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Posts Tagged ‘Decision-Making’

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I ran across this interesting article today from John Hollinger of ESPN.com, where he took his Player Efficiency Rating stat (PER) one step further (PER is Hollinger’s overall rating of a player’s per-minute statistical production).

He came up with a new acronym: VA. It stands for “Value Added.” The idea behind VA is to take the difference b/t a given player’s performance and that of  a “replacement level” talent – perhaps a player that rides the pine and doesn’t see a lot of quality playing time.  So to get VA you multiply that difference by the number of minutes that player played. The result shows how many number of points the player added to his team’s bottom line on the season.

Hollinger says VA is an excellent predictor of this year’s MVP (really a two-man race now b/t Kobe Bryant and Lebron James),  because it allows us to compare players with disparate production and minutes — say, one player who was brilliant in 60 games and another who was merely good but played all 82 — and figure out which performance was more productive.

That’s not all, there’s another acronym Hollinger analyzes, called EWA (Estimated Wins Added). EWA is the same idea as VA, except that the result is expressed in terms of wins instead of points. This is helpful if you’re trying to figure out the impact of, say, removing LeBron from the Cavs or Kobe from the Lakers.

I pointed out in a earlier blog post called Are They Ready For Prime Time? that professional sports organizations have long been using statistical analysis to conduct due diligence on athletes. The athletes that are predicted to have the most upside are the ones that get drafted, make millions of dollars, and go on to have the most successful careers.

In his review of the book Wages of Wins, Malcom Gladwell wrote, “Weighing the relative value of fouls, rebounds, shots taken, turnovers, and the like, they’ve created an algorithm that, they argue, comes closer than any previous statistical measure to capturing the true value of a basketball player. …Looking at the findings that Berri, Schmidt, and Brook present is enough to make one wonder what exactly basketball experts—coaches, managers, sportswriters—know about basketball.”  Well, after reading Hollinger’s article today, I think Gladwell can remove sportswriter from his expert list…

But this VA acronym that Hollinger has coined raises an interesting question. How can we apply VA to the business world? Well, it’s something we debate nearly everyday. Will Apple’s stock turn sour without Steve Jobs running the show? What will happen to News Corp when Peter Chernin steps down in June and is replaced by average talent? Which executive is more valuable to their team? At North, we love this kind of stuff. We’re all number’s geeks at heart.

Oh, I almost forgot. The winner of this year’s NBA Most Valuable Player Award according to Holinger? King James by a landside. As a lifelong Laker fan it pains me to write that, but after looking at his statistical rationale, it’s extremely hard to disagree. Read the full article on predicting the MVP here.

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Entrepreneurs are an interesting bunch. While nearly all of them have an “I can do it myself” attitude, which is crucial to get the ball moving, that same attitude usually ends up preventing the company from scaling. The truth is there are some situations where you simply can’t be the most effective person for the task. Now if you have to lean on others (something you should get comfortable with if you ever want to scale a business where you don’t work 22 hours a day), you should think about the cost/benefit relationship of doing it yourself or having someone else do it for you.

Think about it. Can you be a reference for yourself? How is an investor to trust an entrepreneur who has conducted his or her own due diligence? These are a few examples where you simply CAN’T do it yourself. In fact if you even try, it starts to have an inverse effect. Try telling an investor that you’ve done a background check on yourself and that it came back clean (and please film their response and send it to us if you can…).

Also, when you are looking at which aspects of the capital raising process you need to offload, be realistic about the time factor here. Sending an email to X number of Angel groups or VCs takes about 30 minutes each (to find the site, read about them, then apply), take that number and multiply it by X applications and we’re looking at X hours. At what point does it make sense to pay someone to do this work for you?

240 Investors X 30 minutes = 120 hours. Okay, if you do this yourself that means that you could spend 8 hours a day every working day for three straight weeks, sending (not responding to) emails. Is this a good use of your time?

For investors it’s the same problem. Reading 40 business plans a month for 30 minutes each = 20 hours of reading. Before an investor has even picked up the phone, or a golf club for that matter, they’ve already spent 4 hours a day reading highly subjective business plans.

