Opportunity Costs

Supported by Greenhaven Road Capital, finding value off the beaten path.

“The cost of one modern heavy bomber is a modern brick school in more than thirty cities.” When Dwight Eisenhower gave his farewell address in 1961 he warned against the military industrial complex and vividly laid out what else we might spend the money on.

In the paper, Opportunity Cost Neglect a trio of Yale professors and two others commend Eisenhower for his language. Most people are vaguely aware of opportunity cost, and its calculations aren’t difficult, yet unless the costs are vivid and explicit we won’t weigh the decision.

One of the paper’s authors wrote:

“This customer was frozen in indecision between a $1,000 Pioneer and a $700 Sony, and the salesman intervened, framing the choice as follows: ‘Well, think of it this way—would you rather have the Pioneer or the Sony and $300 worth of CDs?’ Remarkably, the decision that seemed so difficult just moments before was no longer even close—the Sony was at the cash register moments after the word CDs escaped the salesman’s mouth. A big pile of new CDs seemed far too steep a price to pay for the Pioneer’s slightly more attractive speakers.”

In a recent podcast, Rory Sutherland put it this way:

“I made the decision to underspend on property on the grounds that nearly everybody else was effectively maxing themselves out. The default behavior of housing was to buy as much as you can borrow. That assumes the greatest return on happiness comes from property expenditure. No one really looks at the opportunity cost. If you’ve got a massive mortgage there’s a holiday you can’t take there are children you can’t educate.”

When considering a purchase try to be creative when what else you could buy.

  • It’s not just Apple or Samsung.
  • It’s Apple or Samsung or ‘dumb’ phone and two-months of groceries.

Actually, the authors note, if the alternative isn’t exciting or enticing people tend not to choose it. A better comparison might be a ‘dumb’ phone and a new television.


Thanks for reading and watching.


Stewart Butterfield


Supported by Greenhaven Road Capital, finding value off the beaten path.

Stewart Butterfield spoke with Guy Raz on the How I Built This podcast about Flickr and Slack.

We’ve highlighted other HIBT episodes; Systrom & Krieger, Jenn Hyman, Ron Shaich, Tony Hsieh, Katrina Lake, Troy Carter, and Yvon Chouinard. Roz has quite a roster.

Butterfield succeeded because he found customers where they were, not where he wanted them to be. In the words of Lady Gaga, “I will continue to become whatever it is [the fans] would like for me to be.” Butterfield’s online game turned into Flickr. Another online game turned into Slack. The first pivot came because the game was too hard.

“We had been working (on this game) for over a year and it was clear how complex this was going to be and we realized we were never going to be able to finish it. We were desperate for something else that we could complete in a shorter amount of time – and that thing ended up being Flickr.”

It was a smart choice with a helping of Google good fortune.

“Around that time Google had bought blogger and they didn’t have a way to host photos online. When someone asked how, they said to use Flickr.”

Tom Brokaw had similar luck, showing up in California for the genesis of a gubernatorial candidate named Ronald Reagan.

Flickr also had a great product. They asked people to become customers and they did. This is something many failed startups failed to do.

After a Newsweek cover (more on this in a bit) and a buyout, then earn-out, from Yahoo (thirty-five million) Butterfield left. He says of Yahoo. “It was horrible at the time but I did develop character.”

Butterfield did hear some helpful stuff. “I learned a lot more than any MBA program…I was involved in things I never would have been involved with otherwise.”

People marvel when Alice Waters explains she never went to culinary school. Instead she traveled, hitchhiked, visited galleries and concerts, and ate at any little restaurant that looked right. As we’re often reminded; school is not our only education.

Butterfield vested, left Yahoo, and noticed something was different.

“Now there was an order of magnitude more people online. In 2002, the majority of people didn’t have internet access or computers at home.”

Let’s try the game again!

It was called Glitch and Butterfield described the bizarre fantastical world as “Dr. Seuss meets Monty Python.” They fundraised. They got customers to say shut up and take my money. But they didn’t get enough. Glitch had “a leaky bucket.”

“We never found the magic formula that would make it work economically. It would have been a fine lifestyle-business, but it was never going to become the type of business that would justify seventeen and a half million dollars of venture capital.”

Andy Weissman reminds founders that when a business pockets venture capital money, they shoulder the venture capital business model. Weissman said, “an investor like me needs to make 10 or 100x on our money, which means we need these companies to be really large businesses for us to return money to our investors…You have to believe it’s a big business. You are comfortable taking big risks, including existential risks around managing that business.”

