January 24, 2017

“Risk free” Investing

TIPS May Be the Answer

Someone I know is coming into a moderate sum of money and asked me how he can invest it “risk free”. He was very clear that he isn’t looking for gain on the investment, just safety; so, although no investment can be truly free of risk, given some assumptions it’s a very reasonable question. However, if you act on my answer, you are doing so entirely at your own risk.

Although it may sound contradictory, the main question for a risk-intolerant investor is what risks ARE you willing to tolerate. For example, I know that my advisee is investing in US dollars. He does care if these dollars lose purchasing power (inflation) but doesn’t care if the dollar declines against any other currencies so long as his purchasing power at home is not affected. He is willing (I think) to accept the risk that the US government will default despite having a president very versed in “restructurings”. A very important risk he is willing to take – and you may not be – is that, if he needs the money sooner than he thought he would, his investment will NOT have been risk free; he may take an actual loss.

OK, with all that out of the way, what I think my advisee should do is buy TIPS – Treasury Inflation-Protected Securities. These are interesting bond issued by the US Treasury which protects against loss of purchasing power. Like most bonds it pays a fixed interest rate which is determined by auction at the time of issue; the interest rate is fixed for the life of the bond, which may be 5, 10, or 30 years. What is not fixed is the principal amount of the bond; that is adjusted daily based on inflation – more precisely on “the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U) published by the Bureau of Labor Statistics of the U.S. Department of Labor.”

Here’s what this means: suppose you buy $1000 of these things at auction with an interest rate of 0.375% (yes, this is low) and a maturity date 10 years from now; $1000 is your ORIGINAL principal amount. Each day the Treasury calculates the ration between the CPI for that day and the CPI for the day your bond was initially sold at auction. This adjustment affects both the dollars of interest you receive at each semiannual interest date and, most importantly, the principal you receive back when your bond matures.

You really don’t care about that index on a daily basis so let’s skip forward 10 years to when you are going to cash in your bond. If the CPI has increased 50% over that ten years (used to happen all the time), you will be repaid $1500. You haven’t really made a profit; your purchasing power is still the same as $1000 had when you invested it. But you did almost protect against inflation. The “almost” part comes from the fact that Uncle Sam wants income tax on the $500 nominal gain; since it is a federal bond, it doesn’t pay state or local income tax.

If there was no inflation as measured by the CPI, you will get back just the $1000 you put in. You’ll still have the same purchasing power you started with (and you won’t owe any tax because you had no nominal gain).

But suppose there’s deflation. Most economists will tell you that doesn’t happen long term but experts are often wrong, especially lately. Suppose the CPI is at 75% of where it was when your bond was auctioned. You still get back 100% of the principal you put in. You will have an actual (untaxed) gain in purchasing power. Of course most bonds promise to pay back 100% of the principal so can be considered to include deflation insurance. But most bonds don’t protect you against inflation. From my PoV, this is a free lottery ticket that comes with TIPS – but my advisee isn’t out to make money, just wants to protect what he has; so we’ll ignore this now that I mentioned it.

The inflation adjustment to your principal also affects the interest payments you receive semiannually. For example, If the CPI is cumulatively 1% higher six months after you bought your bond than it was on auction day, your principal will have been adjusted up by 1% to $1010 dollars and interest will be paid on that adjusted principal; you will receive $1.89375 ($1010 x .00375/2) instead of the $1.875 ($1000 x .00375/2) you would have received had there been no adjustment. “Whoopee!” you say, “big deal”. But remember, we’re in this for safety and not income. However, there is no ratchet in the interest calculation. If deflation were to take place, the dollars of interest you earn could go down.

Like any bond, if you want to sell your TIPS before they mature, no one is guaranteeing that you’ll get your principal back. You sell them on an open market. If the rate of inflation has accelerated, you’ll probably lose money. If it’s decelerated, you may gain.

TIPS are a really boring investment. But they may be right for you if you are willing to forgo future gain in return for safety – at least on part of your portfolio. If you want to buy them, you can get them directly from the Treasury at auction. See here for instructions. You can also get them through a bank or broker but check the commissions; you’re not earning much on this asset. If you’re a sophisticated investor, you may want to buy or sell on the secondary market – but in that case you don’t need my advice.

January 23, 2017

Both Parties Lost the Election

Occupy Washington May Be The Winner

This is certainly not a time of Republican triumph at the presidential level. Trump’s trouncing of Republican establishment candidates (one of whom I supported) was much more overwhelming than his victory over a weak Democratic candidate with many self-inflicted wounds. At least up to the end, Hillary was probably more the candidate of the REPUBLICAN establishment than Trump was. That’s because the establishment is establishment first and Republican or Democrat second. It’s quite possible that Trump would’ve lost to Sanders. Republicans can take pride in the way they’ve been winning state elections.

