Disrupting Wall Street
Is the Finance Industry Ready for Innovation?
I put together a video summary of Howard Lindzon’s talk with Jason Calacanis on This Week in Startups (episode #309). Enjoy :-)
Howard Lindzon — Disrupting Wall Street
Howard Lindzon is a serial entrepreneur, a hedge fund manager, and invested in over 50 early-stage startups through his angel fund, Social Leverage. He is best known as the co-founder of StockTwits, where he is now Chairman of the board after stepping down as CEO at the start of the year. In 2006 he created Wallstrip, a daily business satire news video podcast that was bought by CBS in 2007. He has also authored two books, The Wallstrip Edge and The StockTwits Edge, and blogs actively athowardlindzon.com.
If you’re interested in the markets, startups, Bitcoin, anything finance related, and you have a sense of humor, you should follow him @howardlindzon.
Hedge Fund Manager
Howard is still managing the original hedge fund he started in 1998. Back then it seemed like everybody was starting a hedge fund, now the asset class has a bad reputation. So what exactly is a hedge fund?
“A hedge fund is just a fancy word for a limited partnership that allows the manager (Howard) to do whatever he pleases, which is usually stated in a document, and Howard’s document says Howard may change his minda lot, so you are giving him your money and his job is to do well, and he gets paid 2% of the assets (which he has waived for the last 6 or 7 years) and 20% of the profits.”
It also means that you have friends who trust you immensely, your partners are wiring you money to do as you please. That’s the relationship with most hedge funds — not so much with the $4B mega-funds. At that level the GP-LP incentives can get misaligned. When managing $4 billion, all it takes is one good year to make $800 million (20% performance fee). After that the risk tolerance can disappear — you’re living off the 2% management fees. At the same time, if you do take risk and have a bad quarter (or if$AAPL is down 3 days in a row) the LPs can ask for their money back, which means you’ll earn less management fees. The multi-billion dollar funds end up being a really expensive way to preserve capital.
This is why the industry broke — it became about gathering assets, just like the mutual fund business which is dying towards ETFs, which will then die back towards individual companies, through AngelList and the Stock Market. It’s a big circle.
Although the industry standard in venture capital is to charge 2 and 20 as well, the incentive to gather assets and collect the fee isn’t there because the funds are closed-end (no redemptions). The larger funds, most notably Andreessen Horowitz, are reinvesting the 2% management fee by hiring an increasing amount people on staff to help their portfolio companies. The investing partners (who share the carry) have actually been known to take a reduced salary when joining a16z, which aligns the monetary motivation towards the greater goal of helping build valuable businesses.
As a thought exercise, here is what a hypothetical 2% management fee comes out to for the 5 largest hedge funds in 2013:
Learn the Stock Market!
Jason asks if investing in stocks makes you a better entrepreneur? Howard believes that “Knowing the stock market is being an entrepreneur.” Buy a stock as soon as you get a little bit of money, the lessons that the market will teach you are profound. Back in the day it didn’t make sense to invest a mere $200 when your broker charged $35 in commission. Today, E*TRADE charges $7 per trade, and the market is getting even more efficient… Later this year a startup called Robinhood will be launching it’s commission-free trading platform. There’s a waiting list so claim your spot! Naturally, Howard is an investor…
I am amazed when I walk into business schools or talk to entrepreneurs that have never opened a brokerage account. 10 years ago taxi drivers had a brokerage account, now the smartest kids in the world don’t want to buy a stock. It’s a language that they need to learn, they are not thinking about making money. You have to start early. You need to read about this stuff and surround yourself with positive reinforcement. If you are a hard working person you are going to make money. Therefore one day take control of your money, don’t hand it off to anybody.
The Markets Are Connected
This is a great time to learn the market. Howard tries to teach people around finance that all the markets are connected. If you are an angel investor and you want to raise money it’s your job to understand the bond market, the stock market, and venture capital market. If you’re trying to raise money as an entrepreneur; knowing how all the markets work will give you an edge, and will make you sound smarter when talking to investors.
You have to understand how everything is connected. That’s why the data on AngelList is so interesting, because the data on AngelList is now connected to Wall Street.
Tools like AngelList have only been around a few years, and people need to learn how to use them. Howard points out how investors thought OpenTable ($OPEN) was overvalued (in 2012) and whether they knew it or not, what they were really saying was that OpenTable is going to get disrupted. Howard was seeing lots of startups on AngelList working on yield-management for restaurants, meaning that if OpenTable didn’t buy a couple of them they really would be in danger of getting disrupted.
SalesForce ($CRM) is the opposite example. Marc Benioff will buy anyone who poses a threat and absorbs them into Salesforce. He is setting back innovation, but he is also owning the food chain. This is what Microsoft has been doing for 20 years…
Advice for entrepreneurs::
- Understand how all the markets are connected
- Learn to play a game, it will teach you social etiquette (golf)
- Networking is critical
Wallstrip
Howard knew that if he started a company it would have to be for himself, and what he really wanted to do was make fun of CNBC and Wall Street. From that, Wallstrip was born, and people were loving it. In the first episode Lindsay Campbell is covering Apple, and Howard makes a special appearance to deliver a message to Steve Jobs.
I highly recommend you watch the 3.5 min clip — entertaining to say the least.
Financial Tech
Howard is a strong advocate for financial tech, although the finance industry is resistant to innovation. Bloomberg has been charging $2,000 a month, Fox and CNBC don’t get charged for what they put on the air, and Twitter is filled with too much noise when it comes to stocks. So one day Howard calls (then) Twitter board member Fred Wilson and says, “Twitter.Finance.com — let’s disrupt CNBC.”
