Friday, August 31, 2007

Shiny pennies

So what is VC investing like today? The one thing that is hard to appreciate until you are doing it, is the magnitude of the deal flow. This is simply drinking from a fire hose. You see new deals every day, occasionally a dozen new deals a day at a pitch conference. But an active early stage fund may only close a financing on one deal a month and an active partner may only do one deal a quarter. So there must be an aggressive triage process to whittle down the hundreds of new deals down to the one you will devote significant time to. Being a VC means very aggressive time management --- you have to, or your life turns into an endless series of digressions. (It sort of looks like my desk, with stratigraphic layers of papers and ppts, but that is another story.)

In passing, this is one reason that VCs often seem to ignore entrepreneurs and aren’t polite enough to even say no. They live in a deluge, and can’t spend too much time responding to each submission. If they did, they would have no time for follow up study and pursuit of the best deals they see.

At the risk of trivializing what I do, in some ways, my VC life reminds me of the time back when I was a kid and an avid coin collector. My dad had this giant jar of coins and once every month or so, I would get access to it and avidly sort through the coins looking for the proverbial 1947 D Lincoln penny in “Fine” condition. I had a book of pages with little round slots numbered with all the preceding years and mints and variants, and I was always trying to fill every hole with a better example of that coin.

And my attention was inordinantly driven to penny-collecting because during the Second World War, in 1942, due to a shortage of copper, the U.S. Mint made pennies out of steel for one year. Some of these steel pennies were still in circulation when I was a kid, and to a coin-oriented kid such an obvious anomaly suddenly appearing in your hand made the whole idea of coin collecting just fascinating.

So there is my Dad's bottle, and initially every coin looks roughly the same. Some are a little shinier, but at first they blur together. You looked sequentially at each coin and roughly evaluated it: what was its year and its mint stamp, what condition was it in, was there anything special about that year… You put aside maybe 1% of the coins as possibly worthy of further study, while the rest went into rolls to be taken to the bank. Then you took the promising ones and did “due diligence” on them, comparing to your previous best coin in each category, and looking them up in the coin collectors handbook. Rarely, and with great pride, you would replace a coin in your collection with a newly found one. Some people looked at different coins, i.e. nickels, dimes, silver dollars (different investment focus areas). Some people went to shows and shops and traded for already discovered coins (later stage investors). I liked the adventure of searching for coins in general circulation, gleaning value from the worldly flow. I confess I would sometimes go to the bank and buy rolls of coins, scan through them, and then return the leavings. (I recall my local bank began to take a dim view of this after a while. Fortunately, a lot of my relatives had bottles of coins.)

I liked the penny business. The upfront cost was low, the deal flow was high, and yet if you found a 1909 VDB, it wasn’t worth 10% of what an equally rare dime was worth. Suddenly a coin’s value became detached from its face value. It wasn’t even proportional. It was all about uniqueness and rarity, and diligence, luck, perceptiveness and knowing when to flip them…

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