Moneyball
I just got back from a week of offline vacation (hence my lack of posts) but did have the chance to catch up on my book reading list while away. One of the books I read, Michael Lewis' Moneyball, deserves a VentureBlog write up and gets the honor of the first VB book review. I've been a fan of Lewis' writing since his classic Liar's Poker and certainly The New New Thing remains, in my mind, the best book about the Valley during the bubble.
Moneyball is about, at first blush, a very non-VentureBlog topic: baseball and the Oakland A's. As Lewis relates, the story of the A's is one of competing as an underfunded, scrappy "start-up" against wealthy, established giants (e.g. the New York Yankees) in an arena where more money has generally correlated strongly with more success. Many writers have traced the parallels between baseball and real life. In Moneyball, the analogies match closely with the entrepreurial battles many in the Valley fight every day.
Over the last few decades, professional sports such as football and basketball have instituted salary caps and revenue sharing plans to even out the inequalities of major television markets with significant local revenue (New York City) versus small markets with none (Milwaukee). Every team gets the same amount of money to hire players and, in general, gets to compete on strategy and game plan, not size of bank account. But baseball hasn't taken that path and so teams with big local television contracts (like the New York Yankees and Mets) or with wealthy owners willing to open their checkbooks (like the Texas Rangers) have been able to spend substantially more money than teams like the Oakland A's without either.
With the leadership of Billy Beane, the A's general manager, Oakland has won more games in the last few seasons than anyone else in major league baseball (except the Atlanta Braves) despite having one of the lowest payrolls. Most dramatically, in the 2002 season the A's lost three of their strongest players (including MVP Jason Giambi to the New York Yankees) and yet still won their division while setting a baseball record of 20 straight wins
How they've done this is straight out of the entrepreneurial playbook: by using intellect and analytics to replace money as the solution to problems. As Michael Lewis relates in great detail, the A's take a fresh look at what makes a baseball player successful and are able to exploit inefficiencies in the market for talent. They don't spend top dollar on big names but instead hire for efficiency in what's important in baseball (getting on base). The A's create the equivalent of a personal stock option plan for baseball players: they take underappreciated players and give them a chance to excel knowing that those who do will rise in value and eventually get hired away by the big money teams. The A's can then use draft choices (which they get as compensation when their players are hired away) to reinvest in new young, underappreciated players.
My favorite quote from the book, which is directly applicable to life in a start-up, is one of the rules Billy Beane uses when he searches for talent to sign:
"No matter how successful you are, change is always good. There can never be a status quo. When you have no money you can't afford long-term solutions, only short-term ones. You have to be always upgrading. Otherwise you're fucked."
A good lesson for today's entrepreneur. I highly recommend Moneyball as both a fun summer read and an interesting primer on how to compete on an unfair playing field.
1 TrackBacks
Listed below are links to blogs that reference this entry: Moneyball.
TrackBack URL for this entry: http://ventureblog.com/cgi-bin/mt/mt-tb.cgi/69
At the suggestion of Andrew Anker, chief blogger of VentureBlog, I'm reading Moneyball - a book by Michael Lewis about how the Oakland A's have rethought baseball and become successful despite having 1/4 the budget of the New York Yankees. This is a... Read More
This report http://www.econ.unt.edu/research/pdf/01-12RTJmlbeff.pdf shows that salary inequality between teams does not correlate as strongly with team success as conventional wisdom suggests. If you control for the fact that player salary does not predict player performance all that well, the correlation of team salary to success is weak. The study furthermore suggests that salary inequality within a team is an important negatively correlated factor that should not be neglected, and I suspect that that observation may also be an important one for those of us who are not in the professional sports world.
Potentially another strategy is to look at the problem from the point of view of ROI. How much additional revenue (in advertising, stadium attendance, merchandising) will come my way if I win X more games? How much will it cost me (in terms of player contracts) to win those games?
They say that baseball is a game of percentages, so this is just a broader application of the rule. :-)
Peter... Michael Lewis does cover much of that in the book. They have a sense of how much each player adds in terms of net run count (both offensive performance and defensive performance) and are able to judge the ROI of a player. Given that run count correlates pretty well with game winning, they know how much more they have to spend on players to win a certain amount of games. There's a chapter in the book that talks about how the A's went about replacing Jason Giambi that addresses this topic head on.