Twitter should have disrupted Bloomberg but had more important things to worry about (like not crashing). Google doesn’t want to take on Bloomberg (they should). Yahoo Finance is better than Google Finance (that’s not saying much). Google Finance’s performance relative to Yahoo Finance on the day of the $TWTR IPO sums up the bunch.
You can’t disrupt a commodity (Schwab). Silicon Valley is attacking Wall Street from the very wrong angle. Naval (AngelList) is attacking Wall Street from the very right angle.
Howard is also attacking Wall Street from the very right angle. StockTwits is a Twitter for stocks. It’s a place for people that only want to talk about stocks to share ideas and get real-time insights, curated in a way that cuts through the noise. But StockTwits wasn’t always a company — it started as a feature!
StockTwits was formed out of a simple (yet brilliant) idea for organizing conversations about stocks on Twitter, putting a dollar sign before ticker symbols. The “cash tag” is now the universal way of adding financial context to an online conversation. When you tweet about $TSLA people will know you’re referring to the stock, rather than the inventor. Howard invented that.
Where our true value lies is that we have interesting data, we have interesting sentiment, we are building a brand that people trust, and trust is an important thing. They trust StockTwits to get a picture of what’s going on in the market. We need to give the 99 percenters a snapshot that they trust.
“I am a big believe in the stock market — it’s one of the greatest things that capitalism has. It’s crazy that people are not putting their money in the stock market anymore. There are great opportunities, and that’s because people aren’t learning. That’s what StockTwits is about. We are a mentoring, education tool. If I want to learn from smart people, I want to learn from people who sit and talk about stocks all day. I want to learn the chatter, I want to learn the language. That’s what StockTwits is. Tune in. Listen in. You don’t have to say a thing. Sit there, curate, absorb.” (41:17)
Cheap & Expensive
Howard is a momentum investor in the public market so he looks for stocks that are trading at or near their all time high — which is the opposite of what most people do. Although when investing in a startup, you have to buy cheap. With private companies it’s about ownership percentage, not the number of shares.
As an example: Howard could have invested $25,000 very early in Twitter at a $20 million valuation — but passed. At that price the round was considered very expensive for such a young company with no revenue. You have to start thinking about a $200 million exit to get a good return, and very few companies can get to that level. Twitter’s shares are now trading at a market cap of $32 billion. That said, Howard did back into quite a lot of shares when Twitter bought Summize (through an investment in BetaWorks) and TweetDeck (Howard was the first investor). When TweetDeck was acquired, Howard received a lot of Twitter shares because he invested at a $1 million valuation, which is why valuation is important.
In the stock market, cheap and expensive are the two most dangerous words. When investing in startups they are the two most important words.
- “In the private market you need to invest cheap because you’ve got nothing, and your entrepreneur is gonna get punched in the face. Nobody knows what it’s gonna be like so you have to invest cheap… Cheap matters a lot in the entrepreneur world.”
- “In the public market it’s about liquidity, and you have liquidity. You can change your mind every minute so who cares about cheap and expensive? Have a thesis, have some risk management, have an idea… You can go buy Facebook, but the good news is you can sell it tomorrow too. You can change your mind.”
Individual Investors
Most people don’t beat the market. The averages make sense. What makes sense for 99% of investors is to put in $100 to $500 a month into a well diversified pool of securities, and it’s important to be consistent. If you’re truly going to take the time to learn the market and used the tools that are available (like StockTwits), than invest with the mentality of making 80%! Why work so hard just to make 8%?
“I believe that an average investor, if they actually learn the language of this stuff, can really do this. I am not saying they need to invest in stocks. But by learning the language of the stock market you’re going to learn the language of all the markets. Sentiment, mood, timing, networking, all those things.”
The Original Social Network
Bloomberg has such a dominant market share because investment professionals pay $2,000 a month to access it — not despite of it. It’s a way of curating all the people that ‘know’ what they’re doing, otherwise you wouldn’t pay that kind of money. It’s like a country club, and even if you wanted to leave, you wouldn’t. You want to be where all the smart people are, and everybody is on Bloomberg.
“Individuals should have these tools. You shouldn’t have to pay $2,000 a month to get a snapshot. Bloomberg is just some nice packaging and good customer support, wrapped around a communications product. The reason Bloomberg works is: it’s the original Facebook. Bloomberg is the best social network that was ever created.”
Surround Yourself With Smart People
Jason: The public is obsessed with the media.
Howard: I just don’t watch TV and I don’t watch the news. I am obsessed with smart people. I am obsessed with the crack of opening up my (Twitter) stream, and it being smart.
Jason: Whose smart? Bill Gurley?
Howard: Super smart, but you’re never gonna see him when you tune into Twitter.
Jason: I don’t know if you saw him in CNBC…
Howard: Did they let him talk?
Jason: They let him talk and he just crushed them with him intelligence. They were just sitting there and didn’t even know how to respond because they’ve never heard such intelligence on their program.
Startup World
- Stop reading the news — your startup is not affected by the news
- Reduce the friction that you can control (price, number of founders, cap table, good lawyer)
- Startups are about going fast, work to succeed, and do it fast
- Use the tools that are around you (Fred Wilson’s blog, This Week in Startups, Howard’s blog, etc.)
- The world needs people to quickly dismiss ideas — it’s your job to just start polishing
- Mobile is a wide open game, still very new, nobody has domain expertise (everyone figuring it out)
- Be mindful of valuation, stop with the $8 million pre (what’s wrong with giving your investor a deal?
When I did StockTwits at a $600k valuation I didn’t have to do that. Sometimes you give people a deal and it grows, it blossoms. Giving people a deal and not being greedy is very important.
Do you agree with Howard’s viewpoints?
Are the markets interconnected?
For more video summaries check out the DataFox Blog, and you can reach me directly @Nivo0o0.
