Review – The Life-Changing Magic Of Tidying Up

The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing

by Marie Kondo, published 2014

This is a work of philosophy under cover of personal organization and household habit. The question at the center of the book is “Why do you own what you own?” Put more bluntly, it is, “Why do you have so much stuff you don’t use and never will?” If those don’t seem like profound questions, maybe you don’t live your life and enjoy your material existence in a thoughtful way.

The book’s weakness, ironically, is in the specific tidying, folding and organizing methods Kondo advocates. Reading on Kindle, I did not find any helpful pictures or diagrams (but thankfully, there is a wealth of videos on YouTube where people have demonstrated her techniques) and I found the text-explanations of how to fold or where to store different things in a closet generally confusing. I believe my confusion will be relieved with some practice and patience in experimenting with different techniques over time. But if you’re hoping to learn the “KonMari Method” for folding, storing and the like, I don’t think this book is the best resource.

Instead, the book’s strength is its principles– always key to the strength of any philosophical work. Kondo suggests a general method for tidying one’s living space– start with your own possessions, then move to shared possessions; begin with clothes, then work through to other easily accumulated items such as books, kitchen and toilet supplies and finally to trinkets and trash; when tidying by category, locate ALL such possessions throughout the home and dump them in a pile on the floor before sorting. Anyone can grasp the principles of this method regardless of their specific circumstances. Her criteria for keeping things (note: this is a positive criteria, NOT a negative criteria for determining what to eliminate) is to hold the object and ask oneself, “Does this spark joy?” It seems ambiguous, emotional… subjective. But that’s the point! It’s a deeply individual approach to tidying. Neither Kondo nor anyone else can tell you what objects bring happiness to your life and which you can do without, you have to sense that on your own.

As a rational person I was alarmed by this at first. It seemed goofy and mystic, maybe not even serious. “Spark joy”, I don’t think in those terms. But I gave it some time and realized it made sense. I started thinking about shirts and sweaters and pants I look for an excuse to wear. I have a pair of corduroys, for example, that almost make me excited for cold weather. And then I have articles that are just taking up space in my dresser and closet, items that I can never seem to find a good opportunity to use them but nonetheless I keep holding on to them because they still fit and they are nice and in good condition. But every sweater I have that I don’t wear and won’t get rid of is another sweater I can’t acquire that I might actually enjoy.

When Kondo pointed out the cost of storing all this useless stuff, I was floored. I would never pay for a “self-storage” unit somewhere, or turn my garage into anything other than a place to put my car. In fact, I regularly shake my head when I peer into neighbor’s open garages as I walk past with my dog seeing them bulging with stacked crap all the way up to the door. What on earth are these people thinking? They’re never going to use this stuff!!

But then I realized that all the items I keep around my home that I have no use for is effectively absorbing part of my rent each month– I am paying to store these items! And what’s worse, as Kondo points out, much of the time these are items I bought in bulk to “save money” but which are in such significant supply that they will last me multiple months if not years. I am effectively floating the manufacturer’s inventory and parking part of it in my home, or thought of another way, I am subsidizing his production by buying several items I don’t really need and won’t ever use with each one I do need. Rather than saving money, I am costing myself– once for buying more than I needed and twice for paying to store it in my home. For me, I’d argue a third time with the emotional cost of being aware of and surrounded by these unused possessions that continually fail to “spark joy.” Just the other day I bought a pack of 12 pens for annotating books as I read. I was unhappy with my previous pens and wanted to try something new. I didn’t need 12 pens, I needed 1 or 2. But I bought 12 for around $10 because I was “saving” money over buying a pack of 3 for $5. The problem is, it turns out I kind of hate these pens and now I have enough to last me a couple years at my current rate of use. Kondo made this so clear to me!

Another startling revelation was the way I’ve shifted some of my own tidying burden to family members. It’s hard to visit my childhood home at times because my parents have a bad case of hoarding. But I’ve had no problem storing my finished or unread books in an unused room of the house I used to occupy when I occasionally stop by. One part of me has been mentally scolding my parents for hoarding and not cleaning up their living space. But another part of me has been dumping off my own clutter on them, completely unaware! I have resolved to go over there and dump a bunch of the stuff that remains.

While I am excited to declutter clothes (and look forward to the opportunity to purchase new articles I might actually enjoy wearing with the newly freed space), hallway closets, linen storage, bathroom and kitchen cupboards and more, one area I struggled with was her suggestion for decluttering one’s library. I love books. Or, rather, I love the idea of reading my books. But Kondo helped me clarify another meaningful point– many of the books I purchase and do not read were meant only to gratify my own ego, ie, “It’d be so great to know more about X.” When I purchase a book and don’t read it for months, I probably won’t read it ever. The inspiration and desire to study that topic has come and gone. I have made the mistake, time and time again, of purchasing far more books than I could ever hope to read and that I will ever be able to sustain an interest in. It’s wasteful.

