In Willie Wonka & The Chocolate Factory, uber-creative yet pragmatic Willie Wonka manages the development and distribution of exciting new candies. Similarly, successful entrepreneur Howard Lindzon appears to be running a factory of cutting-edge candy for the emerging social web.
Howard’s best known for WallStrip: a witty and funny daily video about trending stocks (hosted by the attractive Lindsay Campbell). In 2007, Howard sold the venture to CBS for $5 million. Currently, Howard is working on what he considers “The Big One.” The white-hot web platform is called StockTwits. It is a Twitter-powered platform on which investors and traders can share information. While the foundational engine Twitter has yet to discover a viable business model, Howard has brought the technology to a niche where instantaneous information is profitable to users (and the well-heeled demographic is attractive to advertisers). Thus, a sound business model is at hand.
I got Howard out of bed early on Saturday morning to watch his life flash before his eyes — from his car wash during high school to his multi-million dollar companies. Lucky for me, Howard doesn’t need much sleep to run his Chocolate Factory …
Damien Hoffman: Howard, how did you initially get your entrepreneurial spirit out into the world?
Howard: I was definitely a late bloomer. I grew up kind of spoiled. My parents left me alone. But my first entrepreneurial experience was cleaning cars in high school. During the summer I charged $60 to $80 bucks to take someone’s car for the day and give it a wash, wax, and clean the interior. My operation wasn’t too sophisticated. I just did it to pay some bills so I could play golf and stay out of my parents’ hair.
That was my first entrepreneurial experience. Then I started selling some Native-American jewelry that became popular in the 70s. I went to Albuquerque, New Mexico, to buy the stuff. Then I’d sell the jewelry up in Toronto. It was like a license to print money. My dad, who is also an entrepreneur, would give me money to buy the jewelry. I would set up shop in my house and sell to all his friends and their kids. It was an insane mark up. [Laughing] Oh well. I had some advantages other kids didn’t have. I was a lucky kid in many ways.
Damien: Did you remain entrepreneurial through college?
Howard: I went to college and just partied. I didn’t do anything. I was just a rotten college student so I ended up going back later to do my grades. College was just my friends and me partying. I lived with my best friends and just did enough to get by.
Damien: So what was your path when you first got out of college?
Howard: The first job I took was in ’87 right before the stock market crash. I didn’t really know anything. My grades weren’t great. I needed to get a job if I wanted to graduate school. My friend’s dad owned a brokerage firm in Toronto. So we worked in the order room. You know, back then in the olden days.
Damien: Before the “Internet” and “World Wide Web”?
Howard: Truly before the internet. There were PCs like 186s. But a broker would walk up to the back office, put a buy order on a green or blue ticket and a sell order on a pink slip. Then he’d put the slip onto a little air driven order train that came into our room. We’d pick up the ticket and enter the order into the computer. The PC sent the order to the floor to get filled. That’s how amazing it was not that long ago in ’87.
I lasted at that job for about three months because the market crashed in October. It was really weird to know nothing about the market other than how to make fun of the brokers. We also knew how bad the brokers were because you could really notice.
When the crash happened the order flow went crazy. I was just doing my job and then over the course of a week the orders started to increase. Then I saw banging on the door during that infamous Friday and Monday when the market went to shit. Brokers were feverishly trying to get in their orders. Thousands of orders piled up in the machine. I was upset that night about having to work late — entering orders until midnight. That was my first real experience with the market: chaos. My friends and I at the brokerage firm got in all kinds of trouble when the downsizing started. Last in, first out [LIFO]. We were all laid off. The brokerage went under. I thought, “Wow! that was pretty cool.”
Damien: What did you do with pink slip in hand?
Howard: It was meant to be. I thought, “Ugh! I don’t want to work. This is brutal!” So I went back to school. That’s when I turned my life around. I realized I wanted to be in control of my own destiny. So that was my last job. Since then I’ve been an entrepreneur.
Damien: Since desperation is the mother of ingenuity, what ingenious business did you launch when you realized you didn’t want a traditional job yet you needed cash?
Howard: Actually, my first deal was probably still my biggest. The business was in consumer products. When I went to Arizona St. and did a masters degree, through a cold call I hooked up with a guy who was making a product called The Gripp: a stretchy squeeze ball he had created. The two of us teamed up. I invested $25,000 and we went on to sell 40 million units. The Gripp is still a product. The company is still in business today.
