Teams as Investors
Why teams should act like angel investors minor leaguers are entrepreneurs, not assets
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MLB organizations are investors. And there is nothing wrong with that.
Last week, I wrote about Eric Longenhagen and Kiley McDaniel’s book, Future Value. I gave my ten lessons, but wanted to dive deep on one big takeaway.
Longenhagen and McDaniel are skeptical, and rightfully so, of the extreme “consulting” or “business” approach some teams are using.
Explicitly, they are against:
cost cutting for the sake of cost cutting
devaluing of scouts
reducing investment in minor league affiliates
turning everyone and everything into a number
It is hard to argue any of the above would be good for baseball, or even good for any organization. However, I do not think the problem is organization’s treating themselves like a business, or making decisions with an investor’s mindset. (Nor do I think Longenhagen and McDaniel believe this.)
The problem is teams are simply investing through the wrong lens.
Organizations Are Not Private Equity Investors
The most important metric for a private equity firm is IRR or return on capital.
Likewise, baseball organizations- while also valuing winning- care about their return on investment. A teams’ owners/shareholders are making large investments and caring about the bottom line is OK.
However, baseball teams have very different timelines than other investors. Private Equity firms hold companies for 4-5 years. Organizations have much longer relationships with their athletes, their fans, and their cities.
Additionally, PE firms answer solely to their investors. When they chose to buy a company, they usually buy the entire thing. They rarely need to care about the interests of other parties.
Again, baseball teams are different. They answer to their fans. They need to build relationships with players, partners, and other parties who are not concerned with the organization’s balance sheet.
Put simply, teams should not act like private equity investors or hedge fund investors because they have 1) a different time frame and 2) other, external parties to answer to.
Organizations Are Angel Investors
However, there are investors that 1) think long term and 2) care deeply about their partners: venture capitalists and angel investors.
At the surface, venture capital is similar to private equity. Both groups raise capital with the goal of offering great returns for their limited partners
But when we dig deeper, we see a big difference in how they accomplish this.
VC firms and Angel Investors 1) invest early 2) invest with founders and other interested parties 3) think long-term and 4) help drive growth.
Without knowing it, teams already do the first two things. They invest early with the players they draft- who regularly spend years in the minors.
And whether or not they realize it, they are investing in a player’s development with that specific athlete. In other words, player development is a win-win.
Teams need to realize they are angel investors in their players and 1) think long term and 2) drive growth.
In short:
Organizations are investors…and that’s OK.
Good organizations should behave like angel investors, investing with the e̶n̶t̶r̶e̶p̶r̶e̶n̶e̶u̶r̶ athlete.
Together, the organization and athlete can grow the b̶u̶s̶i̶n̶e̶s̶s̶ on field results
Athletes are Entrepreneurs, not Assets
If teams are angel investors, not PE investors, that means athletes are entrepreneurs, not assets.
Entrepreneurs:
Have passion, discipline, and a strong work ethic
Are ultra competitive and will do anything to succeed
Realize there are better ways to earn a living and do not care
This sounds a lot like an athlete to me.
The Angel and Entrepreneur Relationship
Once we shift from “Investor and Asset” to “Angel and Entrepreneur”, we can better think about the relationship.
We can better define the goal:
Improve the player’s long term value. This is a win for the team, in terms of 1) literally winning games, as well as 2) trade capital.
And this is a win for the player as he will rise through the organization and eventually reach a bigger pay day. (And, you know, achieve his life long goals.)
We can better define what is important:
PE firms are very focused on the price they pay. Angel investors focus more on the upside. They realize if an early stage firm grows and develops, the exit price will be the driving factor of returns.
Organizations should think similarly. Teams bottom lines will be far less impacted by cutting five and six figure expenses than they will be by extra seven and eight figure values found through scouting and player development.
We can better structure how an organization works with its minor leaguers:
If players are assets, players are meant to serve the organization. If players are entrepreneurs, the relationship is flipped.
Organizations are meant to serve their players. Organizations should look to arm players with the right tools, offer them the right coaching, and make great connections to help them grow professionally and personally.
As teams do this, they will get the best out of their players. Additionally, others will be attracted to the organization.
The Bottom Line
MLB organizations are a business. The teams’ owners/shareholders care about their bottom line. And they should.
However, caring about their bottom line is not a sole focus on this year’s accounting statement.
Great organizations will look long term at the future value of the team. In order to do this, they should focus on growth- growing their farm system, growing their talent, and growing their revenue (this happens when you win)- more than on cutting costs.