Butterfield called an all-hands meeting. “It was humiliating. There was a real sense I had failed all these people.” They shut down the game. They coached, counseled, and connected their employees to new jobs.

Then the aha moment arrived. Butterfield doesn’t say if was a mental anvil or inspirational breeze, but the forces behind it were built from years of experience and a deep understanding of working on teams that built software.

“While Glitch wasn’t successful as a business, we were extraordinarily productive. There was this system of communication we developed, we didn’t think of it as a thing, it didn’t have a name, we didn’t talk about it, it was just how we happened to communicate. It was built around the concept of a channel.”

And Slack took off like a rocket ship!

Well, no. Kind of.

“What we imagined was an easy sell was met with cold stares.”

What gives?

“We had been working like this for years and the advantages were obvious, they were so obvious they were hard to articulate. When we tried to convince our friends and other companies they said, ‘Why would we do it that way?’ And, unlike most software you can’t unilaterally decide to use Slack – everyone has to buy in.”

Butterfield and his team needed to find the IDEO style of empathy. Ali Hamed said, “that empathy translates to features and functions that understand the seemly non-pragmatic nuances of a given industry.”

They retooled the product. They got feedback. They empathized with customers. They got out of beta. “Within three weeks of our official launch we sold a million bucks worth of Slack.”

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Butterfield posed for another magazine (Fortune this time) and it was a huge help. The cover and the word-of-mouth spawned a virtuous loop.

“We were growing really quickly, and because of that the press would write about us. Because the press wrote about us, investors were interested. Because investors were interested, we were able to raise all this money. That got us more headlines. It got us more interest from great applicants.”

It’s the Increasing Returns Economy.


Thanks for reading.



Randy Komisar


Supported by Greenhaven Road Capital, finding value off the beaten path.

Randy Komisar, entrepreneur & Kleiner Perkins VC, spoke with Jason Calacanis on the TWIST podcast about the “importance of cultivating luck as a skill & accountability over apology, how VC has changed, the future of the market & the enduring wisdom of investing in talent.” We’ll highlight a few parts of the interview. Ready?

Komisar is another advocate for the talent stack and suggests entrepreneurs be able to build, brag, and bounce back. In an August Marginal Revolution post, Why Does Tech have so Many Political Problems, Tyler Cowen wonders if part of Silicon Valley’s problem is, “1. Most tech leaders aren’t especially personable. Instead, they’re quirky introverts. Or worse.”. Komisar said that a key skill is communicating your idea in a compelling way.

This is one of Elon Musk’s skills. “The marketplace was not going to capitalize two (electric car companies) and Elon is a master at conveying optimism and potential to investors. He was able to bridge the gap on the financing side that others couldn’t get to.”

Josh Wolfe said – ideally – “You need a storyteller and you need an operator.” If they aren’t the same person, they need to be two people who think alike.

Sometimes the storyteller is too good. Some people think Musk is selling more sizzle than steak. Jim Chanos says Tesla doesn’t sell cars so much as hopes and dreams and visions.  But maybe that’s what you have to do. Patrick O’Shaughnessy said to Bethany McLean, “This idea of storytelling in business is amazing because of the power that you can create something from nothing with a great story.”

It’s okay to drink the label? Yes.

In 2009, Komisar wrote Getting to Plan B, “That book often gets interpreted as, if you don’t believe there’s a correlation (between business plans and business success) why do them?”

This is the wrong conclusion, and misses the point. “I need to see a business plan because I need to see how you think. That’s the linga franca of the business.”

Randy Komisar wants to read your writing to follow your thinking.

Stephen King wrote, “Writing is refined thinking.”

Maria Popova said, “Writing is thinking in public.”

Guy Spier said, “The more conscious we are of what we’re doing the better it is, and writing is a great way to be more conscious of yourself.”

David Salem added, “I think that clear writing and clear thinking are synonymous.”

That’s why Komisar wants to read business plans.

Venture capital has changed. It’s gotten more competitive. “What’s going on (in 2018) from an economic perspectives doesn’t seem rational,” Komisar says. Twenty years ago the base level of a fund could return 1-2X and “have some huge hits on top.” Now, “You’re going to make your money only on your black swans.”

Venture capitalists now confront Michael Mauboussin‘s Paradox of Skill. Michael Batnick simplified it as this, “Imagine a team of Lebron James’s playing a team of Lebron James’s.”

Twenty years ago a venture capitalist “didn’t have to be brilliant to make a lot of money.” You just had to be a little better than average because you had great deal flow.