Howard: The Gripp is in the QVC Hall of Fame. So, my first company after graduate school was a home run. The business made a ton of money. That’s when I started my hedge fund. We had all this money coming in during ’94, ’95, and ’96 when the stock market was very good. So, the orders would come in, we’d get the cash, and then the two of us traded stocks.
I totally remember them all. Semiconductor company PhyCore (PHYC). A lot of healthcare stuff. Also employee benefit companies. The spreads were ridiculous: a bid was $19 and the ask was $19.75. But you could make money.
Damien: Seems like the odds are stocked against you with a 75 cents spread on a 19 dollar stock.
Howard: It was a bull market. So you could make money.
Damien: From what I gather, you seem to have a knack for parlaying the winnings from one venture into new opportunities.
Howard: If you ask me to scrounge around 5 grand, I couldn’t do it. All my money is out there somewhere. I am fully invested in entrepreneurs at every moment.
Damien: So when did you start your hedge fund?
Howard: I’ve had the hedge fund since the summer of ‘98. Slowly the fund has basically become almost entirely my money.
In the beginning when managers start a hedge fund they want to raise as much money as possible. They think, “Oooh. You’re ‘Accredited’? Well my strategy works for you.” However, unless you went to Harvard or worked at a brokerage firm and have some big accounts, anyone who wants to start a hedge fund is going to hit up family and only a small number of accredited investors.
Damien: So you started small, grew, and then downsized?
Howard: No matter how many investors you ultimately get, you must have alignment between the manager and shareholders. In 2001, after my investors had gone up and down with me, no one’s goals aligned with mine. The biggest problem a hedge fund manager faces — especially non-professionals, and I wasn’t a professional, and now we know no one was a professional, but that’s another story — is that your investors’ goals must align with yours. Otherwise you’re going to do stupid stuff to make your numbers because you’re trying to please everybody.
So very recently I decided to kick out everybody who wasn’t aligned with me. Not because they were bugging me, but because they wanted to force me to do stuff I wasn’t willing to do. What really drove me nuts about the business was monthly and quarterly reporting. I don’t think focusing on the short term is in the best interest of investors.
A more important problem is the trust factor. And now trust has completely blown up. The hedge fund industry could have been great, and still may be great one day. But the investors were only concerned with chasing returns and not investing with a great manager who really knew what he was doing — someone you could be with for 10-15 years and it didn’t matter what he did today or tomorrow or six months from now because you were going to invest in this guy for 10 years just like you would a business.
So, now I invest in only one hedge fund because I know these guys aren’t going to steal my money. I also know that over time they’re going to figure out the market. So if I was going to tell someone how to pick a hedge fund, I would say: “One, are they going to run off with your money?” As long as they’re not going to steal, you’re ahead of the game. “Two, if you were to invest in these guys’ business, where will it be in 5 years or longer?” If you think of a hedge fund like a corner store or some other type of business, you’ll be in much better shape.
Damien: VCs use the same framework. Management gets the highest weighting because everyone alleges to have great ideas.
Howard: Exactly. Investing is about the people. If you read Fred Wilson, who is one of the only VC bloggers I read because he is not a money-suited bot, he says in the end it comes down to gut-feel. You do all the math and spreadsheets, but in the end you’re taking a flyer.
Damien: I graduated college at the height of the dot-com bubble and raised capital from VCs, and our business plan projected revenues of $5 million in year one and $52 million by year three, and at the end of our first 12 months in business we generated a sweet $500,000.
Howard: That’s why people matter.
Damien: Inexperience at age 22 matters. [Laughing] So does insight as an investor.
Howard: Fred Wilson called me with Twitter and I took a pass. I said, “This is the dumbest idea I’ve ever seen.” You have to know who you are. I’m never going to be the guy who can analyze spreadsheets and find a company that’s going to do $50 million in sales. And I’m also not the guy who is going to know that zero revenues in year-five will end up being a billion dollar company. I just don’t have those skills. I don’t have the balls or the vision. I can only see as far as “Is management going to steal my money? Are they going to take exorbitant salaries unmonitored and not focus on building a business?” I am all about shareholder value. I invest in guys who care about shareholder value. I make fun of Jason Calacanis because all he cares about is himself. If I was his VC I’d be so pissed because he’s using my money to build his personal brand.
It’s all about shareholder returns. If I see my entrepreneur is focused on making me money, those are the entrepreneurs I want to invest in. You have to make your shareholders money. I’ve been running my hedge fund for 11 years. You can call any of my clients and they all will tell you the same thing: “Howard stresses-out about returning value.” That’s the only legacy I want my entrepreneurs to have. That’s the only legacy I really care about for myself other than my family. I want my investors to say I busted my ass to get them their money back plus something.
