Ok, so let me start by saying I don’t know much about IPO’s outside of what I read in magazines. However, most people wouldn’t think there was a link between the two.
Yesterday I was reading an article on IPO markets and how venture capitalist are getting burned and how there is a looming bubble. Which makes sense. A lot of start-up tech companies receive tons of capital, looking to be the next Facebook, Twitter, Pinterest, Instagram or Snapchat. In most cases, many of these companies fail and fail big. Hundreds of millions of dollars big. To me it seems like greed and I’ll come back to that, as it relates to Warren Buffets strategy on assessing value.
Though venture capitalist are looking to make money, unfortunately the companies are as well. What I read is that some companies or people build to collapse, meaning they just want to cash in personally on the IPO, the business world version of GoFundMe.
Naturally with a system like this comes hype, which also breeds disappointment. Which is why I’m comparing it to the NFL.
The NFL, is a business where money is the biggest voice. Numbers would be the microphone that gives that voice power. Everything is based on numbers. For instance, I had a coach that said 10 sacks as a DE will get you paid. There’s often a saying about sacks, ‘They don’t ask you how, they ask you how many’. This is dangerous for me because, you can get 10 meaningless sacks that have no impact on the outcome of the game, but nonetheless numbers dictate a value.
You also see most players that change teams in free agency don’t do well, you see well paid players not work as hard. The former happens because, it’s often system and coaching that makes a player great. The right player in the wrong system could be a disaster. The later happens because when you have a boat full of fish, you don’t watch the pole the same…you follow me?
The same is so for business, a successful operational system can take you from good to great. So how are they similar?
Well the Venture Capitalist is the NFL and the Tech Companies are the players. Teams want to find the next best thing, and they’re willing to bet loads of money, based off superficial similarities. Namely, potential. The NFL likes to say well this guy runs this and jumps that so he should be able to do this…but that’s not football. Just because a car is powerful doesn’t mean it will win the race. Just because measurables are great doesn’t mean performance will be. But they invest anyway.
That’s why every year you see a major free agent bust. Every year some tech company worth millions goes bottom up. Because they’re looking at the wrong thing.
Buffet believes in Intrinsic Value vs Book Value. Based off the raw numbers of profit and loss you can equate the book value. Intrinsic value is different, it’s not always obvious and it can be found through careful analysis.
I’ll use myself as an example. My book value as an NFL player shows bust. Largely because I was drafted in the first round and didn’t become ‘great’ but that’s not the case at all. In my 5 years I was a 1st and 2nd down player as well as a rotational player. So I players about 30% of the plays and the plays I did play on were primarily 50/50 situations. Meaning it could be run pass or play action. Not a clear passing situation like 3rd and 7. Within that I finished with about 19 sacks in my career. Which sounds feeble. Well let’s take a closer look.
Durning my NFL career, I played probably less than 3,000 plays. For comparison guys like Pepper, Jared Allen, Ware, Von Miller they probably get 12-1800 playes a season. And all are primary players, playing in all situations but mainly passing downs. They get 80/90% play time, so they have 70% more opportunity, not accounting for the favorable circumstances. Of course they should be very productive.
Let’s use JJ watt as an example. Based off his sack numbers vs play time and if he has 20 sacks, then for every 10 sacks he gets I should get three. To be equally phenomenal in my limited play time. Having 10 sacks, like I said gets you paid. So if I averaged 4 sacks per year, with my percentage play time I did very well.
Then you have the teammate factor, when I was in the game in Detroit, whatever side I was on, the offense couldn’t run to that side. Suh and Fairley both performed better per snap when I was on the field. I was unselfish and made the unit better, but because I wasn’t a shiny tech start up, I wasn’t in line for a massive IPO.
The venture capitalist were looking at a company that could’ve helped tremendously but chose to see the wrong value.
Me being more than an athlete I saw that they value something else. They didn’t value true keys to victory but more so doing it the way they want to. So although the money was good, I was giving the NFL 65% of my time for a minimal return on my time investment. So I left corporate America to finance my own start-up and get going. No need for a huge IPO, just being a good dude making good things.