Problem: Ray Soifer is the creator of the infamous “Harvard MBA Indicator.” This long-term financial indicator asserts that when Harvard graduates pile into certain jobs, the market is probably overheated and could be heading for a tumble. As reported by the New York Times’ DealBook in November 2009,
According to the index, if more than 30 percent of Harvard M.B.A.’s end up in what he defines as “market-sensitive jobs” — a subset of the financial services category that includes investment banking, private equity and hedge funds — it’s a long-term sell signal. If that number is below 10 percent, it is a long-term buy signal.
More than 30%, sell. Less than 10%, buy.
Well… Speaking from experience as a first-year MBA, we’re definitely heading towards a sell.
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Solution: Short the venture capital market. I don’t know how, I don’t know where, but it seems like a somewhat solid bet.
In 2016 only 13% of Harvard MBAs went into venture capital. In 2022 22% of Harvard MBAs went into Venture Capital. From first hand experience (as a current Harvard MBA myself), I anticipate that this number will only increase. Potentially over the 30% indicator level.
So what would shorting entail? Well, the traditional method of shorting stocks involves borrowing shares from someone who already owns them and selling them at the current market price. When the buyer wants their stock back you simply return it, pocketing the difference. Of course if the price goes up you must go out and purchase the shares.
In this case, you would borrow ownership rights from the Limited Partners (LPs) of venture capital funds or General Partners (GPs) of venture capital funds and sell them for immediate liquidity. The difficult would involve the off case that you must go out again and repurchase the rights if your rights wants them back.
There are two solutions to get around this.
1) Create a net-new borrowing mechanism using warrants for liquidity. Thus instead of being beholden to the rules of the Chicago Board Options Exchange (CBOE) issues options, the warrants would be issued by the company itself (in this case the fund). The fund would set the buy/sell conditions along with the expiration date. More on warrants below:
A stock warrant is a financial instrument that gives the holder the right, but not the obligation, to buy or sell a specific number of shares of a company's stock at a predetermined price within a certain time frame. The predetermined price is called the “strike price,” similar to a call option on a company's stock.
2) Alternatively, this business could take the Michael Burry approach of convincing a large bank to facilitate the transaction. Then there would be no warrants needed and shorters could create some sort of swap for the future equity from holding LP rights in a VC firm. For more on the trade that made Burry infamous, see below:
After receiving an inheritance and loans from friends and family, Michael Burry was able to form his hedge fund Scion Capital. After the technology boom of 2000 and 2001, he gained nearly $400 million in 2001 by shorting overvalued technology stocks. By the end of 2024, he had turned $20 million in funding into over $600 million.
Then in 2008, he was able to make billions by shorting the housing market and persuading large firms like Goldman Sachs to sell him credit default swaps against the subprime deals that he perceived as weak. From these bets, Michael Burry was able to earn over $1.5 billion in profit for himself and the investors of Scion Capital.
If he could make $1.5 billion for an unconventional trade, I’d angle that there might be one here too.
Contributed by: Michael Bervell (Billion Dollar Startup Ideas)