Damien: That’s a rare mission these days — especially in the money management business. Most guys just want to bring in the most amount of money possible and get their fees for as long as the market luckily goes in their direction. We’re coming out of an age that’s the exact antithesis of your philosophy.
Howard: That’s why I didn’t do well in that age. I did pretty crappy relative to the bankers who took home $300 million. But they are loathed and now I’m friends with everybody. Right now I could manage a billion dollars. It’s the tortoise and the hare. I’ve been wrong about money management for 10 years, but my thesis has been right: “Can I reach my managers? What’s their strategy? What’s their 10-year plan?” If money managers are focused on the short term and they get behind 30%, they’re going to shut down the fund because the high water mark is gone.
People simply don’t know how to invest. I don’t think you wake up one day and know how to invest. There’s no magic formula. I think you have to lose lots of money and give your money to lots of guys who scare the shit out of you. Then you’ll learn your tolerance level and what a real strategy is.
As an entrepreneur, one of the lessons you learn is that nobody investing money knows what they’re doing. That’s why poker is the most successful and fastest growing open-source project of all-time. A person who is 10-years old with math skills can play behind a computer and beat a CEO who has played poker his entire life. The best entrepreneurs would be good poker players because you are looking out for yourself and understand how to operate in an environment where there are no rules regarding what’s good and bad [insofar as strategy].
Damien: Howard, you’re best known for co-founding WallStrip. Can you tell me about how that project unfolded?
Howard: Ironically, WallStrip was the worst idea I ever had that worked. Although, my pitch at the time was cool: an entertaining three-minute video with a female [Jim] Cramer. The idea was our hostess would know nothing about the stock market, we’d talk about stocks at all-time highs — which was my personal trading strategy — and if you bought our stocks while using money management you’d make money in a bull market. And our picks killed it for a couple years.
Also, the theory was to make WallStrip a positive show. I have a theory I call “Oprah versus Montel”: you can do really well being Montel Williams, but you get really wealthy being Oprah. By focusing on the negative you may get more viewers, but they’re not the type of viewers you want. On the other hand, the Oprah viewers can change your life.
Damien: Do you have a core personal philosophy you tapped to develop that theory?
Howard: Yeah. In my soul I believe that positivity is rewarded. I truly believe in karma. I hang around with positive people who don’t keep score — which limits the people you hang around. For example, when I go out to dinner with people and everyone adds up the bill and I owe $11.22, you’re not going to see me hanging out with that group of people. Life’s too short. There’s no quarterly balance sheet. The balance sheet is over a much longer time frame. This philosophy is not going to make me the richest person in the world, but sometimes the richest people are the cheapest. I see this as one’s inner-gauge, which ultimately becomes that person’s lifestyle.
Twitter is interesting for this very reason. If you're a negative person, you can’t hide that on Twitter for six months. For example, when I blog I can go through a negative phase, but on Twitter if I twit something negative, a few tweets later I’m back to positive again because Twitter is who you are. That’s why the feeds in Twitter and Facebook are so popular: you can’t hide who you are. If you’re a miserable fuck — and I could name five of them but I don’t want to give them the credibility — you’ll have your following but your followers are all miserable fucks too. That’s why the tech guys have been penciled into a corner with the nerds who like to fight all the time. They haven’t been as successful on Twitter because they’re always fighting. On the other hand, the entertainers have taken over Twitter because they are entertainers — they do things that are positive or funny or have something irreverent to say. That appeals to a much broader audience.
Damien: Do you prefer Facebook or Twitter?
Howard: Facebook is just too fake for me. First of all, Facebook is littered with people making mistakes because they think what is funny really isn’t. Second, it’s a big lie because people get to post the pictures they want everyone to see — like during high school when you put stuff on your wall. Everyone does the same thing: they hang what represents who they want to be, not what represents who they truly are.
Damien: You did a cool blog post about how Facebook is the ego and Twitter is the Id.
Howard: Exactly. I am not on Twitter’s recommended list. People who follow me have stuck with me because I share or because I make them laugh. That’s how I live my life. However, on Facebook I have a lot more followers, but I never go there. When someone follows me on Facebook they have a perceived vision of me. If they knew the real me, the one on Twitter, they’d have a fucking heart attack — they’d never invest with me again. [Laughing.]
Facebook has become a toy. Once a service recommends my father-in-law to me, it no longer adds any value in my life.