Now the venture capital advantage – if multiple is your metric –  is size. And bigger ain’t better. “I think what you will see is syndicates of angels and smaller venture capitalists start to produce great multiples with smaller numbers.” Calacanis agrees, “That’s definitely where we live, higher multiples, smaller dollar amounts.”

Warren Buffett does too, noting that his early partnership deals (and returns) were some of the best.

The fail fast maxim is a contextual point often taken out of context. Komisar summarized it well, explaining that entrepreneurs need to, “Quickly discover your business.” Most businesses die from indigestion not from malnourishment. “When you’ve got too much capital you’re insulated from market information.”

The business owner needs to find the business’s customers.

Ron Shaich of Panera did just that. Before selling bread bowls, Shaich sold cookies. “We took the Tollhouse recipe right off the bag and I would stand out front and hand out samples. Then we would adjust the recipe based on what I would learn talking to customers.”

Then the ah-ha moment for Panera came, again, when he talked to his customer. He’d be working the counter and a customer would ask to have their baguette sliced.

“You didn’t have to be a Harvard MBA to say, the real thing here is that the baguette is not the end, it’s the platform to sell sandwiches. My whole view of business is that if you really focus on listening and seeing you’ll learn amazing things.”

A few more quotes from Komisar.

“I look for entrepreneurs who are super-optimistic but not delusional.”  Brian Koppelman said there’s a thin line between art and delusion. How do you tell the difference? Koppelman says if you’re smart, rational, and hardworking – “If you want to be a screenwriter read a thousand screenplays and watch a thousand movies and then you will have a frame of reference for the work if you’re honest enough with yourself.” – you’ll end up on the right side.


Entrepreneurs, like labradors, are over-enthusiastic.  “They know where they have exaggerated their numbers or opportunity. I’m not talking about lying. Lying crosses a different line. But they know where they’ve pushed these things.”

But they need that excitement. Bad businesses, said Bethany McLean, “are always a mixture of self-delusion, rationalization, greed in the service of ego – not money, maybe some finality, maybe some outright corruption, maybe even some idealism.”


When Calacanis asks if Komisar prefers resiliency or domain expertise, he says, “Resiliency hands down…It seems like the people who win aren’t always the ones with the best domain expertise or who make the best product but the ones who don’t give up or figure out a way to not fail.”

That’s a good one to end on. thanks for reading.



Bethany McLean


Supported by Greenhaven Road Capital, finding value off the beaten path.

Bethany McLean spoke with Patrick O’Shaughnessy about her career, her writing, her contacts, and her (evolving) skepticism. We’ve highlighted Bethany McLean‘s conversation with Barry Ritholtz too.

Critical dogged empathy. O’Shaughnessy heard that “good investors are a bit like journalists.” Jason Calacanis has heard this too. We’ve talked about the Sizzle (and Steak) of selling, and there’s a lot of people out there telling us now nice it is. Investors and investigators sniff through the hot air. Chris Douvos said that to be an investor, “you have to be a professional skeptic, everyone is a fantastic salesman. You can sit there all day and get pitches from people and every opportunity is as exciting as the last.”

Jim Chanos agrees, “There are thousands of people gainfully employed, making a lot of money, who are there to promote stories…who are always going to tell you why it’s fantastic. There are only a handful of people who are there who are going to say ‘This glass might be half empty rather than half full.'”

You get to talk to smart and interesting people, McLean tells O’Shaughnessy. “I just like to figure things out.” But the critical dogged empathy required to figure things out took time to develop. It was like a muscle. McLean had no cynicism or skepticism is the early days. After a few wrong theories about stock perforce, “and I just don’t like being wrong,” she started to look closer.

She hounded Chanos and Doug Millett. What are you working on?

Enron they said.

But with only a start the end wasn’t clear. McLean had to dig. She had to ask questions and then sit and listen. How?

“To start, you have to really care. If you really care what the person has to tell you that will come through and people with respond to interest.”

Eric Maddox said, “It was important to look at both sides as objectively as I could.” Chris Voss said, “There’s a lot more space between Yes and No that most of us realize.” Maddox and Voss, along with Getting to Yes were all in our Negotiation post. McLean knows this stuff. Do your work ahead of time, she told O’Shaughnessy.

“You need to know what’s knowable because there’s nothing more off putting than having asked for someone’s time only to show that you haven’t done your work.”

There are no real-life movies, though movies will be made about real life. McLean has to dig, exhume, and reconstruct. She’s a financial archeologist.

“For me, writing is an act of finding clarity and it’s an iterative act. You try to write. You realize you don’t understand. You go back and try to figure it out. You try to write again. You realize you still didn’t figure it out. But it’s all a process of finding clarity.”

