Published in the San Diego Union-Tribune, November 21, 2022
by Neil Senturia
The infamous potpourri.
A friend comes to me. The problem is a simple one. He would like to find someone to catch a falling knife for a real estate deal he owns.
It seems that bad news has come calling, and “leverage” is its name. When interest rates dramatically increase and you have a floating-rate loan, or mezzanine debt for your startup, then the problem of servicing the debt payment becomes front and center.
The friend says to me, “What interest rate will be needed for someone to lend me money on my project?” The answer is there is no rate because the solution is not rate, it is that the likelihood of being paid back is extremely slender. Very little equity is left in the project.
There might be predatory lenders who would be thrilled to lend and then foreclose, but that only delays the inevitable. What makes the story interesting to me is that the developer is already very wealthy. He could have opted to reduce risk by increasing equity, but that would dilute the ROI, return on investment. Maximum leverage works great in a rising market but can turn ugly quickly when the dark storm clouds blow in.
For reinforcement of this idea, I turn to the Wall Street Journal where Heather Somerville has written a lengthy article detailing the new weather pattern. Her article says venture capitalists are demanding that companies spend less and improve their margins. Profitability now trumps growth. To get there, you need to fire staff, cut spending, cancel projects and make your money last.
I guess Elon Musk must have read that article. He fired half of the Twitter employees a couple of weeks ago. Mike Volpi, Index Ventures, calls it “the end of the cycle.” It is not going to get better next month.
I gave a talk last month to 100 soon-to-graduate engineers at San Diego State Univesity. They are facing a daunting job market. I suggested they think carefully about risk and “expected value,” concepts on which I spend a lot of time.
Good long-term decisions can be challenging if your current personal environment has no optionality if you have no room to consider a rational risk. All of this argues for living below your means, whether you are a student or a startup. Burn rate can kill you.
I understand that this is not easy. I challenged the students to play the long game, if they can, to leave room to take the opportunity that doesn’t pay as well initially, but can be exponentially more attractive over time.
Finally, a somewhat immodest moment. More than a dozen years ago, I wrote the first “I’m There for You Baby” book. It seems it was mentioned recently by a famous podcaster, and I got an email from someone in London, who tried to buy the book on Amazon, but it is no longer in stock.
I tell him to send me an address, and I will send that book and a couple of others. You never want to miss a chance to empty the garage. We send the books, and then I get back a response that moves me to tears.
“My son Billy contacted you a couple of weeks ago wanting to source your book in the UK. I would like to thank you for this extremely generous gesture. One thing I would like you to know is that Billy is a shy, autistic 14-year-old boy. The email he sent you was the first time he has ever reached out to anyone outside of his immediate circle. I am most grateful to you for making this a positive experience for him.”
This is not a story about a pat on my personal back. This is a story that tells you the impact that care and kindness can make in your personal world. The elections are over, whichever side, it doesn’t matter, because in a couple of weeks the chaos will be ready to start again.
Giving Tuesday is coming up. The money is always nice to give, but an investment of your time and talent — well, as they say, is priceless.
Finally, I am going on an extended fly-fishing trip for a few weeks. The next column will be in mid-December. Stay safe and well.
Rule No. 739:
Don’t panic. The wheel will keep spinning.