Monthly Archives: June 2017

The benefits of illiquidity

Venture capital is a relatively illiquid asset class. In other words, since there isn’t a public market with significant supply and demand which produces real-time asset pricing, it isn’t easy to sell a venture capital investment after you’ve made it.

This illiquidity is correctly viewed as an additional risk which investors earn a risk premium for taking.

However, the same illiquidity also carries an advantage. Specifically, it is a natural opposing force to the human tendency to continually check asset prices and to trade in and out of assets when driven by greed and fear.

Frequent trading behavior is known as active management and studies show that the average active investor underperforms his more passive counterpart who simply buys and holds. This is to be expected because, each time that an active investor trades an asset, they lose the spread between the bid and ask prices of the asset while also incurring brokerage fees. And the average active investor’s returns don’t improve as a result of this frequent trading behavior.

This doesn’t mean that all active investors underperform. Some of them produce higher returns than passive investors. However, in the public markets, these are increasingly computer algorithms with tremendous data processing capabilities and low latency. The average active investor, who is increasingly a processing power-constrained and high latency human, produces lower returns than his passive counterpart.

In other words, the illiquidity of venture capital makes it harder to actively manage a venture capital portfolio. It forces you to buy and hold for much longer periods of time, and that’s a good thing.

The illiquidity of venture capital is also the reason why computer algorithms have yet to displace venture capitalists. Although that day will likely come, the success of a buy and hold strategy is less dependent on sheer processing power and low latency than the success of an active management strategy. Instead, the success of a buy and hold strategy depends on having creative and often contrarian insights. That’s where, for the time being, humans still have an edge.

Vivense’s omni-channel ambitions

Vivense is an omni-channel furniture retailer where we’re investors. Although the company started off as an e-commerce player, it soon recognized that it operates in a product category where a high degree of product differentiaton and high order values demand a complementary offline strategy. Vivense therefore pursued a strategy of opening physical showrooms in order to build the brand and trust necessary to convert its online visitors into customers.

Vivense has so far opened 12 showrooms across Turkey. These include 3 on the European side of Istanbul, 2 on the Asian side of Istanbul, 2 in Izmir, and 1 each in Ankara, Bursa, Adana, Antalya, and Samsun.

In addition, the company is moving into its new 8000 square meter operations center in Inegol, a city with a very strong furniture manufacturing presence which is a 3 hour drive outside of Istanbul. Vivense’s previous operations center covered 900 square meters. The growth in the size of the operations center and the new showroom openings are strong signals of the extent of the company’s ambitions.

I had the opportunity to visit both the new operations center and the Inegol showroom over the Eid holidays, and was very impressed with how far the company has progressed since its original e-commerce only days.

Here’s a Turkish article in Hurriyet, one of Turkey’s leading newspapers, which covers the very exciting developments that are taking place at Vivense.

Physical and cyber wars

Yuval Noah Harari, the author of Homo Sapiens and Homo Deus, recently wrote an insightful post on why it’s increasingly less beneficial for countries to wage physical wars. This is distinct from cyber wars which are becoming more advantageous and hence frequent.

The reasons why physical wars are less advantageous today than in the past is because of their higher costs and lower benefits.

On the cost side, nuclear weapons, other chemicals, and drone technology make it much easier to kill very large numbers of people. And since more and more countries have access to these technologies, the risk of mutually assured large scale destruction lowers the likelihood that any single country uses them. The cost is simply too great. And it’s also increasing.

On the benefit side, economic power is increasingly shifting from the ownership of physical assets to that of knowledge assets. And the latter are much more difficult to physically seize. You can seize an oil field or a gold mine but not a search engine or a social network. As a result, the economic benefits of physical wars are lower than in the past.

The transfer of economic power to the owners of knowledge assets also helps explain the rise of cyber wars which attempt to cripple these knowledge assets.

That said, this analysis needs to be taken with a grain of salt because it assumes rational actors. All it takes for a physical war to erupt is a few, or perhaps even a single irrational actor.

You can read the full post here.

Effort and entropy

I recently read an insightful post by James Clear on entropy.

I remember first coming across the concept of entropy in physics class back in High school. In that context, entropy is a measure of the disorder or randomness in the movement of the atoms and molecules in a thermodynamic system. And in any closed system, entropy increases over time.

What is insightful about the post is that it takes the concept of entropy as described in physics and applies it to our daily lives. Specifically, the post points out that, left to its own devices, each area of our lives also becomes more disorderly. Our health declines. Our personal relationships wilt. And our workplace teams disintegrate.

Fortunately, we can reverse entropy by exerting effort. We can keep our mind and body sharp by reading and exercising. We can retain the relationships we value by communicating and showing care. And we can achieve progress at work by defining clear targets, working towards these targets, and motivating our colleagues to do the same.

In other words, we can selectively choose the areas of our life where we put in the effort necessary to locally reverse entropy and create more order for a period of time.