Most Angel groups perform their own due diligence, which for most groups means handing off the task to a “casual” investor member who then has to take on the responsibility for the entire group and conduct some free form analysis of the venture. Don’t be surprised to hear that most investors arms retract approximately 4 inches into their shoulder sockets when someone is asking for a volunteer to perform due diligence. For the Angels, It’s hard to get enough to do it yourself, not to mention the threat of having to corral your investment buddies in order to perform a thorough analysis of the company, that is, assuming you can get any volunteers to help you at all. For the entrepreneur, due diligence is a distracting, time consuming effort that ultimately takes away from their focus of growing and improving their business. Outsourcing this work may be a way for both parties to get back to doing what it is they want to be doing. A standardized set of criteria for this process would also provide complete transparency, allowing both investors and entrepreneurs to be on the same page when it comes to evaluating the strengths and weaknesses of a business.

Many investors admittedly invest in the management team rather than in the idea, essentially betting on the jockey, not the horse. This makes sense, since the most other parts of a business can be easily changed. But it’s unrealistic to expect even the best management team to bring a genetically flawed plan to market with any kind of success (remember Kwame Brown?). Investors need to be clear on the whole picture; without such insight it becomes betting rather than investing. In fact, a study done by Willamette University’s Rob Wiltbank shows that Angel investing is actually riskier than people think. The study found that 61% of the Angels surveyed had returns greater than the amount they invested, which means that 39% didn’t! That’s not a surprising statistic; investors simply are not taking the necessary steps to provide themselves with all the information available to them.

act_satLooking at the world of college admissions we see a highly standardized method for measuring prospective students in the SAT and ACT tests. These tests show how you can have a straight A student from a small high school who may not score nearly as high as a B student from a top ranked private school. While the standardization of analysis would be powerful, what really matters is if the investors value the standard.


There are no analytics that tell the entrepreneur who is reading their plan, how it has been distributed, and what parts they are spending the most time on (or how much time they are spending reading it in general). This data is simple to capture and may give an entrepreneur some valuable feedback as to whether or not their plan is getting into the hands of people who can help them grow, and how they are receiving it.

Look for opportunities to transform investment review into something that is more attractive. That is to say, as an investor you have the ability to greatly influence the plan and direction of a company. Some simple suggestions or compromises may make the investment much more feasible for you and also help out the team in the long run.

The following excerpt is taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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Professional sports franchises spend thousands of dollars on scouting, background checks, and running draft prospects through a series of mental and physical tests before they decide to invest millions of dollars. General Managers look at everything before risking their pick on an expensive draft pick. This is even truer when it comes to making a first round selection.

kwamemisseddunkTake the story of Kwame Brown. Back in 2001, the Washington Wizards had the honor of drafting #1 in the NBA Draft. With their pick they decided to choose Brown, becoming the first team to ever select a high-school prospect with the first overall pick. While still playing in the league, Brown’s career just never lived up to the hype. When drafted, Brown was 6-11, an imposing 250 pounds, and a gifted athlete. He was strong, had quick feet and a ton of potential. But after Washington selected him #1, many scouts said they questioned whether his small hands would hinder his play. They noticed in pre-draft workouts that Brown was having trouble catching passes and he missed quite a few dunks.

Small hands? Yep, out of all of the upside of this young man, it’s his small hands that wound up being the primary liability of this particular investment. With professional sports, like early stage ventures, you have to look at the entire investment (right down to the little details) before moving forward with a big decision. Sure, some mental and physical attributes can be suppressed or enhanced later on, but when that attribute is fixed, like hand size; you’re stuck with it. Ironically, whose decision was it to draft Brown? Michael Jordan. Yep, MJ was just given the title of President of Basketball of Operations and Brown was his first ever draft pick. So it just goes to show you, you can be the greatest basketball player of all-time and still be a mediocre evaluator of talent…

The National Football League (NFL) has developed a unique system for their 32 franchises to evaluate and score college seniors who may potentially become NFL players. “The Combine”, as it’s known, is a standardized system of physical and mental tests which, along with full medical examinations, gives teams a huge amount of objective and standardized data which they can use to weed out and ultimately select which players could be a potential fit for their locker rooms.

“I think it’s the total picture you get from the combine. The combine is another means of helping teams make good decisions, and the escalating cost of signing first-round draft picks makes the decision-making process all the more crucial. Teams spent a total of $160 million on signing bonuses for last year’s first-round picks. They want to make sure they know what they’re doing.” – Tony Dungy, Head Coach, Indianapolis Colts

peytonmanningryanleafIt also happens to be that Dungy’s former star quarterback Peyton Manning was part of one of the most well known draft debates of all time. Back in the 1998 NFL Draft it was all about who do you take #1, the safe choice with “pro-ready” skills (Manning from the University of Tennessee) or the wild card with all the upside (Ryan Leaf from Washington State). Most analysts agreed that Manning was the more mature player and should be the consensus top choice. Turn’s out they were right and then some. Manning just earned his third NFL MVP award to go along with his Super Bowl ring and Ryan Leaf, who played only 25 games in his career, has become known as one of “the biggest bust in the history of professional sports.”

