If You're So Smart, Why Aren't You Rich?

"The merely rich are not rich enough to rule the modern market. The things that change modern history, the big national and international loans, the big educational and philanthropic foundations, the purchase of numberless newspapers, the big prices paid for peerages, the big expenses often incurred in elections - these are getting too big for everybody except the misers; the men with the largest of earthly fortunes and the smallest of earthly aims. There are two other odd and rather important things to be said about them. The first is this: that with this aristocracy we do not have the chance of a lucky variety in types which belongs to larger and looser aristocracies. The moderately rich include all kinds of people even good people. Even priests are sometimes saints; and even soldiers are sometimes heroes. Some doctors have really grown wealthy by curing their patients and not by flattering them; some brewers have been known to sell beer. But among the Very Rich you will never find a really generous man, even by accident. They may give their money away, but they will never give themselves away; they are egoistic, secretive, dry as old bones. To be smart enough to get all that money you must be dull enough to want it."    

G. K. Chesterton  

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G.K. Chesterton: "The Anarchy of The Rich"
http://paxonbothhouses.blogspot.com/2013/10/gk-chesterton-anarchy-of-rich.html

If You're So Smart, Why Aren't You Rich?

Roger Kay Forbes Magazine

My father once explained — through personal stories from his own career — how being rich didn’t mean you were smart, and being smart didn’t ensure that you’d be rich.  He had two stories.

One was how he was involved as in engineer in fabricating the feed for the Arecibo radio telescope, a huge stellar observatory plunked down in the middle of what had been a valley of virgin jungle in the northwest interior of Puerto Rico.  His company, Technical Research Group (TRG), made, as a subcontractor, the large metal feed that was to be suspended above a thousand-foot-diameter dish.  The dish would send and receive radio waves to and from outer space.  Back at a time when these types of calculations were done on a slide rule, he made an error, and the feed was off measure.  That is, its dimensions weren’t right.  Its accuracy was impaired by several orders of magnitude, and the feed had to be done over.  TRG offered to redo the work, but, the contractor threw it off the job in anger.  However, perhaps because the project was part of the whole post-WWII military spending geyser, his firm was paid handsomely for their work anyway.  This was the illustration of how you didn’t have to be smart to get rich.

At the other end of the spectrum, he also designed a small microwave antenna, for which he received $25,000 in payment for the patent.  That dish has been standard on U.S. naval vessels for about 50 years.  This, then, was the example of how you could be smart and still not get rich.

The only place ordinary people can get connected to the investment pipeline is at the highest-risk end, where angels put money directly into the hands of entrepreneurs and hope for the best

My father ultimately did get rich by the standard of the times, although he managed to spend all his money on one thing or another over the next four decades, marrying three times and devoting his energy to various causes.  He left me and my brothers to sort things out on our own, which we more or less did

So, here I am claiming, as an industry analyst, to be smart enough to advise companies in tech, where gazillionaires are minted every day.  How have I done?  I’ve certainly been around long enough.  But I seem to have demonstrated that I can stand right next to some of the tallest trees and still not get struck by lightning.

That’s not entirely true, but strikes have been rare.

For example, after he sold his stake in the firm that bought his final, most successful company, my father began to make angel investments in technology.  He had given me and my brothers some of the stock in that company, and we threw some of our winnings back in with his just to be part of the great game.  I had an MBA and for a while helped him vet deals.

Some of the endeavors were beautiful, but died anyway.  Wormser Technology comes to mind.  A brilliant scientific solution to the problem of clean coal combustion, and way before its time, the outfit burned money faster than carbon.  We went in deep on that investment, and it would have been entirely a bust had not a bright, tireless, and even ethical attorney managed to negotiate for a tiny bit more cash than we put in.  The other side of the suit wasOxbow , a company owned by Bill Koch (the “other” Koch brother).  Oxbow, which had bought Wormser’s assets in a fire sale, wanted to reneg on parts of the agreement.  The lawyer turned Koch’s $50,000 offer into $7 million, still a steal for him, even at that price.  We got out with just our skin.