Democrats, on the other hand, couldn’t win behind an extremely well-financed and experienced candidate running against an opponent whose polling negatives haven’t been matched in recent history by anyone (except the Democratic candidate), who has a demonstrated lack of self-control, and who was opposed by most of his party’s establishment. Yeah, in a close election any one factor can be picked out as decisive – but Democrats have to ask themselves how did this ever get so close in the first place.  The context is that Republicans kept control of both houses of Congress and won control of more states. WikiLeaks and James Coney didn’t do that.

None of the above is actually the party that won the presidential election. If you add up the Bernie voters and The Trump voters and subtract the overlap; I believe you will find a very sizable majority of Americans both in the heartland and on the coasts who are very angry at the establishment and very ready for change. Washington, DC is very practiced at the swing from R to D and back every couple of elections; now it’s being occupied by outsiders.

It’s not surprising that Washingtonians, who gave Trump only 5% of their votes, didn’t turn out in droves to hear him denounce their city as the den of all evils which inflict America. What is amazing and very unfortunate is 1) Trump was surprised by the low turnout 2) (and much more important) his thin-skinned and intemperate reaction to it. He became obsessed; he rained on his own inaugural weekend.

Like most Americans on the left and right, I think we need fairly radical change in many areas. I do think America wanted an outsider (even if they differed as to which one) as their president. Change isn’t easy or even always pretty. Change agents are often strange people. But I also think the new President has to calm down and settle down quickly. I hope he does. I think most Americans feel the same way.

January 20, 2017

Inaugural Hopes, the Radio Show, Today

Today, inauguration day, it turns out that I’m on a radio show here in Vermont which happens to be at 11am ET right before the inauguration with my friend host Bill Sayre. We’ll be talking about my hopes for the new administration, some of which are in yesterday's post. You’re welcome to call in with your hopes and fears or comment here. It’s on WDEV in Vermont at 550 AM or 96.1, 96.5, or 101.9 FM and live streamed from www.wdevradio.com. Call-in numbers are 802 244 1777 and 877 291 8255.

January 19, 2017

Things to Hope for in the New Administration

Granted, there’s plenty to fear from the new administration, the temperament of the president-elect not the least. But I hope Trump will succeed; I also hoped Barack Obama would succeed.

The resentments that led to Trump’s narrow victory stem from these legitimate grievances: 1) the wealthfare state with its bank bailouts, corporate subsidies, and lobbyist-designed tax code; 2) a failed educational system mired in political correctness but failing to enable opportunity; and 3) America sputtering helplessly in a dangerous world and not even willing to name Islamic terrorism (I did not say all Moslems) as its enemy.

I’m an optimist. Here are the things I hope a change in leadership can make possible. They won’t all happen but they all require change – which we are getting like it or not –  to have a chance.

Education. Our educational system is in terrible shape. Obviously we have some great teachers. But, at this point, most of the teachers themselves are the product of a shoddy and undemanding education. Democrats are in thrall to the teacher unions which have fought reform to protect their workers. Now Republicans (with Democrat support I hope) can lead us to a system where incompetent teachers are fired, failed schools are closed, and education can be the road out of poverty it was for my grandparents.

Regulation. Our infrastructure is crumbling and deficient; we need the jobs that would come from rebuilding it. That doesn’t mean we need to pour additional trillions of government money into infrastructure as I hope the new president learns quickly. It takes more than 20 years to get through the regulatory process to build even a small road. A pipeline project at either the state or federal level can be held up long after approval and even after it is almost finished by legal challenges or illegal vandalism. We need a permitting process which gives a quick – and lasting - yay or nay to a proposed project after a single very thorough review. Any legal action after approval which seeks to delay a project should require the plaintiff to post a bond equal to the cost of delay, which is returned only if the appeal is upheld. Criminal obstruction of projects should result in criminal prosecution. If these actions are taken, we will have a wealth of new construction in both the public and private sector. Much less money will go to lawyers and the cost of delay and much more to the construction and jobs which are needed.

Local and regional banks need to be freed from the strictures of Dodd-Frank so that they can resume lending to the new and small businesses which actually create jobs. All bank investors need to be exposed to the risk of failure; that’s the most effective regulation. That means dismembering any institution so big that we would be forced to bail it out. It was the bank bailout (TARP) which first ignited the flame under the teak kettle.

Tax reform. An early test of whether the wealthfare state has been overturned will be whether the tax policy which allows venture capitalists and hedge fund managers to pay only capital gains tax on their income is repealed. More consequential to the economy is ending the tax policies which encourage corporations to move their earnings or even their operations abroad.