Damien: About 8 months ago the mother of a friend from high school poked me on Facebook. Since then my Facebook use has come to a screeching halt.
Howard: I don’t want to speculate on the future of Facebook because they’ve already gone much further than I thought they would. I think they are a big business, but they are going to have to shrink to become a successful big business. I don’t know media. Honestly I don’t care about Facebook because it’s fake. There is no way I’m going to get someone’s real personality on Facebook. At least on Twitter if someone connects with me I have a chance of figuring out who they really are.
StockTwits works because the people who use it fucking love stocks. I gotta like people who like stocks. I don’t like penny stocks or people who hide behind the guise that they’re helping people. That’s become our big fight on StockTwits. Penny stocks are stocks too, but I have an inherent distrust of people who can’t find good performing businesses to talk about. Most people, including myself, can’t pick stocks to save their life. So if they’re down in the $1 stocks I look at them as an inherent dummy or their integrity is off. Or they haven’t had a mentor who taught them penny stocks are penny stocks for a reason.
Damien: There is obviously a high demand for penny stocks, so how does StockTwits deal with the choice to shun a large audience?
Howard: It’s the great dilemma in life: who do you want to be? It surfaces a thousand times over for each of us. Do you want to be Oprah or Montel? Who is investing in penny stocks? Fred Wilson? No. Only penny stock people invest in penny stocks. So let’s say I have 2000 Twitter followers of people who buy 100 shares of a $1 stock. As soon as I ask those people for something they’re gonna turn the other way. They’re not real followers. Whereas, if you have one Fred Wilson that’s worth 10,000 followers.
Penny stocks have a right to be public, but I don’t have to welcome them into my community. People get mad, but StockTwits is still a community with figure-heads. The community is going to take on the personality of the people that lead it. We make mistakes, but we are trying to preserve value. Yahoo Finance Message Boards have no value. There is no one leading Yahoo Finance Message Boards. So the whole platform has digressed to Lord of the Flies. You end up with the lowest denominator of people yelling the loudest. If we left StockTwits alone for a week, it would become Yahoo Finance Message Boards.
Our job is to filter at the top of the hose. If you are following 900 people yet only have 30 followers, you’re a spammer. Look, we’re making up rules as we go along and we’re going to make mistakes, but we want the community to be around in five years.
Howard: You just have to shake your head and say, “People are stupid.” I traded them too, but I can’t believe I got out alive. I had some monster losses from not understanding how those things work. Unless the market is moving like crazy, and I’m talking volatile like VIX over 50, those things head to zero. In the end we have chosen to keep them because the market has been focused on financials. If people want to be stupid, we can only warn them. I think if you look over the past two weeks, their popularity has dropped off [now that volatility is drying up]. If you leave those people alone to hold those stocks, they’ll find their way to the stock market grave.
On the other hand, penny stocks are just criminal. They are pushed by scummy people who don’t post their real names. The stock market is pump and dump at every level, but the issue is liquidity. You can get out of an institutionally owned stock. We had two years to get out of the housing market. But when the bid disappears in a penny stock, there is no out.
I don’t want to be a party to that scam. Our community is not going to have that type of criminal behavior. They are welcome to start their own community. And they’ll be successful. We know the numbers, and we could increase our traffic 10-fold if we got hot on penny stocks. But I don’t know any billionaires who run penny stock operations. I know a lot of thousandaires and millionaires, but they won’t create true value and none of their community members will trust each other in the end.
Damien: After WallStrip, how did you know StockTwits was the next big idea as opposed to one of your other numerous investments?
Howard: Great question. I am an investor in Covestor, so I didn’t base my decision solely on a passion for finance. StockTwits was the one dumbed-down enough for me to run. [Co-creator] Soren is a great guy. I had the opportunity to work with Phil Pearlman who loves people and has done an excellent job on the community. The experience sounded fun and was in my passion zone. Also, I wanted to prove something again.
Damien: How was the idea conceived?
Howard: StockTwits was an idea I had in a blog post a couple years ago: Twitter for stocks. Soren was a guy who read my blog. I didn’t know much about Soren. I told him you go develop StockTwits and we’ll split it. He went and developed the platform, so we split it.
Damien: Soren is going to have a great success story.
Howard: Soren made a great opportunity for himself. We have some stuff in the works that proves we’ve built a valuable asset.
Damien: That’s an example of the social leverage you discuss in Chapters 9 and 10 of your new book The WallStrip Edge.
