How InsightStudios Follows The Chicago Cub's Playbook

Fans cheer as Chicago Cubs' Anthony Rizzo (44) hits a home run against the St. Louis Cardinals during the sixth inning of Game 4 in baseball's National League Division Series, Tuesday, Oct. 13, 2015, in Chicago. (AP Photo/Nam Y. Huh)

Fans cheer as Chicago Cubs' Anthony Rizzo (44) hits a home run against the St. Louis Cardinals during the sixth inning of Game 4 in baseball's National League Division Series, Tuesday, Oct. 13, 2015, in Chicago. (AP Photo/Nam Y. Huh)

Three weeks ago, before the MLB playoffs started, I had the pleasure of meeting Crane Kenny, President, and Jed Hoyer, EVP/GM. The event was organized by the Harvard Business School Club of Chicago and the Wharton Alumni group. 

Both Crane and Jed gave presentations that were awesome. In their talks, they shared a lot of inside information on the Cub's turnaround strategy and how difficult it was in the early years as they were losing everything.

Jed Hoyer's presentation was absolutely riveting. He talked through the player personnel situation that he discovered when he arrived in Chicago in 2011. Jed is one of Theo Epstein's guys and was part of the turnaround at the Boston Red Sox. 

Jed's strategy boiled down to a simple idea - develop young players and lock them up once their greatness is known.

Jed shared a chart which showed how old each player was and the number of years each player had left on their contract. He showed the chart for the roster he inherited in 2011. Then, he showed the current chart for the existing roster. In four years, Jed and his team had completely transformed the ball club and the fundamental situation. After all of his hard work, the Chicago Cubs has a younger, more talented team, most of whom are locked up in 5 and 6 year deals. It was clear to me and everyone in the audience that the future of the Cubs has never looked brighter.

There were two fundamental insights the Jed used to develop his turnaround strategy for the Cubs.

1. With the league's crackdown on steroids, baseball is now a young man's game.

2. The only way to create value for your franchise is to develop young players in a proprietary way. 

The first point was interesting to me because the last time I lost my voice at Wrigley field, Sammy Sosa hit his third home run for the night. The age of juiced up home run hitters is an ancient memory in major league baseball.

Without enhancements, it makes sense the younger players are doing better in the majors than the veterans, as a general rule.

Jed's second point is interesting from a competitive market perspective. As he explained in a lot of detail, Jed pointed out that the free agent market is very efficient. There are several metrics, once pioneered by Jed and Theo, that all the teams use to evaluate players. In the free agent market, the prices players go for match up with these metrics exactly. Basically, every buyer in the market is looking at all of the players in exactly the same way. This means that any excess value a player has in the market is bid away by competition. In other words, it's impossible to create value by acquiring players in the free agent market. Jed and his team realize this and have accepted this reality. They don't want to play the free market game. This was a conscious and intentional decision.

So, if the free agent market is a dead end from a value perspective, the only other way to create a sustainable competitive advantage with your roster is to develop your own players. 

When Jed started at the Cubs, he proposed a massive investment program in the Cub's minor league farm teams. The investment included upgrading all the facilities in all minor league teams. It also involved relocating some teams to better organize how they were developing players and using facilities. Some of his moves were controversial and were not well received by the minor league fans who watched their favorite baseball teams leave town. Jed spoke at length on how painful this rebuilding process was.

But in the second year, his changes started to work. The energy, enthusiasm and spirit started building with the minor league teams in a way that had never happened before. When the Cubs were losing in the majors, Jed was comforted by what was happening in the minors. He knew the farm teams were the future. 

A few moments ago, the Cubs beat the Cardinals and are advancing to the National League Championship Game. This was the first time in history Tuesday that the Cubs clinched a postseason series at Wrigley Field. Cub win! Cubs win!

After listening to this presentation a few weeks ago, it was clear to me that the Cub's victory today was a direct result of Jed's and Theo's plan for developing proprietary players four years ago.

I can't help but to see a parallel between the Chicago Cubs and InsightStudios. As a startup studio, our playbook is essentially the same. It's based on two important insights.

1. Serial entrepreneurs have a much higher success rate than newbie entrepreneurs.

2. Our process for developing companies enables us to identify winners long before their greatness is known.

Our investment strategy boils down to a simple idea - develop great companies and invest in them early at a low valuation once their greatness is known.

The serial entrepreneurs are the young players in this analogy. This is the inverse age effect where experience matters a heck of a lot in building startups. It's the entrepreneurial judgment that comes with creating several startups that makes the difference in this game.

Our proprietary process creates insight into a startup's potential before investors can measure or quantify this value using vanity metrics. Since we are working day-to-day in the startups in a hands-on fashion, we see this greatness before anyone else even realizes it. When it occurs, we lock up the value by creating a new startup after customer validation is achieved. We are investing in a "proven" business at a very low valuation considering the potential of what we know this business will become. In this way, it's analogous to Jed locking up a young player on his farm team to a 5 or 6 year contract.

Over the next few years, especially if the Cubs continue to progress in the playoffs and, oh my God, win the World Series, everyone in baseball will be copying Jed's strategy. As more and more startup studios appear and generate a 100x success rate versus seed-stage companies today, everyone will start copying this business model as well.

And four or five years seems to be the right amount of time for this to occur.