Health care. It’s still broken. Whether you call the needed fix a repair of Obamacare or a replacement is just political semantics. Yes, many people have been added to the ranks of the insured. However, the cost of doing that, as we’re seeing this year, is a cost shift: those who used to be able to afford health insurance are now seeing it take a hugely increasing share of their income, if they can afford it at all, while deductibles go through the roof. This will need a bipartisan fix. The problem would have had to be addressed no matter whom we elected.

An assertive America on the world stage. Cozying up to Putin is not the way to get there. There are no more reset buttons to be pushed. Where redlines must be drawn – North Korean nukes and Iranian cheating are two examples, we must never tolerate their being crossed. We must rebuild the military. If we free up oil and gas drilling (safely and responsibly, of course), build pipelines to our ports, and encourage exports, our adversaries including Russia, will lose the oil revenue they need to do a matching buildup as well as the ability to threaten our allies with embargoes.

The end of political correctness. College campuses should be cauldrons of controversy. Speech must never be criminalized. Dissent and debate are essential to democracy.

Good luck to us all.

Friday inauguration day it turns out that I’m on a radio show here in Vermont which happens to be at 11am ET right before the inauguration with my friend host Bill Sayre. We’ll be talking about my hopes for the administration. You’re welcome to call in with your hopes and fears or comment here. It’s on WDEV in Vermont at 550 AM or 96.1, 96.5, or 101.9 FM and live streamed from www.wdevradio.com. Call-in numbers are 802 244 1777 and 877 291 8255.

January 18, 2017

The World Economic Forum at Davos

The More Things Change...

You may have noticed that this week many news stories are being filed from Davos, Switzerland. That is because the World Economic Forum (WEF) is being held there this year – as it has been almost every year at this time – and reporters important enough to be invited can write about almost nothing else. I wrote the post below in 2006; but, since it sounds like the WEF has changed less than the world itself, I'm re-posting with only minor edits.

In 1999 (before the IPO of our dotcom era company) and in 2000 (just after our IPO), Mary and I were invited to the WEF. Our stock which had debuted at $12 was near its all time high of $120. The dotcom bust was still months away. In many ways, this trip was the apogee of our lives inside that fantastic bubble and Davos is the setting for a chapter of my book hackoff.com: an historic murder mystery set in the Internet bubble and rubble.

The World Economic Forum is an organization “committed to improving the state of the world”. It’s members are some 1,000 of the world’s largest corporations. They pay large dues, rumor says up to 300 thousand per year. And their executives are appropriately invited.

But many other people are invited as well. Political leaders are invited and come; for Davos 2000 they included Bill Clinton and Tony Blair, Israeli Prime Minister Ehud Barak and Palestinian leader Yasser Arafat, former Israeli Prime Minister Simon Peres and young King Abdu’llah of Jordan, and many, many more. There was an expectation that deals would be made; peace and commerce advanced.

The anointed thought leaders from the press were invited; Thomas Friedman, of course, but also David Kirkpatrick of Fortune and — much to the point that year — Tony Perkins of Red Herring and Upside fame. No one who hadn’t read both of these was anywhere near an IPO.

The corporate leaders for 2000 included Bill Gates of Microsoft and Scott McNeally of Sun (they had less use for each other than Barak and Arafat).  Jeff Bezos from Amazon was here as well as Michael Dell. Michael Bloomberg — who was not yet a mayor — attended as a business leader. [Bloomberg and I were on a committee together which was chaired by Carly Firiona. His open contempt for her inanities would have made you believe he never could have a political career.] There were Asian billionaires as well; Richard Li of Pacific Century Cyberworks and Masayoshi Son of Softbank were the most prominent. European business was represented mainly by the third to tenth generations of old companies with a sprinkling of telecom executives. South America and Africa were “underrepresented”.

To the discomfort of some the members, a smattering of Internet IPO CEOs had been invited as well. We were thought of as nouveau riche, which we were; some of us didn't stay riche very long. We were not asked to participate in the major panels but were on small panels. Some of us were invited in 1999 and 1998 before most of us were rich but when we were already hard at work changing the world. Most of us were not invited in 2001 or ever again.

The scene below is from the book I wrote about my strange time in the Internet bubble. I’m going to extract some of it in this post and some in a subsequent one. The fictional characters are Larry Lazard, CEO of hackoff.com, who, in this flashback, has not yet been found dead in his office; his wife Louise; and a Israeli friend Chaim Roslov, who Larry met while chairing a small session at the WEF. Simon Peres, of course, is an historic character and a meeting very much like the one I describe in the book actually did happen except for Larry and Chaim’s contribution which is fictional.

We join them just after a meeting which Larry chaired:

Chaim buttonholes Larry as they leave the luncheon: “You are going back to the Congress Center.”

“Uh … yeah, my wife and I are.”

“So we’ll share a taxi.”

“Yeah, sure,” says Larry, not sounding sure. “This is my wife, Louise.”

