Are You Too Old??

 
 

Too-Old-On March 23, 2014 an article in the New Republic talked about the “Brutal Ageism of Technology”.

This article quoted supposed technology luminary Mark Zuckerberg as stating: “Young people are just smarter.”

Or the website of Service Now, an IT consultancy, who, in their job postings states: “We want people whose best work is ahead of them, not behind them.”

The article further quotes employees in their 40’s and 50’s who haunt doctors’ offices seeking that Botox injection that will make them look younger and who take advice from career coaches that advise them on how to have a younger looking professional picture taken for LinkedIn or how to hang out in company parking lots to see how the younger employees dress.
 
 

And the VC’s would seem to agree that …

To a very few investors; older entrepreneurs are considered “the mother of all undervalued opportunities.”   Indeed, of all the ways that VC’s could be misled, the allure of youth ranked highest.   “The cutoff in investors’ heads is 32,” a VC told The New York Times in 2013. “After 32, they start to be a little skeptical.” Clearly a mind made up, unconfused by facts.

vc-economicsThe economics of the VC industry help explain their thinking.  Investing in new companies is fantastically risky, and even the best VC’s fail a large majority of the time.

That makes it essential for the returns on successes to be enormous. Whereas a 500 percent return on a $2 million investment (or “5x,” as it’s known) would be considered remarkable in any other line of work, the investments that sustain a large VC fund are the “unicorns” and “super-unicorns” that return 100x or 1,000x-the Googles and the Facebook’s.
 
 

Silicon Valley Mysticism …

And this is where finance meets what might charitably be called sociology but is really just Silicon Valley mysticism. Finding themselves in the position of chasing 100x or 1,000x returns, VC’s invariably tell themselves a story about youngsters. “One of the reasons they collectively prefer youth is because youth has the potential to be the “black swan,”  “It hasn’t been marked down to reality yet. If I was at Google for five years, what’s the chance I would be a black swan? That’s the collective mentality.”
 
 

For the 10 years ending June 30, 2013 …

roiSo, how have the VC’s done with that thinking?

  • Venture Capital: For the 10 years ending June 30, 2013, venture capital scored a 7.8% return, according the index compiled by Cambridge Associates LLC, which the National Venture Capital Association uses as its performance standard.
  • DJIA: This slightly trailed the Dow Jones Industrial Average, which was 7.9% for the period
  • DJIA Small Cap: and was well behind the Dow Jones U.S. Small Cap Index, which was 10.6%. Venture exceeded the S&P 500’s 7.3% return.
  • Growth Equity: a strategy that targets older companies with revenue, many of which are family owned, often run by the older founder, was a much better investment than venture, generating a 13.1% return over the decade, according to Cambridge.

 
 

22 year-old CEO spectacularly burns through cash …

The March 23rd issue of Business Week offers an article about a company called Clinkle.  Run by a 22 year old, first time, entrepreneur, Clinkle has raised over $25 million in venture capital.

Yet, Clinkle has spectacularly burned through cash, failed to develop a product, and after building a pre-revenue base of sixty highly skilled young employees, has been forced into multiple layoffs. When Business Week wanted to interview the CEO, the company refused, trotting out the Chief Operating Officer, a 60 year old former CFO of Netflix. Presumably it was felt that a certain amount of experience was required to talk with Business Week.
 
 

But They REALLY Believed …

There are many more stories than this blog will allow that relate to cases where inexperience has caused significant losses to investor and employees.  The camera company Contour is one of them.  Facing a formidable competitor in Go Pro who had raised approximately 20 times the funding to compete in the consumer market, Contour’s young founders, because they “believed” in their product and company, and didn’t have the experience to seek alternatives to continuing as an independent company, ended up in receivership; a total loss for their investors.

wisdomThe other side of the story is that of a legendary attorney that often represents Revitalization Partners in receivership and bankruptcy cases.

This attorney, in his late 60’s, is a walking legal Wikipedia.

Ask him about a problem with a case and off the top of his head, he can find a solution; citing decisions, case law and precedents, some going back to the 1800’s.
 
 

An Old joke for you …

To further make the point, let me end with an old joke: One evening the older farmer decided to go down to his pond, as he hadn’t been there for a while. He grabbed a five gallon bucket to bring back some fruit.

As he neared the pond, he heard voices shouting and laughing with glee. As he came closer he saw it was a bunch of young women skinny-dipping in his pond.

He made some noise so the women would be aware of his presence and they all went to the deep end of the pond. One of the women shouted to him, “We’re not coming out until you leave!”

The man frowned, “I didn’t come down here to watch you ladies swim naked or make you get out of the pond naked.”

Holding the bucket up he said, “I’m just here to feed the alligator.
 
 

Age & Cunning Will …

The Moral: Age and cunning will mostly triumph over youth and enthusiasm. Maybe when the VC’s realize it, their returns will improve.