There are a few books I really do enjoy and which I will read again. There are books I’d like to keep which I may not read again, but which I believe my children will gain a benefit from studying at an appropriate time in their life as I did. You can argue that it’d be better to buy them their own copy at that time, which is true, but this is a limited case in which I am okay holding on to a few titles for them in the meanwhile. But most of the books I own that I haven’t read yet, won’t get read– they’ll remain as costly monuments to an ambition not realized. And many more which I have read and absorbed from them what I can will similarly sit on my shelves unused as a monument to the hope that there is more juice to squeeze. But the pulp is dry at this point. I have made another resolution, which is to keep the few titles I know I will re-read because I’ve re-read in the past, the few titles I want to share with my kids and the few titles I am excited to read in the next month or two at my normal pace of reading. Everything else (read, unread) is getting sold or donated. I want to have a limited library of titles that “spark joy” and feel good to see on my shelf and not a stack of paper that I subconsciously feel a burden to get to as some kind of project.

Marie Kondo’s “Life Changing Magic” invites us to live our lives more consciously and to purchase, use and store with purpose. Any book that helps me to resolve logical contradictions in my own thoughts and actions is valuable to me. I took far more away from this book than I thought I would going into it given that I already have a reputation for being a neat freak!

 

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Getting More Out Of Venture Capital

In “We Have Met The Enemy, And He Is Us” (PDF), the Kauffman Foundation gets radically honest about the world of institutional venture capital investing and their own experiences with the asset class:

Venture capital (VC) has delivered poor returns for more than a decade. VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC. Speculation among industry insiders is that the VC model is broken, despite occasional high-profile successes like Groupon, Zynga, LinkedIn, and Facebook in recent years.

Specifically, they found that:

  • The average VC fund fails to return investor capital after fees.
  • Many VC funds last longer than ten years—up to fifteen years or more. We have eight VC funds in our portfolio that are more than fifteen years old.
  • Investors are afraid to contest GP terms for fear of “rocking the boat” with General Partners who use scarcity and limited access as marketing strategies.
  • The typical GP commits only 1 percent of partner dollars to a new fund while LPs commit 99 percent. These economics insulate GPs from personal income effects of poor fund returns and encourages them to focus on generating short-term, high IRRs by “flipping” companies rather than committing to long-term, scale growth of a startup.

And who is to blame? As hinted at in the title, the authors believe the cause is primarily a fundamental misalignment of incentives and weak governance structures allowed by the LPs:

The most significant misalignment occurs because LPs don’t pay VCs to do what they say they will—generate returns that exceed the public market. Instead, VCs typically are paid a 2 percent management fee on committed capital and a 20 percent profit-sharing structure (known as “2 and 20”). This pays VCs more for raising bigger funds, and in many cases allows them to lock in high levels of fee-based personal income even when the general partner fails to return investor capital.

Their conclusion is utterly damning:

There are not enough strong VC investors with above-market returns to absorb even our limited investment capital.

The Dismal Asset Class

Is the average VC fund manager earning their keep? According to the Kauffman report, “since 1995 it is improbable that a venture fund will deliver better net returns than an investment in the public markets.” The “mandate” for most VCs in terms of investment returns that justify their existence is that they return 3-5% per annum over a typical benchmark like the S&P 500 as a proxy for public financial market returns. But in reality:

Investors are still attracted to the ‘lottery ticket’ potential VC offers, where one lucky ‘hit’ investment like Zynga or Facebook can offer the potential to mitigate the damage done to a portfolio after a decade of poor risk-adjusted returns.

VC is a proxy for gambling and the average fund is consistently not justifying its fees.

3 Ideas For Improving The VC Investing Experience

I took away three ideas for improving the VC investing experience based on the report. I think these three ideas have applicability outside of VC and speak to the need for improved corporate governance in any investment situation:

  1. transparency; eliminate the black box of VC firm economics
  2. incentives; pay for performance, not empire building
  3. accountability; measure fund performance against the “Public Market Equivalent” concept

A venture capitalist considering an investment for his portfolio will demand to know the internal economics of the business he is investing in as a normal part of due diligence. He wants to know this to ensure the business is being operated in a safe and sustainable manner so his investment will be secure. In particular, he puts emphasis on the incentives of managers and other owners of the business as indicated by their ownership stakes and decision-making structure and their compensation agreements. While an LP investor is not technically an investor or owner in the GP that manages the fund, the arrangements and incentives predominating at the management company level WILL have an influence on the way the portfolio is operated. Rather than argue for a right to know, LPs should ask their GPs to defend their right to privacy. If they’re to be business partners and in a relationship of joint risk taking, why shouldn’t their be sufficient trust to share information such as the following?