“Hello, Louise,” says the Israeli. His name is Chaim Roslov, pronounced with a guttural like Chanukah.

The driver of their cab doesn’t speak English but the multi-lingual Israeli establishes Spanish as a lingua franca and directs him to the Congress Center.

“You are Jewish,” says Chaim to Larry. It is not a question.

“Only half,” says Larry. “How do you know?”

“I know,” says Chaim. “Your mother was Jewish.” Apparently question marks are not in his English vocabulary.

“Right,” says Larry.

“Then you’re Jewish.”

“Right,” says Louise, amused.

“But I don’t practice,” Larry objects.

“I’m not asking you to synagogue,” says Chaim. “Practice does not matter. But you are a Jew.”

“I guess…”

“You are free for breakfast tomorrow,” Chaim asserts.

“I think so,” says Larry. “For what?”

“There is an important meeting. Simon Peres is coordinating this. We must do something to create opportunity for Palestinians. There must be hope for them or there will be no peace. We have a plan; we want your help.”

“I don’t even know any Palestinians,” says Larry. “I don’t think I can help.”

“You can help,” says Chaim. “You must come to the meeting.”

“We will come,” says Louise.

“Only your husband may come.”

“Why?” asks Louise. “Are you orthodox? Are you afraid of women? I’m Jewish — all Jewish.”

“Your husband is the principal. It is he who must come. If you are the principal, you would come. It must be that way.”

“Why must it be that way?” asks Louise.

“It must,” says Chaim flatly.


The breakfast meeting is in another hotel in a medium-sized conference room. The chairs have been arranged in an oval, and Simon Peres sits in the middle of one of the long sides of the oval. Larry takes an empty chair near one of the ends. Chaim is towards the other end but there is no seat open near him.

A young, black-haired functionary from the WEF speaks first. “The World Economic Forum has a proud history of being the venue for progress on otherwise intractable issues. Much of the discussion that led to the Oslo Accords began here in this neutral territory where direct communication is possible. In the midst of unparalleled global prosperity and relative peace, we must do what we can to solve the world’s most intractable problems. We may not succeed, but we have no excuse not to try. Prime Minister Peres has been kind enough to host this breakfast so we may discuss part of what we can do. Before we start, I’d like to go around the room and ask each of you to identify yourself, your country, your company, and state briefly why you are here.”

When the introductions reach Larry, he says: “I’m Larry Lazard; I’m an American. My company is hackoff.com; we do security for e-commerce. I don’t know why I’m here. Chaim asked me to come.”

Peres turns his large gray face to Larry: “We’re glad you’re here, Larry Lazard,” he says. “You’re here because you can help.”

After the introductions, Peres himself speaks: “We are here because there are problems which must be solved,” he says. “The greatest obstacle to peace in the Middle East is the lack of hope among young Palestinians. We are doing something about that. The danger is that, in the Middle East, hope is its own worst enemy. There is a story about an asp and a camel who meet on the banks of the Suez Canal. ‘Take me across on your back,” said the asp to the camel.’

“‘I can’t do that,’ said the camel to the asp. ‘You will sting me.’

“‘I won’t sting you,’  said the asp.  ‘If I sting you, you will die and I will drown.’

“‘Okay,’ the camel said and the asp got on his hump. Halfway across the canal, the asp stung the camel.

“‘Why did you do that?’ asked the dying camel.

“‘Because this is the Middle East,’ said the asp before he drowned.

“We cannot allow ourselves to be drowned — to remain trapped in this cycle of despair and violence,” continues Peres. “We must create hope where there is no hope. We must give young Palestinians an alternative to violent death. That alternative comes from jobs. We must export some of the potential of the Israeli economy and the world economy to the Palestinian territories.

“We are doing that. We are establishing businesses and factories there.  We are creating jobs and we are creating hope. But there is great resistance to this when it is perceived to come from Israel. There is a brave Palestinian woman who has risen to be the plant manager of one of the enterprises we created. She has risen above the squalor and despair she was raised in. But her own father has called for her death; a local imam has declared a fatwah against her. She may not live long although this brave woman does live today.

“So we need you who are not Israelis to create jobs in Palestinian territory, in the West Bank and in Gaza. We need you to create hope.  We need you to create an alternative to violence and death. We will help you; we will put you in touch with the right people; some of them are here at the conference. But we must be invisible and you must be visible. Otherwise this remains the Middle East. The asp will bite the camel. And both will die. Will you do this?”

Many say they will. Names are taken; appointments are made.

“Will you help, Larry Lazard?” asks Chaim, who is now somehow seated next to Larry.