Howard: Right. You can’t put a dollar amount on Soren using social leverage to meet up and start a business with me. That’s why stocks go up: there’s a catalyst nobody truly understands. Everybody thinks they understand, “Oh yeah, I heard about the iPod and the iPhone.” But they don’t understand how viral the [Apple Inc.(AAPL)] app store is, or how much time people are spending there. They don’t truly know why a stock is going up. Stocks go up because smart money finds a catalyst other people haven’t valued properly.
I only buy momentum stocks because then I can be sure someone knows something I don’t. Then I know I’m definitely not the only guy who knows something that nobody else knows. When nobody else knows anything, you have a $2 stock that stays $2. This is the reason buying stocks in a downtrend is stupid. Unless you have endless money. But if you hire a manager with endless money, they may sit in a stock that’s going down 50% because they think they’re right. I don’t care if someone thinks they’re right. If the stock is going down, then nobody else thinks they’re right. I find it more fun to be right when everybody else thinks your right.
Damien: Can you paint a picture of social leverage? How can a non-technical person understand the power of your central focus on social leverage?
Howard: Think of the movie There Will Be Blood. Daniel Day-Lewis’s character had to go through hell to find oil. He had to leave home, he had no life, he was stuck in a hole digging, and he risked his life. Shit, in the social media world you can do your business in the bathroom. That’s social leverage.
Damien: Can you share some of the social leverage businesses in which you’re currently invested?
Howard: I am so invested in social leverage I have a company named Social Leverage. I am also invested in TweetDeck [a Twitter browser], Bit.ly [a link shortener], and Disqus [a blog comment platform]. I also just invested in a company called TicketFly which uses social media to help sell event tickets. I’m invested in Covestor which is eBay for money management. I’m invested in eduFire which is online video education. Honestly, I don’t know all my investments anymore. I can’t keep track of them.
Damien: With all that experience, what advice do you have for aspiring entrepreneurs?
Howard: Let me go back to WallStrip. I knew I would be successful because I knew the competition very well. I grew up reading Forbes and watching CNBC. The only newspaper I would go back to was Investors Business Daily — and that was just data. There was nobody doing Saturday Night Live or engaging financial media. I knew if we could provide entertaining financial media, big companies would pay a ton for the asset. But the most satisfying part was proving the thesis that people wanted entertaining financial media. That was probably the most satisfying deal of my life because we proved our thesis so quickly. And the total market opportunity is so small, but the demographic is very influential. If you can make a guy running a billion dollars fall off his chair laughing, you’ve got something. So, we didn’t have the largest audience, but we had a very influential audience. And that’s all we needed to be successful.
The Game of Risk
The best lesson for an entrepreneur is to completely understand your industry. And that’s very hard. There’s only one Michael Dell and one Bill Gates because not many idiots know their industry and have a viable vision that early. But you can be successful in an industry without being Dell or Gates. The key is to not bite off more than you can chew. You have to accept you’re not going to own the world, but you can own your little niche. Like the game of Risk. If you start in Europe, you’re fucked. You look good owning Europe on a map, but you have to fend off everyone. On the other hand, if you start in Western Australia or Chile, everyone’s fighting on the main land while you’re building up armies preparing to expand.
So, to be successful you have to do something very well and own that niche. Surprise people. And there’s no shortcuts to do that. If your business can be profitable, all the better. The problem with social media is there may not be profitability. I think the niches will be profitable. That’s what we’re trying to prove with StockTwits. Twitter may not ever get profitable, but StockTwits can get profitable very fast. You don’t have to be the next Facebook, you just have to be the next excellent local store in your niche. And your local store can be larger than a physical local store because it’s a global local store.
Damien: To drill down from the global back to the local, I have one more question I know your Twitter followers would love to hear answered: When in the world do you ever sleep??
Howard: I don’t sleep. I did sleep last night, but not well. I talk about it all the time on my blog. It’s just a curse.
Damien: I think it’s a curse of the creative, entrepreneur, worrier, and neurotic.
Howard: Yeah. I did stand up when I was in college and all the students had notepads by their beds. We used to get up and write a note, and that helped us fall asleep. I guess that worked when I was younger. I don’t remember that far back. But with my blackberry, I don’t put it in a drawer or hide it. It’s always on. I’m always on.
Damien: I’ll let you turn off for a while. Howard, thanks for taking the time to do this monster interview with me on a summer Saturday morning.
Howard: Thanks a lot, Damien. I had a lot of fun doing the interview with you.