Howard Lindzon

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 70’s. 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.

Damien: Wow.

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 anti-thesis 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 tortuous 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 your 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.