“I would like to,” says Larry. “I mean this sounds like a very good thing, but I’m not sure how I…”

“My friend Larry Lazard and I will help,” says Chaim. The great head turns toward them. “We will work to create jobs in the territories. We will outsource there. We will create well-paying programming jobs there and we will save money for our companies doing this. It is what our friends the Americans call a win-win.”

“So,” Larry explains to Louise later, “I’m going to be put in touch with a Palestinian who’ll be our contact for contracting some of our programming to a group in Jenin. They’re supposed to be good; they can do it cheaper than we can get it done in the US. And we save them from being suicide bombers.”

“Was Barak at the meeting?” asks Louise.[She meant Israeli President Barak, of course. She wouldn't have heard of the Illinois state senator with the funny name yet.]

“No, why?”

“Isn’t that strange?”

“The whole thing is strange,” says Larry. “Davos is strange. Being a billionaire is strange. I don’t know.”

“We’re there any Palestinians at the meeting?” asks Louise.


“Does that tell you anything?”

“No. I told you; I’m going to meet a Palestinian. This is a good thing.”

“We’ll see,” says Louise.

“Why are you so negative?” asks Larry. “You’re the JAP. You’re the 100 percent pure Jew. You had a Bat Mitzvah, for Christ’s sake.”

“I don’t know,” says Louise. “I don’t know. We’ll see. I am glad you’re trying. I’m glad that chauvinist pig Chaim recruited you.”

“So that’s it; you’re still pissed off that you weren’t invited to the meeting.”

“No, that’s not it,” says Louise, then: “Yes, it is. I AM pissed off. But that’s not what’s bothering me. I don’t know. Try. It’s the right thing to do.  Meet the Palestinian. And remember the camel.”

January 17, 2017

Dodd-Frank and Me

The Magically Receding Bank Loan

Software companies usually don’t borrow money; I blogged long ago about the loan my old company couldn’t get to buy a switchboard. But in 2011 Mary and I started a new company, NG Advantage LLC, to truck compressed natural gas. Our idea was to bring the economic and environmental benefits of natural gas to companies located beyond the reach of pipelines. We were the first to do this in the US and there is a lot of demand.

But my inexperience with borrowing and then Dodd-Frank almost did us in.

One of the new technologies which make trucking natural gas viable is carbon fiber trailers. A trailer with carbon fiber tubes can haul twice as much gas per trip as the old trailers you may have seen with steel tanks that look like something a giant would use for SCUBA. These carbon fiber trailers, at the time, cost $500,000 each. Since customers use the gas directly from the trailer, there are usually two of these sitting at each customer location (active and standby) and then there are some more trailers being filled or going to and from customers. There is also very expensive equipment at each customer site and then a station full of compressors built on a pipeline to put the gas into the trailers. In other words, you need a lot of stuff to be in this business. I knew that; I’d made a spreadsheet.

My assumption was that, since I had successfully built businesses before, once I had customer contracts, I’d be able to borrow enough using the equipment as collateral to get the business started.

“No,” said the bankers. “We can’t do that. Your company has no track record; your industry doesn’t even exist!”

“But I’ll have contracts to prove that there’s a need and the equipment will be collateral. Isn’t this just like a car loan only a little bigger?” I argued.

“Now you’re talking,” they said. “If you want to personally guarantee the loans and put an amount on deposit with us to cover them in case of default, we can probably do something.”

It didn’t seem like a very good idea to lend them our money (even if we had enough) at 1% so they could lend it back to us at 7%. “How much of a track record do we need before you can finance us without a personal guarantee?” I asked.

“One year of EBITDA-positive operation,” they said without even having to think about it. [If you’re not familiar with the concept of EBITDA they meant they wanted to see us generating cash from operations.]

“OK,” I said.

We raised money from angel investors; we got an economic development loan (which we did have to personally guarantee); we got seller financing on the land we needed for the compressor station; and we got some very, very expensive loans from non-banks which, at first, we had to personally guarantee.

We built the compressor site; we bought the trucks; we signed contracts and delivered gas. We had a backlog of customers signed up. And we had been EBITDA-positive for a year. Deploying new customers meant we needed more trucks and everything else. Back to the bank I went.

“No,” they said. I reminded them of what they had said last time.

“That was then and this is now. Under Dodd-Frank, we can’t make risky loans to new companies. We need you to be EBITDA-positive for two years.” We got more very high interest loans and raised more from investors.

Dodd-Frank is a law which was passed after we bailed the banks out under TARP (see We’ve Been T*ARPED). The premise was that, if we’re going to bail out banks, we have to regulate them to make sure they won’t need more bailouts. Actually, I agree; that’s one of the reasons we shouldn’t have bailed them out. And, although only the money center banks got bailed out, even local banks, who had been more likely to lend on reputation, came under the same strictures.

