Can Crowdsourcing & Open Sourcing Save Sailboat Racing?

Those of you who know me know I like to race sailboats, but I’m not a “one design” kind of guy (where absolutely identical boats with identical sails & identical crew weights race together) because I don’t get to use any ingenuity, creativity or technology.  The problem is, outside one-design racing, yacht racing has failed.  I’m also a VC and love to figure out how new technologies can help solve complex problems. So here goes…

“Development-class” yacht racing holds great conceptual appeal for owners who want to tweak their own boats, yet these formerly large race boat populations have collapsed due to increasingly-rapid failure of rating rules.  (i.e. handicap systems where similar but non-identical boats race together.)  Over the past 80 years, each rule has lasted half as long as its predecessor – usually due to slow and / or dangerous boats, unmanageable costs and sometimes boats that are hopelessly uncompetitive even before they hit the water.

Inception: Rule: Duration
1930:  CCA/RORC:   40 years
1970:  IOR:  20 years
1990:  IMS (VPP):  10 years
2000: IRC/ORC (VPP):  5 years
HPR:  ??

As a result, development-class boat numbers have collapsed worldwide from Cowes Week to the Giraglia Cup or Key West Race Week, while there is a boom in One Design fleets.  (Key West now offers only one-design and PHRF)

What happened here?  (Moore’s Law backwards.)

This disaster is is the opposite of Moore’s Law of semiconductors where electronics performance doubles approximately every 18 months creating huge new markets, so the result should be no surprise.

The CCA and RORC racing rules were established in the 1930s and produced excellent racing & great boats through the 1960s.   However it failed to evolve to new high-performance materials such as fiberglass hulls, aluminum masts and dacron sails. (40 years.)

Classic IOR typeforming disfunction

The International Offshore Rule (IOR) was therefore introduced in 1970 and produced heavy and slow boats (how fun is that?) until Sparkman & Stephens figured out how to game the rule leading to “dangerously unmanageable boats” (S&S own words) downwind due to the exaggerated mid-boat beam and pinched-in sterns the rule favored.  IOR was modified numerous times resulting in boats becoming worthless in one year giving IOR its infamous nickname:  “Invest Or Retire.”   IOR was all but dead by 1990.  (20 years)

Merlin Surfing At 25 Knots

Meanwhile the Wizard of Santa Cruz (Bill Lee) and others were building planing “ultralights” like Merlin in the late 1970s and obliterating distance records like the Transpac by days.   As Bill Lee famously said, “fast is fun” but this fun would have to wait more than a decade because worldwide racing remained dominated by old-fashioned “leadmine” oriented rules.

IOR was replaced in the mid 1990s by International Measurement System (IMS), the first “black box” computer velocity-prediction program (VPP) rule where a secret (and evolving!) mathematical formula determined your rating.  Designers guessed at the optima and this produced some excellent all-around boats until Farr + Beneteau figured out the combination of high-freeboard + light keels were the way to game this design resulting in the popular Beneteau First 40.7 aptly nicknamed the Beachball.  Subsequently designers Botin-Carkeek extended that trend by ballast out of the keel and putting it in the bilge (reducing stability / safety and increasing weight) producing winning but slower and less safe boats.  That was the beginning of the end of IMS.   (10 years)

Beneteau 40.7 “Beachball”

Similarly secret VPP-based rules named IRC and ORC (and the failed ORR) replaced IMS in 2008.  These fixed some aspects of IMS producing both fast and fun boats, however the opacity of the rule resulted in limited adoption.  Anyone who purchased an IRC boat before Juan K. figured out that hard chines & twin rudders are the way to game this rule, had a suddenly worthless boat.  No surprise IRC is nearly moribund outside the UK.

Less than five years after IRC was founded, people realized these opaque rules are conceptual failures.   The optimistically named High Performance Rule (HPR – based on the successful TransPac 52 design principles) is a  far better-in-principle rule with published and calculable specs. but few are biting perhaps for a combination of expensive exotic-material & uncompromising pure-race boats only (i.e. no interiors) plus “rule fatigue.”

The exception is the evergreen Performance Handicapping Racing Fleet (PHRF – 1976) rule which allows handicapping across diverse fleets, as determined by the experience (and sometimes politics) of the local yacht racing authorities (YRA).  However, because of variabilities in locally prevailing winds and depths, PHRF ratings are local only.   (e.g. Los Angeles will not let you race with a San Francisco PHRF rating & vice versa.)  So unfortunately, PHRF does not scale.