Others were hits, but we only nicked the ball.  When Mark Ain, founder of Kronos, had my father and me into his office in Allston, MA, he was demonstrating a digital time clock for employee punch-ins.  A smoker in those days, he put a standard time card on the floor, dumped a full ashtray onto it, stomped on it, and ground in the ashes with his shoe, then picked it up and wrinkled it into a ball before flattening it out manually on the desk.  Then, he inserted it into his machine.  It read perfectly.  He noted that hourly employees don’t always treat their time cards with the greatest of respect.  We were impressed and put some dough in the company.  Eventually, Kronos went public, and we cashed out at a nice premium.  I sold all my shares, a few at the opening and the rest later, and promptly forgot about the firm.  By the time it came to my notice again, it was going private once more in a transaction valued at $1.7 billion.  Kronos had been transformed into a time-and-attendance-software-and-services firm.  Much of the growth in value had occurred since the company went public, contrary to the way things go in the current environment, in which most value is generated before the public offering.  So, we got a nice taste of that, but were unable to gorge on it to our full satisfaction.

Groundwater Technology was one of the more satisfying hits.  Originally called Oil Recovery Systems, it had a technology that involved creating a vacuum under a subterranean spill.  Since oil is lighter than water, it sits on top, even in the ground.  The vacuum creates a funnel-shaped vortex in the water, allowing the oil to drop into the vortex as if into a cup.  From there, it can be sucked out with a separate pipe.  The system can be run until all the oil in a plume is recovered.  But after the oil shock of the 1970s, there was an extended period in the 1980s of low oil prices based on a worldwide glut.  The pivot for the company was to recover the water rather than the oil.  The oil was treated as a contaminant, and the water was the resource, rather than the other way around.  The company changed its name to Groundwater Technology and was off to the races.  Again, we all had a piece of that, and it financed a good number of my father’s peccadilloes in his mid-retirement.

My father continued to invest over the years, but increasingly focused on investments in which shareholders’ interests were balanced with those of other potential constituents like the environment, employees, communities, and, why not?, customers.  The idealist in me wishes otherwise, but they were all busts.

I, on the other hand, knowing that most private equity investments don’t pay out, stayed pretty close to what I knew.  I didn’t have his resources.  So, I had to husband them carefully.

When I formed Endpoint Technologies a decade ago, I realized that I might never build a company that I could sell.  A sage business advisor told me, “You don’t have to.  You can just operate like a country doctor, and when you’re done, turn the sign on the shop door around and say, ‘Gone fishing.’”

In order to have a shot at retirement, though, I figured I’d have to make a few angel bets.  But not being connected to the deal flow in Silicon Valley, I had to drum up my own.  Over time, I managed to spread smallish sums over a half dozen deals.

And then I waited.

And waited.

Years went by.  Then a decade.

None of my companies went bankrupt, but none paid out, either.

Then, finally, after 15 years, Citrix bought one of my holdings: Sanbolic.  Today, it’s easy to say what Sanbolic does.  It has a software-defined storage product, which Citrix sorely needs to compete with VMware VMW +0.78%.  The company had been shopped toDell , IBM IBM +1.7%, Microsoft MSFT -0.21%, and a host of other companies over time, all to no avail.  And for years, almost no one, not even I, could understand exactly what Sanbolic did.  The stars aligned when virtualization, which had started with servers and worked its way through networking, finally arrived at storage, the last element in enterprise infrastructure to be abstracted.

Last week, I went to the Sanbolic acquisition celebration cocktail party.  Quite a motley crew of angels showed up to join management and employees in lifting a cup and speechifying.  It was held in a dive not far from the automobile repair shop where the company started.  The bar was open and the food was heavy on the starch.  In 15 years, the company avoided any truck with venture capitalists, which surely stunted its growth but also kept the angels from being diluted.  My piece will not be life-changing, but it will make 2015 a decent year.

And I have a few more poles in the water, at least two of which look fairly promising.

I’ve gone on and on here, but there’s one more thing I’d like to point out.  My father, at 89, is now in the final stages of dementia, but as recently as just a few years ago, he was still making new investments.  I note that much more successful and visible investors — like Thomas Perkins of Kleiner, Perkins, Caufield & Byers, who is now 83 — continue to make venture investments unlikely to yield in their lifetimes.  Perhaps they are just creatures of habit.  Perhaps they like the game itself.

But as the Bible says in Ecclesiastes 3:1-8, “To every thing there is a season, and a time to every purpose under the heaven: … a time to plant, and a time to pluck up that which is planted; …”

My thought on investments that take 10-15 years to mature is that the time to plant is when you are reasonably young, and the time to pluck should be within your own lifetime.

And it’s good to remember that luck — of the draw, of birth, of timing — plays an extraordinary role.  The correlation between intelligence and wealth is tenuous at best.  And wisdom — as distinct from intelligence — might at some point lead you away from riches.