How Building a Startup and Building A Trading Operation Are Similar

One of the things that is certain, in trading you cannot beat the market.  In angel investing, or in starting a company you cannot pick a unicorn.

I traded my own money and had zero customers.  I was thinking the other day about how similar the trajectory of my trading career was like building a startup.  Similar, not exact.  Most people don’t understand the commodity trading business.  In New York, if one goes into the stock business, they trade other people’s money.  They have customers.  They trade off order flow.  They trade against customers.  They always have an edge.  Chicago trading floors were not like that.

There are a lot of people that don’t think that trading your own money qualifies you for anything when it comes to entrepreneurship and venture capital.   They can’t seem to think out of the box.  You need the right degree, the right pedigree.  But, to tell you the truth, it doesn’t give anyone a better chance of success.  Ivy Leaguers fail just as much.  I have an MBA from ChicagoBooth, but I went to a community college and a service academy too.  Floor trading and VC is about understanding and relating to all kinds of people.

When I went into trading, I knew one person.  I had zero money.  Many of the people I met in trading had family history.  Their fathers had traded and made millions of dollars.  Their fathers could pave the way for them.  They could introduce them to people and create opportunities for them.  When they had a bad day, they could bail them out with a check.  They could give them a leg up in certain markets.  Those kinds of people had less downside risk, and in a lot of cases were able to take more upside risk.  We used to say they had a “PhD”–>Parents have dough.

I made no money my first two and a half years in the business.  I was a runner, then a clerk.  I had to network like crazy to find opportunities.  This is like the “bootstrapping” phase of startup world.  As a runner I made $150/wk no insurance and no taxes taken out.  As a clerk, the most I made was $400/wk.

The guy that I clerked for, Roger Carlsson, was my seed funder.  He seeded me in the business and backed me.  That was the seed, and Series A of my startup.  I gave 50% of my profit to him.  It was worth every penny.  The series B was different.  Roger and I had a great relationship and he helped make sure that when I left him I was well capitalized.

When I went on my own, I bought a seat and put half down in cash.  The seat cost $580,000.  I had to pay a point over prime on the loan over five years.  That payment came before my mortgage, a trip to the grocery store, or going out.  Startup founders can probably think about how many things they have foregone to put money back into their business.

I paid the loan off in two and a half years.  As soon as I paid it off, I lost a ton of money and had to remortgage my seat.  I paid off that loan in six weeks.

Then I started up the hockey stick.  I traded well. I traded bigger. I tried to scale to different markets, most of the time not successfully.  I know failure!  I doubled down by purchasing another seat and keeping ever more capital in my account.  This was my Series C and D round, but it was self funded.

There were all kinds of people on the trading floor.  I was able to learn from people as famous as Leo Melamed, and street smart as Bill Sheperd.  Sheperd is one of the greatest traders, thinkers and mentors you have never heard of.  There are plenty of others.  They aren’t famous like Tudor Jones.  But, the trading floor was a fantastic place to learn how to take risk, think out of the box, examine market niches, strategize, find trends, know when trends stop, learn failure, learn how to size people  up, and maybe most important, learn ethics. The floor was a giant petri dish of entrepreneurship. Some of the smartest people in the world walked on the trading floors of Chicago.  It was an incredible place not unlike certain places in Silicon Valley.

In 1996, I joined with a group of gentleman that thought a lot like I did.   Bill lead the group and was its spark.  We saw the macrobusiness heading in the wrong direction.  Our leadership at the time was totally misguided.  They were running the exchange for the benefit of them and their cronies.  We fought to change it.  We had to constantly politic on the floor and persuade people to see the world as we saw it.  It was bloody.  As Simon Sinek has said, we had to persuade people to buy into the “why” of what we were doing-not the features, advantages or benefits of what we were doing.  It cost me money because certain people wouldn’t trade with me since they felt differently.  Our group successfully took over the board room, and we changed the place.  The company went public, and I cashed out.   That’s the exit phase of the startup.

It was a unicorn, but we didn’t enter into it thinking that.  We thought we had an idea for a great business but didn’t know how large the value could be.  It’s a $19B dollar business today.

The company doesn’t act exactly like I would want it to act today.  But, that’s the price you pay on exit.  Startup founders see the same thing in their companies.  I doubt that PayPal is acting like Max Levchin thought it would act either.

I can empathize with the mentality of the CEO and top employees.  I understand what keeps them up at night.  I understand what they are going through, their highs and lows.  It’s offensive to me when I hear commodity traders were just lucky-or that they don’t know enough, or don’t have the necessities.