With this history of declining adoption and litter of worthless boats, it is no surprise that new boat growth is in one-design classes from J/Boats, Melges, Open Sailing and others.

Yet there remains an undeniably exciting aspect of development-class racing where owners, crews, designers and builders participate in the development and evolution of their yachts.

Can crowdsourcing help yacht racing?

The roots of all these failures are that they are defined by a handful of mostly wise old guys at influential but cozy yacht clubs like the RORC or CCA who decide what is good for those of us who actually race.  To be fair, the CCA and RORC (and others) were instrumental in establishing the concept of rating rules and safety regs. but we have “been there, done that” too many times now.

So the question is how to define a new box rule with unprecedented input from owners, sailors and race managers?   I suggest crowd-sourcing + expert guidance (to ensure things don’t get too dangerous through either extreme designs or construction)  is the the only way.    There is precedent!  One crowd-sourced design / build has already occurred:  Sailing-Anarchy’s forums defining of the “Anarchy 30” in 2002 became the Flying Tiger 10 meter boat with Bob Perry’s experienced design work.  Over 100 have been built.

Online tools such as Poll Daddy can be used to determine preferences.  Community participation levels can result in higher “ranking” in inputs.  Participants can vote for “experts.”

So where to start?

I suggest a simple box-rule (e.g. boats must fit inside a dimensioned “box” that defines maximum length, beam, draft & air-draft) with several defined lengths that race in Level Classes (8 meters, 10, 12, 15, and 18 meters) with Cruiser, Cruiser-Racer (CR), Sport, and Grand-Prix divisions (permitting less or more use of exotic materials & professional crew) that allows participation by various price & performance points.  Safety and build-standards are the size-applicable CE / ISO 12215 standards to ensure boats are stable, safe and strong.

Popular features such as non-overlapping headsails (as demonstrated by the wildly successful Farr 40) and bowsprits (vs. conventional poles) reduce crew size and expense.  Construction material limits and annual sail limits help manage costs and are adjusted upwards as one evolves from Cruiser-Racer (CR) to Sport to Grand Prix levels.

I call this the Simple Fast Rule or SFR©.   Conceptually it looks like this.

Boat	L.O.A.	Safety / CE	Cruiser	C / R	Sport	Grand Prix
SFR 26	7.9M	B4/C5/D6		X	X
SFR 33	9.90M	A8/B8/C8/D10	X	X	X
SFR 40	11.90M	A12/B12/C12	X	X	X	X
SFR 45	13M	A12/B12/C12	X	X	X	X
SFR 50	14.90M	A12/B12/C14	X	X	X	X

In more detail here.

The remaining question is who’s up for the challenge?

Exploding Termsheets: A Bridge Too Far

Last night I posted a presentation on VC term sheets (The Good, The Bad & The Ugly) that I put together for Blue Startups Hawaii (an accelerator for which I am a mentor) on Slideshare.  I didn’t think much about it beyond “might as well post it in case anyone else is interested?”

This morning I woke up to an email from Slideshare noting the presentation was “being talked about on Linkedln more than anything else on SlideShare right now.”   “Cool!” I thought – but I guess I have a bunch of entrepreneur & VC pals on LinkedIn so maybe not too surprising” and went back to work.

Then at 4:04PM (PDT) I got another email from Slideshare noting the preso. “is being talked about on Facebook more than anything else on SlideShare right now.”   Seriously?  On Facebook?  So I checked and despite the fact that I have far fewer FB friends than LinkedIn (I’m a pretty boring guy) and FB isn’t usually a hotbed of business chatter, the humble VC Termsheet preso. handily beat out the Queen’s 60th Coronation Celebration and America’s Cup pix.

So there is clearly a vacuum of hard information on VC term sheets (& bridge notes) despite this being where the rubber meets the road on every deal.  There were nearly 4,000 VC equity investments last year in the US according to the NVCA – adding in bridges & and angel deals probably more than doubles that number.

SO WHAT ELSE IS OUT THERE?

The answer is pretty much zip except (a.) the NVCA model docs., a few term sheet generators from venture law firms which don’t help unless you already know what you want and (b.) Brad Feld & Jason Mandelson’s excellent book Venture Deals, Be Smarter Than Your Lawyer & VC.   (I highly recommend this book to all entrepreneurs who are serious about their ventures.)   There is also a chapter in Jeff Bussgang’s Mastering The VC Game (also great, and the only book that actually captures what VCs really do) but it’s somewhat limited by the nature of the book.

