“Smart Money” Explained

Thanks to the fact that Mikey Arrington is currently hiding from a German with bad saliva, TechCrunch readers are blessed to have the inane and useless Sarah Lacy publishing her drivel on TechCrunch.

Of course, I don’t feel sorry for them. Even Time has named TechCrunch one of the most overrated blogs of 2009 and wrote, “Stick a fork in this one — it’s done.”

Anyone still reading TechCrunch deserves what they get and it’s only natural that Lacy write for TechCrunch while Arrington studies Brazilian Jiu-Jitsu and grows some balls. An increasingly superficial blog deserves a superficial star writer and while Lacy is clearly a bit slow, I have high hopes that she can do for TechCrunch what she did for SXSW.

In her first TechCrunch masterpiece, Lacy took almost 1,000 words to explain why VCs are increasingly looking abroad for opportunity. And why she’s following them:

Ten years after following the money brought me to Silicon Valley, increasingly following the smart money is taking me halfway around the world.

Frankly, I’m inherently skeptical of women who “follow the money” but I’ll give Lacy the benefit of the doubt and assume that isn’t looking for some fun on the side with Steward Alsop.

Her point that the rest of the world will be spokes in Silicon Valley’s hub of innovation as the smart money goes abroad is a flawed one for a simple reason.

There is no smart VC money.

From big bets on Web 2.0 bullshit to big bets on cleantech voodoo science, it’s hard to see “smart money” anywhere in Silicon Valley. The VC industry’s results speak for themselves.

There’s a lot of confusion about the term “smart money” and what it really is so I thought I’d take some time out from working on automated trading systems to explain.

If you’re a successful VC (oxymoron), you’re not smart money. If you’re a successful equities trader, you’re not smart money. If you’re a successful real estate investor, you’re not smart money.

Opportunists are smart money.

The reason is simple: no single “asset class” or “industry” consistently provides the maximum available opportunity to profit at any given time.

To maximize your opportunity to profit you have to be opportunistic. That’s exactly what smart money is.

From inflating asset bubbles while setting up their eventual bursting to taking advantage of vulnerable local markets to smuggling cigarettes, smart money takes a holistic approach to profit maximization.

Venture capital? That’s a hit and miss game that has historically only really worked well for a relatively small number of firms during a few boom periods. Equities markets? As a trader I can’t deny that there’s plenty of opportunity (especially with an intraday long-short strategy in today’s trader’s market) but there’s a whole lot of opportunity beyond equities. Real estate? Quite a few people have made a lot of money in real estate but far more have lost money. Even The Donald has his bankruptcies.

The point is that if you’re tied to any one particular asset class or activity, you’re almost always inherently limited by forces that you can’t control and that you can’t overcome.

Smart money, on the other hand, is dynamic and moves where the profit potential goes – where economic forces are advantageous or can be overcome with minimal friction. It doesn’t care about ideology. It doesn’t care about “innovation.” It doesn’t even care about legality. It knows nothing other than ruthless and efficient profit maximization.

Back to Lacy. Her “smart money” VCs are apparently all boarding jets looking for the next big thing overseas. Yet if you haven’t been stuck in the bubble called Silicon Valley, you know that the globalization plane left two decades ago when the fall of Communism ushered in an era of economic liberalization. New markets were opened and new opportunities created by artificial imbalances between those markets (thanks, of course, to clueless government).

While American VCs were busy investing tens of millions in startups like Pets.com, Webvan and Flooz, citizens and foreigners alike were creating vast amounts of wealth (legally and illegally) in international markets from Russia to the Emirates, Angola to China.

Sure, a preppy-boy VC wearing Old Navy khakis wasn’t going to invest in a factory in China and wasn’t going to get involved in the weapons trade in the Congo but the point is that when it comes to money, those represented better opportunities and there was plenty of smart money that exploited them.

Since Lacy can’t provide perspective, I will: on a daily basis, trillions of dollars circulate throughout the global financial system regardless of the publicly-visible health of the global economy. The amount attributable to VCs is less than a rounding error on Tim Geithner’s tax return.

If Sarah Lacy is looking for smart money, Silicon Valley was the wrong destination. She’ll find more smart money at a restaurant in Abu Dhabi, a market in Ciudad del Este and on the docks of the Port of Hong Kong than she will on Sand Hill Road.

While some partner from a VC firm boards a first-class flight from San Francisco International to Pudong International excited about global opportunity, remember that somewhere an Antonov filled with cargo unknown is taking off for the nth time in more than a decade. Its owner found global opportunity (and fortune) long ago while said VC and Sarah Lacy were attending a shitty Red Herring party in San Francisco.

Who’s the smart money, Sarah? Answer: you haven’t a fucking clue.