the hat-snatching howls out among Wyoming’s burgeoning coal beds and wind farms, to the jasmine-and redwood-scented breezes of Silicon Valley where every garage awaits a moment in the spotlight.

* * *

Before we left the East Coast, the kids and I hoofed it up to Brooklyn to visit the grandparents.  (Every trip comes with a complimentary helping of immigrant wisdom slathered in portent: “son, where you’re going, I’ve been . . .”)  And whenever we visit, I always walk my daughter, G, around the old ‘hood to give her a feel for a place that’s unlike the leafy college towns in which she’s grown up.  I love telling her about the people who passed through the neighborhood, the teeming masses who started their American adventures right there.  The storefronts help to tell the story:

“Check it, G.  That’s where Giovanni’s shoe shop used to be.  He came from Sicily at age 11 and started fixing shoes the same day he got off the boat . . . that Polish travel agency over on Church Avenue, I remember they gave away pierogies the day they opened . . . see that Bangladeshi grocery over there?  That’s where the Ruiz family had their bodega before they moved up to New Rochelle . . .”

“Dad?”

“Yeah, G?”

"America’s like a blackboard, isn’t it?”

“How so, G?”

“People keep writing on it, erasing it, and writing on it again.”

“You know what G?  You’re absolutely right.”

A breeze kicked up in the gloaming and we turned the corner onto McDonald Avenue.  “Look around, G.  By the time we get back here, some of this stuff will be gone, but most of it will still be around.  You miss what’s gone, but appreciate the energy and the passion of the folks who are still there.  That’s continuity and change, and it’s what makes this place and this time so much fun.”