  • Partner capital contributions (by partner), partnership ownership
  • Partner comp amounts and structure– salary, bonus amounts and structure, and the allocation of carry, management company agreement
  • Quarterly firm financials– balance sheet, income statement, cash flow
  • Full-year firm projected financials, annual budget
  • Partner track records, investment cash flow data for public market equivalent (PME) analysis

Further, LPs should have other value-adds besides the cash they bring to the fund. Often this comes in the form of specific industry or personal experience which could be useful to the GPs in evaluating investments for the portfolio. But active agency in a corporate governance structure is another important value-add, missing in too many firms of all sizes, types and industries. Additional transparency could be achieved by involving LPs in the following:

  • The right to elect LP representatives to fund Advisory Boards
  • Information rights to detailed firm quarterly and annual financials
  • Right to review and approve annual firm budgets

According to the Kauffman report, almost two thirds of VC fund revenues come from management fees, NOT carry on performance generated. This means that most funds are incentivized to maximize assets under management by continually building new funds rather than to maximize performance by making outstanding investments while minimizing losses. Why should VC managers get rich regardless of the performance of their investments? The owner of a wholly-owned business only makes money when his business is profitable. He can’t pay himself a big paycheck forever just because he put a lot of capital at risk.

Instead of the standard “2 and 20” model, a VC could manage under an operating budget and a sliding carry system. Under this system, rather than charging a fixed 2% on all AUM regardless of how much or how little it is (and regardless of how many funds paying 2% have been raised historically), the GP tries to estimate its operating expenses needed to manage various levels of scale in advance, including office, support and vendor expense, travel and reasonable salaried compensation for the investment professionals in the firm. This budgeted expense would be spread across all funds and would likely decrease as a percentage of total AUM over time. To enhance the incentive and reward for strong performance, a sliding carry could be instituted in which the GPs are compensated at higher levels of total profits generated as they achieve increasing levels of outperformance against Public Market Equivalent hurdles. (Of course, this system could also employ hurdles such as returning some minimum multiple of invested capital net of fees before performance carry participation, ie, 1x, 1.1x, etc.) An additional recommendation for aligning incentives from the Kauffman report was constructing the VC fund as an “evergreen” fund:

Evergreen funds are open-ended and therefore not subject to the fixed timeframe of a ten-year fund life or the pressure and distraction of fundraising every four to five years. Without the pressure of regular fundraising, evergreen funds can adopt a longer timeframe, be more patient investors, and focus entirely on cash-on-cash returns, rather than generating IRRs to market and raising the next fund.

The final idea is to utilize the Public Market Equivalent (PME) concept to gauge investment performance, versus an indicator such as Net IRR or Net Multiple. The PME is calculated as a ratio of the value of capital in the strategy to the value of capital in a public market equivalent (such as the S&P 500, Russell 2000 or other comparable index based on risk, market cap, volatility, etc.) For example, if an investment was worth $15M at the end of the fund’s life, but would’ve been worth $10M in the Russell 2000 over the same time period, the PME is 1.5, or a 50% out performance. This is useful because it can reveal relative underperformance even when the VC fund achieves a high IRR or other performance metric but the public markets achieve a growth rate still higher. It is also useful because it can put a loss of capital in perspective when the public markets lose even more. The PME measures investment skill relative to the market environment. For Kauffman, “we have used PME to prioritize our best-performing funds, and to concentrate our investment activity and increase our investment amounts in those partnerships.”

Closing Thoughts

After their grand survey, the Kauffman fund managers have become more skeptical about VC as an asset class:

If they are not top-tier VCs, you are very unlikely to generate top-tier returns… Being a better investor in VC for most LPs will translate into being a much more selective investor.

Kauffman suggests there may be as few as 10 (!) such funds worthy of investment in the entire VC universe.

Part of that selectivity involves choosing to invest only with the most talented managers. Another part of the selectivity is sticking to funds whose total committed capital is not so enormous as to make them unwieldy and unsuited for the initially small, risky ventures they’re supposed to back:

Big VC funds fail to deliver big returns; we earned an investment multiple of two times our invested capital only from venture funds whose commitment size was less than $500 million.

According to a study conducted by Silicon Valley Bank, having a discipline about relatively small size is an important determinant of future investment returns:

  • The majority (51 percent) of funds larger than $250 million fail to return investor capital, after fees;
  • Almost all (93 percent) of large funds fail to return a “venture capital rate of return” of more than twice the invested capital, after fees.
  • Small funds under $250m return more than two times invested capital 34 percent of the time; a rate almost six times greater than the rate for large funds.

Incentives matter, and rather than serving as a failed example of economic and investment theory, the VC industry is efficiently responding to the incentives created by LPs who lack the discipline or data to make informed investment decisions.