After two years a very senior banker assured me we had a loan. “Just have to go to committee,” he said. “Just a formality.” He was crestfallen when he told me he’d been turned down in committee; hadn’t happened to him in fifteen years. “It’s Dodd-Frank,” he said.

The story ended well for us. Banks do now lend to us and we borrowed money at reasonable rates to repay the money on which we had to pay outrageous interest. We paid back the economic development loans. But we were only able to succeed because we’d been lucky enough to succeed before and had the ability to guarantee some loans and to raise capital from people who’d made money by funding us before.

Since the passage of Dodd-Frank, the big banks which caused the crisis have gotten bigger; the big four in the US now control 45% of total bank assets.  Dodd-Frank took away the flexibility which made local and regional banks competitive. A first step in putting capital back in the hands of job-creators should be to exempt all but the biggest banks from this law and allow more money to flow to Main Street. Second step should be to make sure that any of the huge banks which is too big to fail are also too big to continue. If a bank is a systemic risk, it should be broken up. Once it is clear that we can’t be blackmailed into bailing out banks again, the rest of Dodd-Frank can be dismantled. Then capital-intensive startups can borrow to grow after they’ve proved themselves by being EBITDA-positive for just one year. And we will have new jobs and rising wages.

More on the harm Dodd-Frank has done at How the Fed and Dodd-Frank Killed Jobs and more on how much I had to learn about capital-intensive businesses at The Difference Between Venture Capital and Private Equity. See  It Was TARP that Boiled the Tea for some of the 2010 anti-establishment fires which are clearly still burning.

January 15, 2017

Tweets Are DIY Headlines for Politicians

Tweets notoriously have room for only 140 characters so how can they possibly be used to convey a serious position? Well, headlines only have about 60 characters. Sound bites are not much longer. Many of us absorb most of our non-Internet news in headlines and sound bites. The advantage of tweets from politicians’ PoV is that they get to write the tweets themselves.

Way back in 1980 I was running (unsuccessfully, obviously) for the US Senate. After much research I produced a position paper and held a press conference to deal with the fact that the social security trust fund was headed for bankruptcy. My proposal was to raise the retirement age to 67 for those currently under 40 (which included me). The headlines and sound bites were “Evslin Proposes Raising Social Security Retirement Age”. At least half the newspaper articles included somewhere, usually way down in the story, whom would actually be affected; the TV coverage only had the sound bite of my calling for increasing the retirement age and neither the explanation of why or the protection for those 25 years or less from retirement.

Poor Mary was campaigning at the VFW that night. She was accosted by furious veterans near retirement who believed I’d proposed that all their plans be upset and they be forced to work two more years with almost no notice. (BTW, my plan became law without me.)

My tweet obviously would’ve been “Evslin Proposes Plan to Protect Social Security Benefits”. I hope there still would’ve been a position paper behind it; but, frankly, it’s the headline (or tweet) that makes most of the difference. All of us who have run for office wish we could’ve written the headlines. Now we can.

The Internet is a force for disintermediation. We don’t need phone companies to make “phone calls”. Anyone can blog. We can borrow without a bank and crowdsource our funding. Now any prominent politician can write his or her own headlines. This is forcing media to redefine its role which is not a bad thing.

Most national politicians probably have staff that does their tweeting. The President Elect apparently does not. I wish there were links from his tweets to full explanations of his positions; I disagree with some of his tweets and find some of them offensive; but actually I’m glad to know directly what he’s thinking rather than have it filtered through staff or a headline writer.

January 12, 2017

The Difference Between Venture Capital and Private Equity

A Whole New Ballgame

Once NG Advantage LLC, our compressed natural gas trucking business, started to grow, we needed a lot more capital. Moving into a new region requires at least a $5 million investment to build a station to compress gas from a pipeline into the trailers which deliver it to customers. Adding even one new customer can require a million dollars or more in new trailers and equipment. Even though we were EBITA-positive, we were still new so banks still couldn’t lend to us because of Dodd-Frank (thank you, Senators Dodd and Frank). We could now borrow from non-banks (at high rates) but we still needed cash for down payments on all this equipment.

So we had to sell some equity. “Been there, done that,” I thought. Knew we were too small to go public but didn’t know what I didn’t know. Last time I ran a pre-IPO startup we raised money from venture capitalists (VCs). I quickly learned that VCs don’t do investments as big as we needed, in fact don’t do capital intensive businesses at all. It’s private equity firms, which tend to have much bigger pools of money than VCs, who provide early stage financing for businesses like ours. Just like VCs, I thought, but more zeroes on the check.

Because I didn’t know any private equity firms, we hired an investment banker to manage the process. Together we did a five-year plan (as if anyone knows what’s going to happen in five years). We put together the “book” which described our successes, our market, our competitors, and our plan. Anyone could plainly see they’d make a lot of money by investing in us.