Seen in this light, effort is a good thing. This in contrast to its treatment in economics. Economics was one of my majors back in college and whenever our economics professor would model an individual’s utility function, there was a cost assigned to exerting effort.

As the concept of entropy shows, reality is more nuanced. Not all effort is a cost.

In fact, our lives consist of applying effort to the areas we value in order to locally reverse entropy for a specific duration of time.


Today is the second day of Eid, the 3 day holiday at the end of Ramadan.

In previous years, my wife and I would bridge the holiday with the weekends before and/or after it to take a week long trip outside of Turkey.

This year, we have a 2.5 month old son new to our family. Since he’s not at an age when he can travel a long distance, we’re spending this Eid in Istanbul and Bursa, a city which is a 2 hour drive from Istanbul.

Although these aren’t hip international destinations, when you have a son, they bring a whole new level of happiness.

Eid Mubarak.

Personal motivation

Draymond Green of the Golden State Warriors was drafted in the second round of the 2012 NBA draft, as the 35th pick. He is now the heart of the team that has won the NBA championship for 2 of the past 3 years.

Draymond’s teammates are an important contributor to his success. The opportunity to play with these teammates is partially driven by Draymond’s choices and partially driven by the choices of the Warriors management which brought these players together. So part of Draymond’s success is because of external factors.

But the internal factor of personal motivation also helps. Here is Draymond reciting the names of each of the 34 players that were drafted before him.

Building tech businesses in the Middle East

Souq, Namshi, and Careem are 3 of the most successful tech startups in the Middle East.

Horizontal e-commerce business Souq was recently acquired by Amazon for $650M, 51% of fashion e-commerce business Namshi was acquired for $151M by Mohamed Alabbar’s Emaar Malls, and car hailing business Careem is valued at over $1B.

Each of these companies is proof that large tech businesses can be built in the Middle East.

Here’s an interview hosted by Wamda Capital‘s Fadi Ghandour featuring the CEO’s of these impressive companies, Ronaldo Mouchawar of Souq, Faraz Khalid of Namshi, and Mudassir Sheikha of Careem.

Term sheet making and taking

In venture capital, sometimes you have the luxury of being a term sheet maker. In other words, you get to have a strong say on the terms at which you’re investing in a company.

The conditions under which this is more likely to occur are when there is limited competition for the deal, you have a unique ability to add value to the company which is recognized by the founder, you’re investing a relatively large check size, and, better yet, a combination of multiple of these conditions.

But often, these conditions aren’t present. There are multiple bidders at the table, each of these bidders is in a position to add value to the company or at least this is what’s perceived by the founder, and your investment amount is relatively small.

When this is the case, you often have to take the term sheet that is put forth by the company. In other words, the company dictates most of the terms.

While this is suboptimal from an investor perspective, not doing these deals would mean missing out on some great companies. In fact, some of the conditions which produce an environment where you need to accept being a term sheet taker are the direct result of the quality of the company. For example, higher quality companies attract more bidders to the table and this gives the companies a stronger say on the investment terms.

When this is the case, if you really want to be part of the company, you have to take the term sheet on the table.

Rinse’s Series B round

Rinse is a tech-enabled laundry and dry cleaning managed marketplace where we’re investors. The company recently announced the closing of its $14M Series B round of funding led by Partech Ventures.

Now that Rinse has solidified its playbook for expanding into geographies and bringing these geographies to contribution margin profitability, it will be using the new funding to apply the same playbook to grow to 10 new US cities. Rinse is currently operational in San Francisco, Los Angeles, and Washington DC, and among the 10 new cities that it will expand to are New York, Chicago, and Boston.

We commend the Rinse team for their decision to achieve operational excellence with their existing model before rolling it out to new cities. This requires patience and this patience eventually pays off.

We also thank Partech and Rinse’s existing investors for continuing to support the company on its exciting journey.

Internalizing an outcome

I remember reading that visualizing what an outcome looks like makes you more likely to reach that outcome. For example, visualizing yourself after you’ve built a successful company increases the odds that you build a successful company.

The reasoning behind this line of thought is that visualizing an outcome places in motion the subconscious changes in your actions which are necessary to achieve that outcome.

The problem was that, after trying the approach on some small goals, I noticed that it doesn’t work for me. So I tried a different approach. Rather than visualize what the outcome looks like, I decided to write about it. My reasoning was that the general practice of internalizing an outcome might be right while the specific medium which I was using to internalize the outcome might be wrong for me.

Sure enough, when I began to write down what specific outcomes would look like, I began to achieve them much more readily. It turns out that I think through writing rather than images. Given the fun I have writing this blog, this isn’t surprising.

So if there’s an outcome you seek to achieve, it helps to internalize the circumstances of the outcome through whatever medium works for you. This could be by writing about it, visualizing it, recording yourself talking about it, or another medium specific to you.