It’s a difficult process because life is a series of part-of-the-reason explanations.  McLean says that the bad businesses she covers are a mix of self-delusion, rationalization, ego, and idealism. These are the things an investor or investigator needs to understand because some subjects need convincing. “I convinced Microsoft that I didn’t have it in for them.” This takes empathy. “Even if you see that they’re skewed in their point of view why it’s skewed.”

David Ogilvy tried to build empathy and understanding. “I have always tried to sit on the same side the table as my clients, to see problems through their eyes. I buy shares in their company, so that I can think like a member of their family.”

McLean tells stories. Often she tells the counter-story. O’Shaughnessy said, “This idea of storytelling in business is amazing because of the power that you can create something from nothing with a great story.”

Sometimes those stories are buoyed by obfuscation. Mike Pearson, McLean guesses, was so successful because he “spread a veneer of efficient capitalism over it.” Another story  is the home ownership story. It’s the focus of McLean’s latest. This is a great part of the podcast as McLean and O’Shaughnessy discuss the tangledness of life.

Mortgages are forced savings mechanisms. That’s good right? Fannie Mae has an implicit guarantee. Is that right? McLean says, “The irony of the worlds most capitalist economy-in theory – having a government supported housing system is huge. The way in which this has happened is fascinating too because it was sort-of accidental and I love things that have come to seem inevitable but were actually accidental in the way they were structured.”

Accidentally structured could be every story.

So is fracking. What do you need to dig lots of holes? Not shovels but cheap capital.

This podcast felt old and wise. It’s not about crypto. It’s not about machine learning. There’s no new factor for investors or book suggestions. If anything McLean’s study of failure felt peaceful.


Thanks for reading.

Michael Fishman


Supported by Greenhaven Road Capital, finding value off the beaten path.

Michael Fishman is the Assistant GM of the New York Yankees. Fishman majored in Math at Yale, computed insurance risks as an actuary, and won a surfing fantasy sports competition. On the Wharton Moneyball podcast, Fishman said that he wanted to bring an actuary mindset to a basebal field.

“The change I wanted to make was taking the subject matter from insurance to baseball. How could I take what I was good at, math, and combine it with my passion, baseball.”

Like Ted Sarandos, who saw Marvel’s big screen success and tried it at Netflix or Sam Walton who saw what the retailer across the street did, Fishman took something that worked over there and tried it over here. Even David Letterman’s Top Ten list bit came from someplace else.

But new ideas expire and innovation becomes commonplace. Edges erode, and that’s happened quickly in baseball.

“Moneyball, which came out in 2003 was a big factor. Teams started realizing other teams were doing things they weren’t doing and there was a need to incorporate statistical analysis within teams.”

The problem is one that Rishi Ganti talked about with Patrick O’Shaughnessy. Once there is a market – more than one buyer – there are market prices. Billie Beane’s Oakland teams purchased value because they were the only buyer.

David Heinemeier Hansson said that he looks for companies that, “rarely get any PR at all. Most companies that run like us are smart, they duck, they don’t talk about how much money they make. They don’t want to attract any attention.”

The Yankees get a lot of attention, and it’s not as odd as it sounds that they should adopt a Moneyball mindset.

“There are inefficiencies at all levels to take advantage. In a smaller market it’s trying to find cheaper players who are under valued. But those same things still apply to a bigger market club as well. More cheap talent you can get into your system allows you more payroll flexibility.”

In Astroball that payroll flexibility was in the draft. Edges change but the availability of them does not. Baseball players may be on the warning track in front of  Gould’s Right Wall. Maybe the next edge isn’t on the field, it’s off.  “People off the field can have a legitimate impact on the field,” said former Yankees third baseman Chase Headley said.

If that is the next edge, all the stakeholders have to buy-in. Fishman said, “I’m fortunate to be in a situation where analytics is a big part of what we do, and with the belief of all the key people in the organization.” Top-down support and a decentralized command helps. For Brian Koppelman it’s writing the words but letting the actors “make it additive.” Warriors GM Kirk Lacob said, “I always thought our secret sauce was that we have great people and turn them loose and let them do what they’re best at.”

These kind of environments are built on good communication. Headley  said, “It’s a different dynamic being told by somebody who hadn’t played the game before where you need to stand.” Convincing players is a challenge the Astros, Pirates, Athletics, and Yankees have all dealt with.

There’s a salience to the vivid. Fishman said, “You take an example from defensive shifts where some teams started experimenting with it and there was some pushback every time you see a ball get through where a fielder would have been in a normal defense.” Each of the books; Moneyball, Astroball, Big Data Baseball, chronicles the conversations. Often there’s one player whose career gets a boost from the new approach and the other players are slowly convinced.