The investment bankers shopped a teaser to private equity firms and lined up thirty of them for us to present to in New York City during a three-day period. It was intense although not as intense as the IPO road show I’d done fifteen years before. At least I didn’t have to travel somewhere new every night although we did walk around midtown New York. I got sick of the sound of my voice making the same pitch ten times a day but answering questions was fun. The bankers were gentle when they pointed out after the first presentation one morning that I was somehow wearing one brown shoe and one black one.

About ten firms had enough interest to come up to Vermont to see our first compressor station and meet the team. One snowy day, a delegation’s return flight was delayed for a few hours so we took them to dinner near the airport.

“What’s the downside risk?” one of the partners from the investment firm asked me.

“What do you mean?” I asked, surprised by the question.

“I mean, in the worst case, what would happen to our investment?” he asked surprised that I was surprised by the question.

“Well, we’re a startup. You could lose all of your investment,” I said. trying not to sound like I thought I was talking to an idiot. The conversation abruptly switched to sports.

“Why did he ask me that question?” I asked our investment bankers once the private equity guys were gone.

“He wanted to know the answer.”

“No venture capitalist ever asked me that and I’ve talked to hundreds of them. They understand that most startups fail. That’s obvious.”

“You don’t understand the difference between venture capital and private equity,” the banker said.

“That’s obvious, too,” I said. “Please tell me.”

“Venture capitalists do well if they have a batter’s average; private equity needs a fielder’s average.” [note to anyone who didn’t grow up with baseball statistics: players do well when they get a hit more than 30% of the time they bat (.300 average in baseball talk); in the field they are playing poorly if they make an error more than 5% of the time they are involved in a play (.950 average).]

Venture capitalists make a large number of small bets relative to the size of the fund they are investing. If five of them are complete losses, four of them return the investment money, one returns 5 times the investment money, and one returns twenty times or more, the fund is a success from investors’ PoV. This, of course, is what I was used to. It’s why VCs don’t look at investments that don’t have huge potential returns. They only need a few winners but they need them to be big. They swing for the fences, to go back to baseball talk.

Private equity firms make relatively few investments from each fund but each investment is big. If one of them goes down the tubes, ALL of the rest have to do very well in order for the fund to perform reasonably. The capital-intensive companies which private equity firms invest in don’t have products that “go viral” like software or social media. If they grow (like NG Advantage) they require even more capital. When they go public, it is not an astronomical multiple of the early investment. If they fail to make it big, the hope is that they can sell assets or themselves and that the investors will break even or avoid losses.

Lesson learned. We did raise the capital we needed but that’s another story for another day.

For much more on the difference between venture capital and private equity firms, see What VC Can Learn From Private Equity by my friend and super-VC Fred Wilson (aka @AVC). If you are a CEO or CFO talking to both types of firm, you really want to read Fred's post.

January 10, 2017

Why Vaccinations Need to be Mandatory

There are multiple news reports (see here and here, for example) that Robert Kennedy Jr. says that Donald Trump appointed him to head a presidential panel to review vaccine safety and science. As of this moment, there’s no direct confirmation from the Trump team and no explanation of how the findings of this commission are supposed to be used. I’m hoping the story is as inaccurate as the testimony I heard Kennedy give here in Vermont against mandatory vaccination. But it’s a good time to review why many vaccinations (which are obviously intrusive) still MUST to be mandatory.

We used to have periodic epidemics of polio, smallpox, rubella and other diseases. Huge numbers of people were either killed outright or left badly damaged. When I went to grammar school a long time ago, there was almost always at least one classmate in permanent braces as a result of polio. Not true anymore. Because of vaccines, smallpox has been eradicated and we no longer have to vaccinate against it and polio is almost there.

So why can’t people just decide for themselves whether their children should be vaccinated? Two obvious reasons are that parents don’t have an inherent right to risk the life and health of their children and that, especially in a society where many health costs are socialized, everyone else will have to pay for the disease that could have been prevented. But let’s put those two arguments aside.

There are always some people who cannot be given a particular vaccine either because of a general medical condition or because they’re allergic to the ingredients of the vaccine. So long as everyone who can get vaccinated does, the risks to those who can’t get vaccinated is very low

According to Vaccination greatly reduces disease, disability, death and inequity worldwide from the World Health Organization (which is also the well-documented source for other assertions in this post):

“’Herd protection’ of the unvaccinated occurs when a sufficient proportion of the group is immune. The decline of disease incidence is greater than the proportion of individuals immunized because vaccination reduces the spread of an infectious agent by reducing the amount and/or duration of pathogen shedding by vaccinees, retarding transmission.” [footnotes deleted but available via the link]

Those who can’t be vaccinated need herd protection. Those who diminish the herd effect by refusing vaccination for themselves and their children are putting those who can’t be vaccinated at deadly risk.

