The
Economic Structure of the Republic of BooklandEconomics Education in Bookland
Economics Education is required of all candidates for positions as commissioners or moderators.From the fourth grade on, all students in Bookland are required to pass courses in economics.
The first course, Managing Personal Economic Risk, uses as a case study an actual event from a nearby planet.
On this planet, individuals who are uncomfortable with risk but who want to earn greater returns than are available at the local bank entrust their money to funds managers, who entrust the risk portion of their money to "funds of funds", who in turn entrust their money to "venture funds" who in turn entrust their money to "itinerant CFOs" who in turn entrust the money to small enterprises. The point of the whole exercise is to earn a rate of return as high as a passbook deposit at the local bank and then to talk fast so that it seems a little higher. Their effort is helped by a few real venture capitalists like John Doerr, who takes risks on stupid startups run by college kids entering mature markets such as advertiser-driven search. (Doerr actually put money into this ridiculous thing called Google, can you believe it.) Those Sand Hill guys will one day wise up and do things the Boston way, ie by consensus. As we mentioned, the Boston guys sometimes all by themselves almost match what you can get from a passbook savings account.
On this particular rather strange little planet, investing is done as it is in Boston on planet Earth. But unlike Earth, even angel investors do everything by consensus and category. Our case study involves a very small startup that manufactures a line of construction toys under using a resurrected old but valuable brand.
Everything checks out about this young company. Its products are selling, its marketing effort is clicking, it is run very lean by talented and experienced engineering and business people. It is in need of capital. Since it is so small, the leverage available is tremendous. A little capital will go a long way. It's an ideal opportunity for someone who is in a position to invest enough to take the company to the next level, and in fact at the next level growth can probably be financed by bank debt, meaning growth without dilution, growth without having to share your precious inside information with anyone who asks for a 10Q, a veritable potential grand slam.
One might think that the idea of angel investing is all about finding such diamonds in the rough, but on this strange planet the goal is not to generate a whopping good return but rather to do no worse than others in your field. Thus, a well-positioned, well managed company with real products that are really selling is actually at a disadvantage. It should instead put itself into a category where the masses already find themselves investing, and unfortunately "toy manufacturer operating out of a home" is a category that is populated by lots of not-so-well-positioned startups. And of course they all bear the "undercapitalized" stigma. Well, duh! You *want* undercapitalized if you've got a product and a marketing effort that clicks, products selling, and all that. You want to avoid "undercapitalized" companies developing infosec snake oil that are going to have to pay rent for the fancy offices occuppied by their bloated team while they figure out how to FUD the snake oil to fearful IT middle management.
On this planet, individual angel investors think the same way as those in the other food chain - the herds of meat-on-the-hoof fund-of-fund-of-fund-of-mutton-source to which individuals entrust the risk portion of their hard earned savings.
The lesson for our students is that if one is going to set aside some money for risk investing, one must actually make a decision based upon the qualities of the business itself rather than on what other people think of it. After all, we know that the best house to invest in is the one that's been on the market a long time, giving the impression that there's something wrong with it. Losers commonly trust the judgment of the masses over their own judgment.