Fishman and his fellow GMs realize that analytics isn’t a silver bullet.

“Looking through the two lenses (scouting and stats) you want to have many different opinions about a player and try to see if something is being missed.”

They know to be suspicious of simple storiesDan Carlin said, “Any time I hear an argument that’s black and white I can almost automatically assume that it’s wrong. Sometimes reality is black and white but that happens so rarely. The majority of the time it’s complex.”


Thanks for reading.

Sam Walton

Supported by Greenhaven Road Capital, finding value off the beaten path.

An audio post today. You can listen to it on Soundcloud, iTunes, or Overcast.

It’s about Sam Walton’s expansion from Main Street to Wall Street to Every Street. We’ll look at his small bets, the mindset to experiment, and why to bring doughnuts to the tractor trailer drivers. Inspired by Walton’s book, Made in America.


James Aitken


Supported by Greenhaven Road Capital, finding value off the beaten path.

James Aitken spoke with Ted Seides on the Capital Allocators podcast. What I liked most about this episode was Aitken’s approach to interestingness.

We’ve written about that’s interesting moments before. Eric Maddox had his in Iraq. Brian Koppelman had his and it inspired Billions – created using career capital. Haralabob Voulgaris had his when he saw Phil Jackson say something about corner threes.

One of Aitken’s moments was when his group noticed Greeks smuggle the black economy into their GDP calculation. Aitken said it was “unusual” and, “we kind of smelled a rat.”

Aitken points out that boldness doesn’t always follow interestingness. Curiosity does. He tells Seides that his goal investing is to be less wrong.

This was an early lesson for Aitken. At thirty-one he was paired up with a pair of well-read traders. They would talk “…with all these references to psychology and history and economics, and not just Road to Serfdom stuff, or Keynes, but all these other references and historical perspectives that I knew nothing about.”

Aitken started reading more. By 2003 he was with AIG and while he didn’t understand what people were saying when they talked about this subprime insurance thing, “I kept a notebook to write things down that I heard.”

It’s something Aitken still does.  He advises clients who see something weird:

“You write that down in a book and say, ‘Something is changing here, I don’t know what, but equity index and implied volatility is no longer acting the same way it did previously.”

Writing down weird things delineates Aitken’s circle of competence. The best investor’s Aitken works with know theirs too.

“The people who ended up doing the best didn’t try to be sovereign debt heroes, they didn’t try to short all the banks, they didn’t try to be geniuses. They said, ‘We know what’s happening. It’s beyond our circle of competence. We understand the spillovers. But we aren’t going to change our mandate to participate.’ Then along comes an opportunity.”

Those great investors also have great stakeholders. Aitken’s says that great money managers have a long-term orientation and they have the right clients.

“You need the right clients. You cant have clients that ring you up every Friday saying ‘What have you done this week?’ That is just no way to manage money.”

Stakeholders exist beyond the investing realm too. Spouses are stakeholders and Aitken was fortunate to have a good one. When he started his own business “My wonderful wife was so encouraging…That’s what you need, you need that domestic support.” Healthy stakeholders trust you.

The best businesses attract the right stakeholders. Roger Lowenstein wrote about Warren Buffett’s early letters:

“By such words and deeds, Buffett was shaping Berkshire into a very personal vehicle. In effect, he was re-creating it as a public form of the Buffett Partnership. Some of his two thousand or so shareholders were in fact his ex-partners, though most were not. But one purpose of his letters was to attract and knit together a shareholder group who would behave like his partners—in other words, who would stick with him.”

Stakeholders can also be the people who work with you. It’s people who want to be right more than look good. This kind of culture, said Patty McCord, is not about “espresso or lush benefits or sushi lunches, grand parties or nice offices.” It’s about doing difficult puzzles.

These spirited places will argue well. Dying organizations will not. Aitken said, “You and I have encountered places where the founder dominates the conversation, that’s fine, that works well. But all the best fund managers I know instill a culture of collaboration. From the intern to the founder to the CIO, everyone encouraged to speak up if they spot something.”

Charles Koch calls it a “challenge culture.” Sam Hinkie said it’s a “willingness to tolerate counterarguments.” Chris Cole said he has to do this, it’s an existential questions when you’re a long volatility manager.

How do you get people to act this way? Incentives.

Aitken said, “AIG Financial Products was not the culture where you questioned things too intensively. That was most sternly discouraged.” He also mentioned the famous Sinclair quote.


Thanks for reading.