Most vaccines are not 100% effective, even if they are always administered properly which, of course, can’t be the case. However, so long as there is sufficient herd protection, there is very little risk for those few whose shots didn’t take for one reason or another. However, if there are a large enough group who just don’t get vaccinated, then those individuals for who the vaccine didn’t work are at great risk.

California used to have very liberal laws on refusing vaccination. NOT vaccinating became a fad among the nominally well-educated health-food-eating citizens in affluent Marin County. In 2015, only 84% of that County’s students entering kindergarten were fully vaccinated according to the San Francisco Chronicle in a story about the ensuing measles outbreak. “Last year there were 61 measles cases in California — the highest since the disease was declared eliminated in the United States in 2000. The state beat that number in the first month of this year.” California, seeing that there could easily be epidemics of more deadly diseases, has sensibly made it more difficult to avoid vaccination except for those who have a specific medical condition which would make a particular vaccination unsafe.

Part of the anti-vaccination hysteria come from a study claiming a link between autism and measles vaccine originally published in the Lancet; it was reasonable to take that seriously. However, this study was not only wrong; it was fraudulent (see story here). The principal author was funded by lawyers representing parents in suits against vaccine companies. The article was retracted by Lancet and the falsification of data revealed. Because of the scare the article engendered, huge followup studies were done. That was easy because there is lots of vaccination. Absolutely no statistical or causal link has been found between any vaccination and autism. None the less, the myth lives on and both Trump and especially Kennedy have cited this non-existent link (see news stories linked to in the first paragraph). That’s scary.

The truth is that every vaccination does have some small risk. If it’s by injection, there’s a tiny chance of infection. There’s a very small chance that the vaccine, like anything else, can be contaminated. There’s an equally tiny risk that the recipient will have an undiagnosed allergy to the infection. Obviously new vaccines like the one for Zika have to be thoroughly tested and procedures can always be improved. We always have to be aware of the possibility that new data can surface.

Ironically, as long as almost everyone else gets vaccinated, those who opt their families out of the very small risk of a tested vaccine get to free ride on the very herd protection they are compromising. Society can’t afford to let that happen. We can’t leave those who can’t get vaccinated or whose vaccine doesn’t work at risk. We can’t give preventable epidemics room to blossom. Some vaccinations must be mandatory. This is an example of a case where the needs of the society come before the needs of the individual and state compulsion is justified.

Trump and Clinton Call Sanders’ Election “Illegitimate”

Former Candidates say They Got Berned by Putin and WikiLeaks

President Elect Bernie Sanders today addressed criticism that his surprise Presidency will be “illegitimate” because it was due to leaks of email stolen from the Democratic National Committee. National security officials say the emails were obtained by Russian hackers acting under instructions from Vladimir Putin. “This is the bitterness of billionaires,” the President Elect said. “They were sure that their 1% cronies would be nominated by both major parties and, no matter who won, they would be able to continue exploiting the middle class and ignoring the needs of the less fortunate. The people have spoken.”

Critics from both the Clinton and Trump camps say that release of these documents during the end game of the primary season led to Sanders’ narrow surprise win at the Democratic Convention on the third ballot when super-delegates abandoned the former Secretary of State in favor of the junior Senator from Vermont. This upset Trump’s game plane for a campaign against Clinton. “I could’ve beaten crooked Hillary,” tweeted real estate mogul Donald Trump. “Unfair media helped rapist Assange steal the election for Sanders.” Experts are unanimous in saying that Trump could not have beaten Clinton under any conceivable circumstance.

Senior Clinton campaign aides say that President Obama should have done more to discourage and punish Russian hacking. The President responded to that accusation today. “I’m proud that my coalition was essential to electing Bernie Sanders President so he can continue my Progressive policies. This is an endorsement of my legacy. In the interest of transparency, I could not interfere with the free flow of information to the American people during a campaign.”

Vice President Elect Elizabeth Warren reacted angrily when asked if her election is legitimate. “The American people heard the truth about Hillary Clinton and the Democratic establishment and they acted on that truth. Would less truth make us more free?”

Sanders had no direct comment on rumors that Vladimir Putin is urging him to appoint Edward Snowden to an intelligence post.

“Russia had universal healthcare long before we did,” said Sanders. “There are things we can learn from them. I will make every effort to work with President Putin to solve the problems of the world. Anybody who doesn’t think that’s a good idea is stupid.”

Donald Trump says he will run again in 2020.


Notes: This, of course, all happened in a parallel universe. In our reality, WikiLeaks didn’t leak the DNC material until the week before the Democratic Convention when HRC had already sewn up the nomination and none of the people said or tweeted any of the things I have attributed to them.

The idea for the great firewall came from this tweet by @razhael.

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