Would Roaring Kitty Make a Better Fund Manager than Iron Man?
Scale-Up’s take on the WSB/Gamestop mischief and how it relates to VC
News about Reddit* performing Occupy Wall St. II: Short Stuff by pumping the stock of a zombie company with an obsolete business model is now harder to avoid on the Internet than a Kardashian’s cosmetic tips. Sharp observers have called this whole episode dumb. And they’re absolutely right. It most certainly is.
The question I’d like to ponder is why it’s dumb and whether venture capital is really any less dumb than the public markets.
According to some, redditors’ power is not only dumb, but “unnatural, insane, and dangerous.” Big market incumbents’ opposition, however, seems to be as misguided as FlatEarth101.com.
Their objection seems to be based on the fact that markets aren’t doing what they’re supposed to. These incumbents see markets as machines that produce steady returns in the mean and opportunities to fleece rubes on the margins.
The public-equity market is supposed to work this way because middle-aged guys in suits have spent decades, centuries building it to work this way. It’s how they extract value from aggregate gains in productivity, how they skim off the economy’s improved efficiency. It’s a brilliant contrivance.
For them, the dumb part is that the whole system risks being overturned by zero-fee, retail day traders basically overnight. The incumbents’ scam has been based on the logic of collective action: they are a small, concentrated group of people very interested in an activity, which has given them a structural and practical advantage over a dispersed group of people who each have a smaller, vaguer interest in that activity. Their power is simply a matter of pressure. Pounds per square inch, millimeters of mercury, multiples of standard atmospheres.
Their problem is that millions are diluting the power of their thousands. The force exerted on the market is increasing, but the surface area upon which that force is being exerted is expanding even faster. Their pressure and influence is dissipating.
The irony is that it’s not exactly Gamestop’s business model that’s obsolete, but that of the big institutional investors. Memeability is capital, and Citron doesn’t have it.
What’s most certainly not dumb about r/wallstreetbets is the sophistication of many people involved. They understand what they’re doing and can explain the situation with remarkable acuity. WSB’s redditors might be iconoclasts, but they’re not fools. Eleven thousand upvotes is significant. That’s probably more than the average pundit’s paid shill on CNBC or Yahoo!Finance can attract.
Roaring Kitty might not be everybody’s cup of tea, but he’s not blatantly any sillier or more obnoxious or uninformed than, say, Jim Cramer.
Now, let’s compare that with, ohidunno, Robert Downey Jr. Don’t get me wrong. He was great in Chaplin, Natural Born Killers, Home for the Holidays, Wonder Boys, A Scanner Darkly, Zodiac, and that’s all before he went on to become Hollywood’s answer to Elon Musk. As an actor, he’s got world-class chops, and he’s box-office gold. But do you want him behind your VC fund?
Downey started the Footprint Coalition a year and a half ago, and it just launched a rolling venture fund aimed at “real people.” (Our LPs are all cyborgs and fictional anime characters, but we love them no less.) This fund is reportedly seeking upwards of 2000 investors.
Having two thousand investors on a VC fund is insane because: 1) the cost of acquiring so many is prohibitive; 2) having to satisfy and placate them all would be impossible. No one can amass and control a herd of 2000 cats … unless you have Iron Man as the face of the operation.
With Tony Stark endorsing, leading, and championing the fund publicly, you’ll have thousands of eager investors lined up around the block. It’s an investor-acquisition strategy that even big money can’t buy. And which investor is going to balk when, being told after a bad investment, that “Robert personally had really high hopes for that one. Like he said at the Oscars, our benchmark is a higher purpose.”?
While Downey himself seems a little clueless, saying of his roundtable of more qualified advisors, “God I love experts. They’re like Wikipedia with character defects,” and describing his fund as “a little bit more Slamdance than Sundance [and] I kind of dig it,” he’s not running the fund alone. He has hired Jonathan Schulhof and Steve Levin along with some other hired guns to actually run things.
It’s not that the Footprint Coalition lacks informed, smart, qualified people. My point is that those informed, smart, qualified people are not what’s attracting the money. If Schulhof and Levin had started their own fund without Downey, they would be facing the same hard graft and scramble as the rest of us. They have it easier because their investors are giving their money to Sherlock Holmes in good faith. Their fund is more like a collection plate, with people putting money in because they hope for the beneficence of a godlike figure they’ve only seen images of, not a pile of money that specialists are supposed to grow with plenty of hard work and long hours.
So I ask you who are the rubes: the redditors who understand the public-equity game and are deliberately seeking to subvert it, oust the incumbents, and maybe make a buck along the way, or the thousands of investors ready to entrust their money to a charming and hilarious American actor they loved when he played an Australian actor who was playing a black soldier in Tropic Thunder?
Of course, if you’d like to avoid such shenanigans entirely, find yourself some qualified fund managers with deep knowledge, a vast network, valuable experience, and a plan performing beautifully.
*Disclosure: Reddit is one of Scale-Up’s Team investments, and we love it because it’s awesome, and it’s changing the world.