Even Smart Investors Sometimes Go Along

Published in the San Diego Union-Tribune, September 12, 2016

Why are we so stupid?

I am intrigued by the demise of Skully, the San Diego motorcycle helmet maker with the augmented reality embedded screen.  They raised over $10 million from investors and took in over $2 million in pre-orders through Indiegogo.  What happens to cause a company to implode?  They had 1900 pre-orders, and they shipped less than 100 helmets.  You can read multiple points of view on the Internet, ranging from product inadequacy to malfeasance.  I am not giving an opinion, but the question is a larger one.  Why is it so hard to see a train wreck approaching?

Think about Theranos.  Ms. Holmes was on the cover of over 22 magazines, blonde, black turtleneck, attractive and ready to change the world, but after $400 million invested capital, lo and behold, they had to confess that the technology didn’t work.  And amid allegations of fraud and malfeasance, Ms. Holmes was banned for two years from running a diagnostic lab.

An investor does due diligence in order to make a rational INITIAL decision and then what keeps him from understanding and monitoring and reviewing subsequent decisions and deliverables.  (And let’s tell the truth, some investors’ idea of due diligence is no more than a cup of coffee at the corner with the pitch deck hovering above the pizza slices.)

I am in a deal where we were promised the moon, they said they could build it — and to date, no product, and we have simply written it off.  Now here is the dark sentence – I was distrustful from day one – but I did not prevail.  Where did I fail?  What kept me from being assertive and squashing the whole thing before we had written a check?

Because I was not positive – and because I wanted to hope and “we wanted to believe.”  In retrospect, it was fairly obvious.  How come I could not see it, and if I could, why did I acquiesce?   Go along, get along – most people would not ascribe that phrase to me, but still I didn’t stamp my feet and demand rigor.

One answer is that drawing a line in the sand is an all-or-nothing move.  If you are right, no one really likes you (arrogant snot, thinks he knows it all) and if you are wrong, you are out the door.  And revisionist history is a fool’s errand.  Tell it to the judge while you stand in line at the unemployment office.  Being right and being rich do not always follow one another.

Play it safe.  The mantra used to be “no one loses their job by picking IBM.”   But if you go with a hot start-up and they fail, you are dead meat.  I am a believer in the Black Swan effect – an unexpected event of large magnitude.  Stuff happens.  But the key here is that it what you think is an outlier happens much more frequently than you would anticipate.  And we try to rationalize it, and we “concoct explanations, AFTER THE FACT, in an effort to make the events explainable and predictable.”

Shudda seen that coming.

For example, no one saw the 2008 financial implosion, but by 2010, there were 15 books explaining it.  A lot of good that does.  As individuals, we tend to look back and analyze, rather than look forward and strategerize.  Your company is fragile; you need to make it “robust.”

Why do start-up companies with no revenue and an unfinished product think their pre-money valuation is $10 million?  What are they smoking, do they listen to anyone – or do the founder/insiders get blinded by greed and stupidity – unaware that it is the next round when Jesus comes around to preach the gospel.

And finally, let me quote Salim Ismail (Exponential Organizations), “The concept of ownership works well for scarcity, but accessing or sharing works better in an abundant, information-based world”, which is an elegant way of saying that going it alone today is dumb.  There are more than a dozen separate non-profit programs or institutions (from UCSD to Evo to the Downtown Partnership to Connect to Rady to Biocom and beyond), along with over 17 “technology incubators” – all chasing limited dollars (scarcity).  Wouldn’t it be logical to work together for the betterment of the City and the technology community – in the aggregate, rather than serving us the recycled pablum of the evil twins – ego and stupidity combined?

Rule No. 478:  Other than that Mrs. Lincoln ….

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