A BRIDGE TOO FAR…

OK, while we are on the topic, I have a beef with a fad in the bridge note department:  valuation caps which are investor-friendly (at the expense of entrepreneurs) and worse, present what is known as a “perverse incentive” to entrepreneurs which is less fun that it sounds for all involved.

For years, bridge notes with discounts to a future priced equity round were the mechanism which adjusted early investors pricing risk.   Entrepreneurs don’t know what milestones they will hit at these early stages, but burn rate usually gives a good proxy as to how long the cash will last.   Assume a bridge note discount of 30% and a six month runway.   That is a 60% annualized IRR to the priced round if the round comes in on the last (6th) month.  Higher if the round comes in sooner if the company beats its target milestones.   A 60% IRR!   Sure the company might bust but, for comparison sake, our early-stage fund Startup Capital is generating a 16% IRR which is above top quartile performance.

Now let’s look at a real (and painful) case with a capped bridge.   Company had accepted a $750K bridge with a 20% discount and a $2M cap. as pressed by angel investors.  The entrepreneurs blew past their milestones in 90 days with 7 figures in contracts achieving not only revenue, but profitability and more to come.   Let’s assume a Series A pre-money in such an instance would be around $15M with probably $3-5M invested.  (VCs get 20 – 28%) BUT in this case,  the note holders own 50% of the company with the cap + 20% discount.  The VCs need 20-30%, the entrepreneurs need adequate skin in the game (call it 20%) plus a 15% option pool for future employees.   The math simply does not work.

So to the VCs (a.) walk “because this deal has too much hair on it” (b.) try to negotiate down the (numerous) angel investors who were earlier congratulating themselves on the “steal of a deal” (right) they got or (c.) wash out the angels by taking half of the company in the round for $2M then issuing new stock to the entrepreneurs and future employees.   Clearly none are optimal and the company is hobbled in getting the financing it has earned and needs.

The alterntive is a cap. that is meaninglessly high to all involved so never comes into play – but why bother?

So, at the earliest stages, capped prices are either dysfunctional or meaningless because no one can forward-price the trajectory of a pre-seed startup.   The answer is don’t cap it – trust that the market will properly price the deal at the Series A, and accept a discount that will reasonably price your risk.

Turkey: Twitter Powers The First Unrevolution

Turkish citizens are staging an Unrevolution powered by Twitter.  It is not a revolution because the Turks clearly love their democracy and simply want their Prime Minister to hold true to his own words and retire at the end of his final term.

In the absence of press (Prime Minister Erdogan’s policies have led to the imprisoning more journalists than any other nation in order to repress his political opponents) Turkish citizens have turned to social media to show their increasingly power-hungry P.M., that  his attempts to dictate policy by changing Turkey’s Constitution are unwelcome.  Meanwhile, during the peak of the protests, CNNTurk laughably broadcast a penguin documentary no doubt out of fears of Turkey’s powerful censors.

Mr. Erdogan began his political career as a radical Islamist whose political parties were banned from politics.  Subsequently, he became more secular in order to enter politics and was re-elected twice as P.M. by developing effective economic policies that helped Turkey become of of the world’s fastest growing economies.  However Mr. Erdogan has recently tilted back to his ideological roots and become increasingly dictatorial, whether by limiting alcohol sales or destroying historic parks.

Turkish citizens have now recognized that Mr. Erdogan is following Russian Prime Minister Vladimir Putin’s steps to consolidate power by planning to get around term limits by amending the Constitution.  This will consolidate the roles of President and Prime Minister to increase direct policy making powers, effectively muting Parliament.   Some have even said Mr. Erdgogan wants to become the Sultan of Turkey.

The Turks want none of this, and are using Twitter (increasingly via security software out of fear of authorities) to coordinate protests and communicate messages that the press are afraid to.   To this, the tone-deaf Mr. Erdogan stated “the thing that is called social media is the biggest trouble for society right now.”   Yet clearly the Turks do not want a revolution – they simply want Democracy to work according to the Constitution and are communicating this by demonstrating across party lines, ages (grandmas bang pots nightly in the ghettos), and even across age-old football (soccer) rivalries.

Unlike repressive governments in Libya, Egypt or Syria, Turkey is a high functioning Democracy and there is no discussion of throwing out the government.  This is an Unrevolution where citizens are simply signaling the Prime Minister not to attempt to castrate their proud Democracy.

If social media can power a pro-active Unrevolution that actually stabilizes Turkey’s government, then technology and democracy have taken a powerful and peaceful step together to keep Power With The People.  Listen up, Mr. Erdogan, the writing is not just on the wall.