Of course, each professional team has different wants and requirements, but the implementation of a standardized setting has allowed personnel directors the opportunity to systematically evaluate the upcoming draft class. Because the tests are standardized, the players are able to focus their efforts on performing well in specific areas. Obviously, there is no substitute for on-field performance, but for players coming from less-than-storied programs their performance at the combine can drastically improve their stock in the draft. The transparency of the system is what allows players to improve and provides them with instant feedback at to how they have done compared to other players.

What does this mean for the venture market? Well, consider the fact that in sports standardized tests like the 40-yard dash can be applied to all players. Coaches and scouts have a common benchmark upon which they can look at players from all over the country in a standardized way. What this system can offer is a way for scouts to filter out the over-hyped big school superstar, as well as discover that small school player with remarkable physical ability; an effective standardized measurement of a complex set of attributes. Who said football players aren’t smarter than Venture Capitalists?

Key takeaway; Don’t draft entrepreneurs with small hands? Nope. Before investing your time and money in a new innovative venture, conduct your own up close evaluation and make sure that venture’s strengths significantly outweigh its weaknesses. Wash, rinse, and repeat.

Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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Smart, wealthy, and very successful men and women lose billions of dollars every year investing in new ventures. Why? Recent research shows investors are often investing without first conducting their own thorough due diligence. Just how powerful is the connection between due diligence and investor returns? A recent three-year study of 539 Angel led investments conducted by the Angel Capital Education Foundation and the Kauffman Foundation, found an extraordinary correlation between due diligence and significantly greater returns.
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“Spending time on due diligence is significantly related to better outcomes…investors who spent less than the median 20 hours of due diligence and investors who spent more, shows an overall multiple difference of 5.9X for those with high due diligence compared to only 1.1X for those with low due diligence.”Returns to Angel Investors in Groups, a comprehensive study of 539 Angel led investments. Robert Wiltbank, Ph.D. and Warren Boeker, Ph.D.,11/2007


Those numbers are staggering, not only in terms of the difference thorough due diligence makes, but the fact that the median of the study was only 20 hours, and that people are actually spending less time on due diligence than that! While this seems to support both the “follow the roar” and the “trusted referral” methods for selecting investments, this amount of due diligence is far less than most people would spend researching a major purchase. If you take a step back and think about situations in which an individual is preparing to spend a significant amount of money you see in each situation a unique standardized form of due diligence, and that spending a good deal of time on them is the norm. The goal of these efforts is to reveal any potentially damaging information regarding the item to be purchased as soon as possible. Or as Richard Drake of business law firm Womble Carlyle Sandridge & Rice explains, “a thorough review of what you are buying before it’s yours is the best insurance against any unwanted surprises down the road.” sharksighted


It’s time the early-stage private equity industry takes some notes and follows the models of other industries in which thorough due diligence is the norm (real estate, automotive, and professional sports). In the next few days, we’ll be walking you through each of these industries and illustrate how conducting the proper due diligence leads to increased returns. Each example boils down to the basic, easy to remember motto: cover your ass before you spend your hard-earned cash.


Excerpt taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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From time to time my fiancee (that sounds weird…let’s go with girlfriend) signs us up to attend lectures at the LA Public Library. Some are hits, some are misses. The last lecture we attended was about the LA Taco Truck scene. Right in my wheelhouse. Unfortunately, the speakers put me in a bad food coma (minus the free tacos).

Last night however, she redeemed herself. The speaker was author Jonah Lehrer, who just penned the book How We Decide. While there are some parallels to Malcolm Gladwell’s Blink, Lehrer goes a little deeper into the science (neuroscience to be exact) behind decision making. He talked about the occasions when the rational part of the brain is best in decision making; and then discussed examples of when we should leave reasoning behind and just let our intuition (emotions) guide our behavior. Can’t wait to dig into the book. It’s sure to contain many insightful nuggets for entrepreneurs and investors alike.

BTW – I thought about the most recent time where I decided to leave behind my “rational” thoughts in making a decision. Well, clearly it was when I decided to post this shitty, low-quality, ridiculously blurry camera phone photo onto the blog. My apologies Jonah (on the right)…

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