Something Ventured

What makes America so great? There has to be more than one answer to this…assuming it’s even possible to answer the question.

Earlier this year I was in Las Vegas for the first time. Driving down the strip one day, I was amazed at the sheer size of some of the hotels there. From the designs of the buildings and even the decor inside some of them, you could tell many of them were built many many years ago – Caesar’s Palace opened in 1966 with 680 rooms. And the Strip is covered with possibly hundreds of hotels. One question I kept asking myself – where did the people find the nerve to build such things? What if people simply don’t come to Las Vegas? What happens to the hotels?

Whatever the answer to those questions, is the one I tend to prefer as the thing that has made America great.

A random post on Quora led me to a documentary called Something Ventured (It’s on Netflix as well). See trailer below.

It’s the story of the people who started what is today known as ‘venture capital’. For the most part they were a bunch of guys who had a basic to decent understanding of how finance worked and how to raise some money. They certainly didn’t go to University to study ‘venture capital’ – they just had an understanding and appreciation of risk. The one thing they all had in common was that they wanted to make money and plenty of it. Interestingly, these days a number of the guys are now doing all kinds of social and charitable investments which might be an indication of whether or not the chicken should come before the egg in these things.

Usually they backed businesses that banks simply wont fund for being too risky or outright insane. You hear some of the guys in the documentary say things like ‘we decided to raise the $3m and build the business to see if it would make money‘. On the face of it, that sounds truly crazy – why do you have to spend $3m before figuring out if something would make money or not?

And yet, it’s that incredible appetite for risk taking that makes certain things happen. It’s amazing to see how Venture Capital today – certainly in Nigeria – has become something so ‘technical’ that only people who go to expensive schools can do. Having been through a business school myself, I’m certain that the number of investments I would have attempted before my education reduced greatly once I had obtained my degree. You definitely learn a lot about risk and various models and theories that (allegedly) teach you to how not to lose money. Is this a good thing?

The example of how Kleiner Perkins invested $250,000 in Genentech in 1976 is a useful example. At the time, the idea being backed was no more than something that sounded interested. The chances of failure were probably 99.9%. Yet, Genentech was sold to Roche in 2009 for $47bn.

Venture Capital firms regularly lose money of course – some have a success rate of even 1 in 20. Most investments they make are lost completely and returns vary very very wildly. But the interesting thing about the Venture Capital industry is that rarely loses money. That is, more often than not, when you take all the VC firms in the (American) economy, they generally make money. In other words, the industry is good for the economy – value is created more often than it is lost. It’s an industry worth having in an economy.

And it’s just not those who call themselves venture capital firms. The whole VC thing is almost like an attitude. Surely there are fraudsters in the American economy too? Surely there are people who talk a good game and turn out to be a waste of time once they have been given money? Certainly, these are borne out by the fact of the number of investments that go wrong as stated above.

But VC needs doing. The Securities and Exchange Commission of Nigeria’s website lists 6 registered Venture Capital firms in Nigeria. The list hasn’t been updated since 2010 so is definitely out of date. But the fact that the SEC website is happy to leave 4-year-old information on its website tells its own story. Today, most of the VC investment in Nigeria comes from America or Sweden or Germany. It’s definitely better than nothing.

One thing the documentary didn’t really focus on was how the money the VCs deployed was raised. But this happens differently in different economies. Take this example from a story in The Economist about China from 3 years ago (the whole thing is worth reading):

A Wenzhou businessman reckons that there are 100,000 people in his city who could each raise up to 1 billion yuan within 48 hours. So liquid is the system that, unlike private-equity groups in the West, Chinese partnerships often do not raise money before seeking prospective investments; investments are found and then partnerships are formed in short order

As long as the money can be raised like this, stuff will get done.

This post is not about ideas or solutions but just discussing something I always think about. Why do people take such huge risks? How does an investment of $250,000 turn a company into a $47bn one especially when the market for whatever it is you are investing in does not even exist at the time?

Back to Las Vegas and Caesar’s Palace. It’s not hard to notice that the thing that made Las Vegas its name – casinos and gambling – is losing its appeal there. Macau had gambling revenues of $38bn in 2012 compared to around $6bn for Las Vegas. If investors put money in Vegas hotels on the basis of gambling revenues, then those models will need to be torn up and rewritten now. Even American casinos are now investing in Macau.

So what does a hotel do when its casino lunch is being eaten right before its eyes? In 2012, Caesars Palace opened its Bacchanal Buffet. It cost $17m to build and covers 25,000 square feet with 500 dishes on offer starting at $19.99 for breakfast. We can agree that the buffet market is rather different from the casino market – I doubt that gamblers take long breaks from the casino to go and sample dishes at the buffet. In other words, the hotel was betting on families being attracted to the premises to replace the gamblers who had run off to Macau. And it’s a big bet as you will need to sell a lot of $20 plates to recoup $17m before accounting for the cost of the food and chefs.

So you start by attracting gamblers and then move on to attracting families. And then you stay in business. The answer is never one thing.

Watch the documentary if you can. It’s 3 years old but there’s still an education in it.




4 thoughts on “Something Ventured

  1. Pingback: Something Ventured – Y! Opinion

  2. Some business investment defies risk management principles but like you said, VC in general make money. It will require some serious forecasting. In Nigeria, we don’t have such appetite for risk because of a lot of external factors beyond the investors control. The political climate is an example. Good article. Thought provoking.

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