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April 17, 2008

Risk & Reward (Technology Entrepreneurship vs. Hedge fund management)

Filed under: Uncategorized — labordaytheses @ 8:11 am

The below is the text of a comment reply I posted over at The Big Picture.  I wanted to keep a copy for reference as it relates to a topic I’ve been giving a lot of thought recently, so I’m  pasting it below…

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BR: Plenty of rewards have flowed to entrepreneurs: Steve Jobs, the Google boys, the Facebook kid, etc.

Not in proportion to relative value created or personal risk taken.

I’m a huge fan of yours, Barry, but this comparison is way off base. Rewards for technology entrepreneurs are demonstrably lower than the rewards being raked in by hedgies, the competition is greater, and the personal risks are an order of magnitude larger.

I think it’s this last item which really bugs most of us. Reward is supposed to be proportional to risk. If hedge fund managers were genuinely at risk in proportion to their rewards, I doubt many here would begrudge them their paydays.

Contrast their downside, however, with the downside for technology entrepreneurs. An example from just this week: a very well known mobile technology expert had to fold his startup this year because he just wasn’t able to get traction. He blogged about the personal consequences:

…I’m *thousands* of dollars in debt to my family and friends, maxed out on every credit card (all of which are in collections), on my last chance for my apartment (if I bounce one more check…), had my car repossessed *twice*, electricity turned off, cellphones switched off, landline canceled outright, and on more than one occasion (this weekend in particular) eaten little more than buttered macaroni as I waited for an overdue PayPal deposit to arrive…

And this wasn’t some random schmuck – Russell is very well known and respected in the industry. What’s more, even though he failed, he has in the process created a product of demonstrable value (he has users, just not enough to sustain the business.) How many failed hedge fund managers can say that?

Even the mega-successful tech entrepreneurs (Google/Facebook/etc.) have most or all of their personal net worth tied up in their endeavors. If they face-plant and destroy their investors’ value, most of their net worth will go with it. Until hedge fund managers can say the same, the comparison is inappropriate.

BTW, can you tell me how you would construct an economy that somehow prevents “the greatest rewards flow to traders and not entrepreneurs?” I can’t figure that out . . .

Sure you can. It would arguably be socialist, of course, but socialism appears to be quite fashionable on Wall Street these days…

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