In 1994, the smartest guys in the financial trading and academic world got together to start Long Term Capital. John Meriwether from Liar’s Poker fame assembled a stellar group from Wall Street and academia including Myron Scholes (one of the creators of the Black-Scholes option pricing model) and Robert Merton who together shared the Nobel Prize in Economics in 1997. They raised $1.25b in an instant and that giant sucking sound you heard on Wall Street was LTC hiring the best and brightest minds to its hedge fund. LTC prided itself on hiring PhDs and other brilliant talent to add to the mystique of the group. And the hedge fund performed spectacularly. It used proprietary computer driven models (think sexy algorithms) to find miniscule misprincings in markets and would use leverage and derivatives to exploit those mispricings. At one point in time, $5b of equity was levered up to a $130b of total assets or bets outstanding. While I won’t go into the specifics of the trading model (think high leverage or vacuuming nickels from a train track, it works for awhile but the train will get you one day), they crashed, burned and died in 1998 almost bringing down the global financial markets. The bigger it got, the more risk it had to take on to deliver higher returns. In other words, it is harder to drive significant percantage based returns on a huge capital base. What also set LTC apart was its culture. It was one of incredible hubris and arrogance. Their models were designed by Noble Prize winners and it was unbelievable for them to think that mere mortasl could even understand their models. They didn’t even share their investment trading strategy with their investors.
So what does this have to do with my blog? I was having lunch with a friend recently who was telling me about some of his dealings with Google over the last year. As an ex-Wall Street guy, it struck him that some of the meetings he had with Google were like the ones he had at Long Term Capital years ago. Even when LTC was about to crater, he remembers going to their offices, being sequestered into an off-campus conference room, and not being able to get any information out of them to even help bail them out. In addition, people would show up and leave during the meeting, take notes, and not even introduce themselves. Well, it turns out that his meetings with Google over the last year were pretty similar. While the Google employees were clearly bright and technical, my friend was not sure who the decision maker was and what they actually wanted to do with the company. In addition, he felt pretty uncomfortable showing up to Google and having to sign an NDA on the spot, and then going into a meeting where people would walk in and out, sit on their laptop and take notes, and not even introduce themselves. Hmmm-it really does sound like Long Term Capital. There are other parallels-Google has an appetite for hiring PhDs. is driven by an incredible proprietary algorithm, and is by far the best web company on the street and performing like a rock star. Like LTC, the bigger and bigger Google gets, the harder it will be for them to drive significant percentage based growth. In addition, the culture, since it is one driven by engineers, can also be driven by a NIH or not invented here syndrome. Ultimately, since history always does repeat itself, I hope that Google understands that self-confidence is imperative but hubris and arrogance can kill. Look at Long Term Capital and the chronicles of its short lived performance in a book so aptly titled, When Genius Failed. Hell, Microsoft was the same way in the mid-to-late 90s and as time goes by I hear that they are becoming a bit friendlier to startups and partners. I guess that is what happens when you get your ass whooped by a newcomer. Hopefully, Microsoft hasn’t learned its lesson too late. And I hope that Google remembers its mantra of Do No Evil as they are going to need partners to continue to grow their business and build great product.